Proposed corporate ownership of Indian banks poses high risks, says S&P

Pointing to the upside from proposed norms, the agency said recommendation to harmonise licensing guidelines for all banks, new and old, will help restore a level playing field for all players

S&P Global Ratings on Monday said it was sceptical of allowing corporate ownership in banks, given India’s weak corporate governance record amid large corporate defaults over the past few years.
 
The Reserve Bank of India’s (RBI) internal working group on Friday recommended allowing large companies to set up banks and awarding banking licences to well-managed non-banking financial companies (NBFCs).
 
“In our view, the working group's concerns regarding conflict of interest, concentration of economic power, and financial stability in allowing corporates to own banks are potential risks. Corporate ownership of banks raises the risk of intergroup lending, diversion of funds, and reputational exposure. Also, the risk of contagion from corporate defaults to the financial sector increases significantly,” S&P said.

 

It, however, was of the view that NBFCs becoming banks could improve financial stability, while warning the RBI will face challenges in supervising non-financial sector entities and supervisory resources could be further strained at a time when the health of India’s financial sector is weak.
 
Pointing to the upside from the proposed norms, the rating agency said the recommendation to harmonise licensing guidelines for all banks, new and old, will help restore a level-playing field for all players.
 
The RBI’s proposal to raise the minimum net worth for all universal banks to Rs 1,000 crore would ensure better capitalisation. It would also ensure that only promoters with deep pockets can enter the banking sector.

 
In addition, the recommendations would limit the size of shadow banking in India and ensure stronger supervision.
 
“We believe NBFCs have numerous strengths that will give them a headstart in their entry into banking. These include their existing client bases, distribution networks, brand and risk management systems,” it said. Conversion to a banking entity could provide more stable funding, in particular, low-cost deposits.
 
It said the competitive banking environment in India is not expected to deteriorate with these new licenses. This is because the finance companies that are converting into banks will have huge upfront regulatory costs.

 
They will incur additional costs in terms of cash reserve ratio and statutory liquidity ratio requirements; priority sector lending; and adjusting their existing portfolios to reduce concentration in one segment, rating agency added.