Global rating agency Standard & Poor's on Monday revised the outlook for the Indian banking system to 'stable' from 'negative,' but added that risks remain high relative to developed banking markets.

According to a release posted on the website of Standard & Poor's, "Key watershed structural reforms in India so far have improved the health of the banking sector's asset quality, profitability, and capital adequacy."

"The reforms recently introduced include the Securitisation Act, 2002, the establishment of a pilot asset reconstruction company to auction non-performing assets, initiatives on improving recoveries from NPAs, change in the basis of recognition of NPAs to 90 days, and the information technology upgrade of the banking industry raising transparency and efficiency."

Adrian Chee, credit analyst at S&P, was quoted in the release as saying: "The industry still faces a number of key challenges. One is the overall capitalisation level of the banking industry, which could face some pressure going forward from higher demand for new credit and additional provisioning needs as it strives towards international standards of net NPA ratios."

"Another challenge is for the industry to sustain the positive trend of improving asset quality. With stronger powers of foreclosure, banks have to remain focused in their efforts to recover NPAs, yet keep a tight lid over any incremental NPAs."

"The ultimate impact of the changes, however, will be reflective of the degree of effective enforcement by the regulators."

The asset quality of India's scheduled commercial banks, as denoted by its gross NPAs to loans (gross NPA ratio), has been improving in the past six years to around 9 per cent for the fiscal year ended March 2003 from 15.7 per cent in March 1997, the release added.