Mumbai: The increasing involvement of the government in the affairs of the Reserve Bank of India (RBI) could undermine the hard-fought improvements in the banking system over the past few years, S&P Global Ratings said on Monday. “In particular, S&P Global Ratings views as credit negative the circumstances leading to the recent resignation of Urjit Patel, governor of RBI. We await any changes to banking system regulation at the next RBI board meeting in January 2019,” it said. The report said it does not anticipate any 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, 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. “Our assessment of India’s banking system continues to factor in its relatively weak governance and transparency,” it said. Observing that the recognition of stressed assets significantly improved following the RBI’s circular on February 12, 2018, the report said, this simplified recognition and associated provisioning for stressed assets.
It emphasised that more needs to be done to recapitalize 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,” it said. Resolution of stressed assets is likely to occur within the next 12-18 months, particularly given the new bankruptcy framework and courts, it said. However, it said, 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, it said. Rating agency views Patel resignation as credit negative Transfer of reserve to pull down RBI rating: Rajan NEW DELHI: Former RBI Governor Raghuram Rajan has cautioned that transfer of excess reserve to the government may bring down rating of the central bank.
Rating downgrade of the RBI from ‘AAA’ would make borrowing costlier for the central bank and will have implication for the entire economy. Asked if the transfer of excess reserve by the RBI to the government could lead to downgrade of the rating, Rajan said: “It could…it depends on how much. It may not be an issue now…may be an issue at some point of time. That’s one concern”. This is something both the government and RBI should discuss before reaching some conclusion, he said in an interview. “We are ‘Baa’ country. We are barely investment grade.
Sometime, we need to undertake international transactions which require really high credit rating. For example swap we did in 2013. So, for that we need unimpeachable balance sheet. Why don’t we keep the RBI as an unimpeachable balance sheet with AAA credit rating that requires certain amount of equity,” he said. Highlighting that profit of the central bank largely comes due to devaluation of Indian currency, Rajan said keeping a portion for the contingency reserves, RBI usually pays entire profit.
