S&P sees uneasy environment

S&P Global Ratings has issued a cautious note on the Indian government’s increasing involvement in affairs of the central bank, saying it could undermine the hard-fought improvements in the banking system over the past few years.

But S&P Global Ratings said on 17 Dec 2018 that its report does not constitute a rating action.

In particular, S&P Global Ratings views as credit negative the circumstances leading to the recent resignation of Urjit Patel, governor of the Reserve Bank of India (RBI).

“We await any changes to banking system regulation at the next RBI board meeting in January 2019,” said the agency in reaction to the recent surprise and sudden departure of Patel from RBI, relationship of which has strained with the government in recent months.

At this time, S&P said it “sees no material change in the central bank’s level of independence, especially with regards to its adoption and implementation of prudent policy”.

The RBI has traditionally shown greater independence than many regional peers, and a robust institutional culture. But sustained and intense external pressure from the Indian government risks eroding these settings over time and could also undermine the long-term financial stability in the country, said S&P.

This is particularly a risk because the central bank was focusing on “four R’s” — Recognition, Recapitalization, Resolution, and Reform — to restore the health of the financial sector.

“In our opinion, the RBI’s actions in recent years have materially improved accountability and transparency in the banking system, since asset quality reviews were introduced by former RBI governor Raghuram Rajan. However, this is off a low base and continues to face headwinds,” it said.

Recognition of stressed assets have significantly improved as RBI had eliminated previous schemes for restructuring in Feb 2018.

“In our opinion, this simplified recognition and associated provisioning for stressed assets,” S&P said on recent developments at RBI and its impact on the stressed Indian banking sector.

Recapitalization has continued for both public and private sector banks.

“We note that more needs to be done to recapitalize public sector banks in general. In our view, the RBI’s Prompt Corrective Action to rebuild capitalization at distressed banks is appropriate given the fundamental issues these banks face,” said S&P.

Resolution of stressed assets is likely to occur within the next 12-18 months, particularly given the new bankruptcy framework and courts.

“We view this system as a positive step to reduce the time and potentially increase recoveries associated with stressed assets.”

“We believe the restrictions on the RBI’s authority to reform governance of public sector banks as a weakness in its mandate. The central bank has demonstrated a willingness and ability to reform governance at private sector banks, which we see as a healthy check-and-balance that supports accountability and renewal of leadership.”

S&P said its assessment of India’s banking system continues to factor in its relatively weak governance and transparency. fiinews.com