Govt’s intense pressure on RBI could undermine India’s long-term financial stability: S&P

i Indian government’s “sustained and intense” pressure on the RBI could “undermine” the hard-fought improvements in the banking system over the past few years as well as the long-term financial stability in the country, S&P Global Ratings warned on Monday.

In particular, S&P Global Ratings views as credit negative the circumstances leading to the recent resignation of RBI Governor Urjit Patel.

“We await any changes to banking system regulation at the next RBI board meeting in January 2019, said the agency, days after Patel resigned as Governor of Reserve Bank of India (RBI) amid talk of a face-off with the government over autonomy and independence of the central bank.

At this time, 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, Recapitalisation, Resolution, and Reform – to restore the health of the financial sector, it said.

“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 governor Raghuram Rajan. However, this is off a low base and continues to face headwinds,” it said.

Recognition of stressed assets significantly improved following the RBI’s circular on February 12, 2018, which eliminated previous schemes for restructuring.

“In our opinion, this simplified recognition and associated provisioning for stressed assets, the agency said.

Recapitalisation has continued for both public and private sector banks.

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

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.

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