Governance, transparency in Indian banks weak by global standards: S&P

The lack of improvement in risk management and corporate governance in the coming growth cycle could produce a new crop of sour loans, the rating agency said

Rating agency Standard and Poor’s (S&P) on Tuesday said that while banks in India appear to have learnt lessons from bad-debt surges, their governance and transparency are weak by global standards. 

The lack of improvement in risk management and corporate governance in the coming growth cycle could produce a new crop of sour loans. More follow-through on governance reforms is required, especially for public sector banks, the rating agency said in a statement. 

It released a report titled "As India's Banks Grow Again, Will Old Mistakes Return?". 

The Reserve Bank of India (RBI) is tightening and equalising norms for bank licenses, which will make for a more even playing field, while also increasing overall standards. 

Indian banks have become profitable again and have strengthened their capital positions, allowing for a new phase of loan growth. 

Stronger balance sheets and higher demand should boost bank loan growth by more than 10 per cent annually over the next two years. This would be in line with nominal growth on Gross Domestic Product (GDP) of the country. 

"Barring another major outbreak of Coronavirus (COVID-19) in India, we anticipate bank asset quality has hit its nadir and will start improving," S&P said. 

The system's weak loan ratio has peaked at close to 10 per cent as of September 30, 2021. This ratio includes non-performing loans and restructured loans as a percentage of the outstanding portfolio. 

Credit costs--which reflect provisioning on bad loans--will likely hit their lowest level in 7 years. This in turn will boost earnings. 

The rating agency said the economy's expansion is expected to outpace that of developing-market peers over the next few years. "In comparison, some tourism-dependent countries, such as Thailand, are likely to see long-term scarring as we expect only a gradual resumption of travel-related industries,' S&P said. 

The loan growth will be driven by retail credit, an underpenetrated segment for Indian banks. The corporate loan demand could be slower to gain traction and be underpinned by working-capital needs over the next year, the rating agency added. 

Referring to corporate ownership of banks, S&P said "We remain skeptical of allowing corporate ownership in banks given India's weak corporate governance". The corporate ownership of banks raises the risk of intergroup lending, diversion of funds, and reputational exposure. 

The RBI is currently refraining from allowing corporate ownership in banks. The idea remains under examination.