The RBI committee report reviewing the country's bank board governance standards, 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 said in a report.
“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,” Fitch said.
However, it added that 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 rating agency said 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.
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.
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 directly for development and social objectives.
This has resulted in the weaker asset quality of PSU banks versus their private sector banks.
State-owned banks account for the bulk of stressed assets and have become increasingly reliant on Government capital injections for 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 to 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).