Aggression by newcomers may hurt banking stability: Standard & Poor's

Global ratings agency Standard & Poor's on Tuesday said any aggressive market share gaining tactics by new entrants may adversely impact the banking sector's stability. "The sector's stability or risk appetite could be hit if any of the new players relax their underwriting standards or undercut prices to gain market share," it said in a note.

Infrastructure lender IDFC and micro-lender Bandhan were chosen among two dozen applicants to enter the banking fray in February this year, and have an 18-month period to operationalise. The international ratings agency, however, said that the overall risk in the sector has subsided as the RBI chose only two entities to open shop.

"The immediate threat of a large number of new players entering the already competitive banking industry this year has subsided with the RBI granting banking licenses to just two entities," it said, flagging the issue of under- penetration in banking.

In the days of high risk and moderate growth, the competition for safer, low risk assets among the banks is set to intensify, it said. With asset quality continuing to remain a trouble for the system --- S&P said the bad assets pose a "downside risk" to economic recovery --- and the gross non performing assets (NPAs) to rise to 4.5 per cent by the end of FY15 as against the four per cent at end of FY14.

"We expect the pace of creation of stressed assets to slow over the next two to four quarters. However, any material improvement in asset quality will lag economic recovery, corporate de-leveraging, decisive steps to alleviate problem of stressed sectors, and some respite from high interest rates," it said.

On the liability and the capital front, it said the large deposit base, infra bond raising capability and a buoyant capital market will help the banks during the year.