New Delhi: The fraud case at Punjab National Bank (PNB) underscores the urgent need for reforms at public sector banks, said rating agency S&P.
It said that the fraud comes as the sector continues to reel from soaring non-performing assets (NPAs) in an extended downcycle.
However, tighter regulatory standards combined with generous capital injections should strengthen balance sheets, according to an article published on Monday by S&P Global Ratings and titled, “Darkest Before The Dawn: Fraud Case May Hasten Reform For India’s Banks.”
“We expect further losses at India’s public sector banks but the bulk of previously unacknowledged stressed assets have already been recognised," said Deepali Seth-Chhabria, analyst at S&P Global Ratings .
The ratings agency said that it estimates the ratio of stressed assets in the country’s system is more realistically around 13-15 per cent, compared with an official rate of 12.3 per cent in the first half ended September 30, 2017.
It said that $2 billion fraud underscores weaknesses in internal controls and risk-management in the sector.
It noted that over the past three years, government and RBI introduced an array of new guidelines and standards to strengthen bank balance sheets and improve the sector's overall health.
S&P pointed out that authorities have characterised such efforts in terms of “4Rs”: Recognition, Recapitalization, Resolution, and Reform.
“We believe India has made good headway in three of these categories,” said S&P.
It said that recognition of stressed assets has notably improved (contributing to a string of losses at public-sector banks). Resolution has benefited from the introduction of a bankruptcy code and could also benefit from stricter timelines on recovery plans after defaults.
“And the government has committed to inject a massive $32 billion into public-sector banks. This will help them meet regulatory capital levels despite heavy losses in the quarter,” it said.
“In our view, the “missing R” is reform. We believe the PNB fraud case will hasten the impetus for improving banks' governance, risk-management practices, and internal controls,” said S&P.
“The alleged fraud at PNB highlights an inherent weakness in the governance and transparency standards in the Indian banking system as a whole,” said Ms. Seth-Chhabria.
S&P Global Ratings said it expects the 4Rs and other initiatives to strengthen the India banking system in the medium to long run.
