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