Indian banks need an overhaul: S&P

Citing the recent governance issues in India's banking sector, international credit rating agency -S&P Global Ratings highlighted the need for banks to improve risk management, and maintain strong governance processes, practices, and systems.

"As a number of banks in India confront serious governance and risk issues, the 'tone at the top' is crucial. Leadership groups in Indian banks need to ensure that they enhance the risk culture, reputation, and financial strength of banks," said S&P Global Ratings credit analyst Michael Puli.

In the light of bad corporate loans marring Axis Bank’s balance sheet, the Reserve Bank of India (RBI) had asked the bank’s board to reconsider it’s decision to extend managing director and CEO Shikha Sharma’s term till June, 2021. Lately, the board went back to the RBI to approve Sharma’s reappointment for six month ending December 31, 2018.

Citing media reports, S&P points says that the RBI's unwillingness to approve the initial request of three years was owed to a number of risk management and governance issues that have emerged at the bank over the past year or so. These include a deterioration in asset quality and under-reporting of nonperforming loans.

The S&P release also talks about the ongoing fiasco at ICICI Bank with the MD and CEO Chanda Kochhar embroiled in an investigation for an alleged conflict of interest associated with a loan extended to the Videocon group in 2012. While the Central Bureau of Investigation is conducting a preliminary enquiry into whether the CEO's husband, Deepak Kochhar, benefitted from the bank's decision to participate in the consortium loan, S&P notes that the bank’s board has offered full support to the leadership team.

"However, if allegations against the management prove to be true, they could hit the bank's reputation and expose it to legal and financial risk" says S&P.

S&P explains that while rating banks, they assess management's ability and expertise to grow the business sustainably. "We view governance and transparency in Indian banking as a negative factor," S&P points out. "This is similar to many other emerging markets."

The rating agency further points at its December 21, 2017 assessment of Axis Bank's stand-alone creditworthiness to reflect higher risks associated with asset quality and under-reporting of nonperforming loans.

"While the effect of our assessment is the same as ICICI Bank, we assess Axis' risk management as weaker than that of private sector peer HDFC Bank, says S&P. "Axis' gross nonperforming asset ratio of 6% is similar to ICICI Bank's 8% but significantly higher than HDFC Bank's 1%."

The rating agency acknowledges that similar to other banks, Axis Bank continues to take steps to recognize and resolve asset quality issues and improve provisioning levels. It notes that the bank also continues to raise capital to support these provisions. In addition, Axis Bank recently restructured its operating controls (i.e. first line of defense). Additionally, Axis bank has restructured the reporting lines so that operational controls now report to a central point rather than the relevant business heads. "Smooth transition and continuity in management will be important for the bank, in our view," S&P adds.

Historically, the public sector banks have faced the criticism of ratings agencies for the lapses in their transparency, governance and risk management standards. However, the  leading private banks - who have been seen as the poster boys of the Indian banking sector - are now caught in the eye of storm. Clearly, a systemic overhaul is the hour's need.