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Plan to grant new bank licences to cos poses risks: SP

The central bank will come out with fresh set of guidelines for companies applying for on-tap bank licences, or rolling applications that are assessed as they come, in the current fiscal year ending March.

Plan to grant new bank licences to cos poses risks: S&P

India’s plan to grant new banking licences to companies could increase risks in the banking sector given the chance that new entrants could be lax about loan standards, Standard & Poor’s said in a report on Tuesday.

The Reserve Bank of India (RBI) is cautiously opening up India’s banking sector to companies. The RBI awarded two new licences in April after a gap of 10 years in a country where only one household in two has access to formal banking services.

The central bank will come out with fresh set of guidelines for companies applying for on-tap bank licences, or rolling applications that are assessed as they come, in the current fiscal year ending March.

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“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,” said S&P.

The rating agency also highlighted the risks from a prolonged weakness in Indian banks’ asset quality, which could hurt economic recovery.

S&P said it expects gross non-performing loans to rise to 4.5 percent by the end of March 2015 from 4 percent in the previous year.

However, Indian banks fare better on potential economic risks compared with Brazil and China due to a conservative central bank, stringent capital regulations under Basel III, and moderate inflation-adjusted real estate prices, S&P said.

The rating agency recently upgraded the outlook for India’s “BBB-minus” rating to “stable” from “negative”, citing the prospect of government reforms.

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