Fitch: India Bank Proposals Part of Wider RBI Reform Push

Mon May 26, 2014 11:58pm EDT

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(The following statement was released by the rating agency) MUMBAI/SINGAPORE, May 26 (Fitch) A Reserve Bank of India (RBI) committee report reviewing the country's bank board governance standards, released on 13 May, is part of a wider financial institution (FI) reform push by the central bank and a step forward in the process to strengthen corporate governance at India's banks, Fitch Ratings says. That said, implementation of the key recommendations will require changes in legislation, and there is much uncertainty over whether there is the political support necessary for its passage. Other recommendations that do not require legislation have a much higher likelihood of implementation, and will help strengthen corporate governance standards - particularly at the state-owned banks. The report addresses governance issues at both private and state-owned banks (PSUs), while the focus of the recommendations targets public sector financial institutions. The committee reviewing board governance has suggested measures to bring about a level playing field between public sector banks and private sector banks, as with an earlier RBI report concerning the creation of a new FI resolution regime (released on 2 May). Principal recommendations focus on eliminating various constraints on public sector banks as a result of their state control which have a bearing on the quality of their governance. These include explicitly advocating the reduction in state ownership to below 50%; repealing of the parliamentary acts through which public sector banks have been constituted as statutory bodies; the creation of a Bank Investment Company (BIC) to hold state equity stakes; and moving to a uniform bank licensing regime for all banks irrespective of ownership. In addition to these more fundamental changes, the report recommends the creation of a dedicated Bank Boards Bureau (BBB) made up of experienced, retired bankers, to select the board and management team for PSUs. It also suggests minimum tenures of five years for board chairmen and three years for executive directors, with the further addition of cooling periods for directors - five years to return to the same board, and two years to be appointed on any other board. The recommendations related to public sector banks are aimed directly at reducing government influence. By statute, the state is currently empowered to select the majority of bank boards (including independent directors), and is influential in lending directing for development and social objectives. This has resulted in the weaker asset quality of PSU banks versus their private sector counterparts. As we outlined in our Indian Banks Special Report on 30 September 2013, state-owned banks account for the bulk of stressed assets and have become increasingly reliant on government capital injections to ensure adequate capitalisation. Should the recommendation lead to a greater separation between the state and bank, it could necessitate a reassessment of our current assumptions on the propensity for extraordinary support for PSU banks. This has been an important factor underpinning the capitalisation of many PSUs, as this reassessment could have a potential impact on their Issuer Default Ratings (IDR). That said, the passage of the specific recommendations surrounding a reduction in state ownership would require significant political and legislative hurdles to be cleared, and therefore remains highly uncertain in the near term. On the other hand, the recommendations to amend the selection framework for bank boards and institution of minimum tenures would not require new legislation, and will be relatively easier to achieve. Such changes would be insufficient to fundamentally alter the existing governance structure, while helping to professionalise and de-politicise bank boards. As a result, public sector banks may see a beneficial effect on their financial performance with proper and sustained implementation. These improvements could provide support to their VRs in the medium to long term. Contacts: Jobin Jacob Associate Director Financial Institutions +91 22 4000 1700 Justin Patrie Senior Director Fitch Wire +65 6796 7232 Media Relations: Bindu Menon, Mumbai, Tel: +91 22 4000 1727, Email: bindu.menon@fitchratings.com; Leslie Tan, Singapore, Tel: +65 67 96 7234, Email: leslie.tan@fitchratings.com; Wai-Lun Wan, Hong Kong, Tel: +852 2263 9935, Email: wailun.wan@fitchratings.com. The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings. Applicable Criteria and Related Research: Indian Banks - Rising Pressure on Asset Quality; Stress Test Indicates Weakening Buffers here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. 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