The S&P report titled “Indian Banking System: Strongly Placed But Weaknesses Cannot Be Wished Away” was published on Tuesday.
The country’s business environment benefits from higher consumption and private investment demand, due to a growing middle class and favorable demographics, said the report. 
Additionally, India has strengthened its regulatory environment and banking reforms have gradually tightened operational, prudential, and accounting standards, putting them mostly in line with international benchmarks, it added. According to S&P the banking sector has experienced a considerable improvement in credit quality in the past five years. Butdespite the benefits of scale to the banking business, the banking sector in India is highly fragmented, with 53 domestic banks accounting for about 93 per cent of the system’s assets.
Risk Management
Risk management is still largely a work in progress, although significant improvements occurred in the past decade. With strong credit growth and weak risk management systems, especially in smaller banks, the potential for an understatement of problem assets increases. These weaknesses could undermine the potential growth of the Indian banking system.
Increasing the pace of consolidation and providing the sector with an efficient risk management system, should form the basis of such a strategy, it said.