"Indian banking sector's credit quality, pre-provisioning profitability and capitalisation fundamentals are stronger than those of its Chinese counterparts, despite the credit ratings on the leading Chinese banks being higher than those on the Indian banks," S&P said in a report.
Chinese banks have higher rating as the government is ready to capitalise them and sell their bad loans to state-owned asset-management companies.
These factors put Chinese banks ahead in rating but S&P said these factors "do not necessarily add to their fundamental strength." Although banks in both the countries are reaping the fruits of high growth in the respective economies, S&P said "there are key differences."
"Indian banking system is subject to relatively tighter foreign ownership restrictions whereas the Chinese banks are poised to benefit from the expertise they are likely to gain from an increasing number of foreign alliances, through either minority equity stakes or technical assistance from foreign banking groups."
In both nations, the state-owned banks dominate their banking systems, accounting for about 70-75 per cent of financial as sets in India and 55-60 per cent in China.
"However, the Indian banks' strong credit quality stands in stark contrast to that of the Chinese banks," S&P said, referring to Indian banks' gross non-performing assets at an estimated 8-10 per cent of loans at March 31, 2005, compared with 31-35 per cent for Chinese banks at December 31, 2004.
Citing the "structural differences", S&P said "Indian banks play an indirect role in the Indian government's fiscal operations, providing funding to the central government through their subscription to government bonds in line with statutory liquidity ratio requirements."
"In turn, the central and state governments provide support to the central and state public-sector undertakings, particularly the weaker ones and, as such, bear the direct credit risk associated with them."
Consequently, S&P said the credit risk of the Indian sovereign finds its way to the banks' balance sheets, thus sparing the banks the burden of holding large amounts of delinquent exposures of the weak public-sector companies.
Nevertheless, Indian banks are still required to carry out a degree of lending to designated priority sectors that typically are of lower quality relative to other business segments. India has relatively more developed risk-management and legal frameworks, S&P said.
Although the risk-management frameworks of banks in India and China are still developing, it said "Indian banks' credit risk-management systems are comparatively more advanced than China's, mainly because Chinese banks spent several decades under policy-lending regulations that placed very low priority on developing a credit-risk-management platform."
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