Banks' below-cost lending rose in Q2

Domestic banks' lending at below cost to top companies intensified in the second quarter of 2005-06, said R Ravimohan, managing director and CEO of rating agency Crisil.

"Lending to top corporates at rates lower than the cost of funds has been going on for a couple of years now. But this practice was intense in the July-September (2005) quarter due to competition," Ravimohan said at the release of a joint report on top 20 Indian banks by Standard & Poor's and Crisil.

He said domestic banking sector needs to regain the power to price loans appropriately as lending rates are way below economic levels. The S&P-Crisil inaugural joint analytical report on domestic banking sector titled India Top 20 Banks said the financial profiles of Indian banks are stronger than Chinese banks. This is despite Chinese banks enjoying higher credit ratings.

Nevertheless, risk management remains a key challenge for India's banking sector, although the credit profiles of domestic banks have been improving.

"The commercial banking segment dominates the country's financial system, representing about three-quarters of the total assets of the sector. Commercial banks are the main depository institutions, and mobilise most of the country's savings," said S&P's credit analyst Ritesh Maheshwari.

Although Indian banking's key fundamentals, such as credit quality, pre-provisioning profitability and capitalisation, are stronger than those of the Chinese banking sector, the credit ratings on leading Chinese banks are higher.

"The ratings differential reflects the readiness of the Chinese government to provide substantial resources through capital injections and non-performing assets sale to government-owned asset-management companies. These factors boost the standing of the Chinese banks," said S&P's credit analyst Adrian Chee.

Domestic banks reported strong growth in their balance sheets of about 20-22 per cent over the past three years. Rising interest rates have forced banks to return to their core intermediary role of lending within the financial system to support their underlying profitability.