Global credit agency Standard and Poor's (S&P) said the Indian banks need to improve risk management and governance practices in the light of troubles faced by the two private lenders ICICI Bank and Axis Bank.
"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.
Rating agency assesses management's ability and expertise to grow the business sustainably. The flaw in governance and transparency issues in Indian banking is a negative factor. This is similar to many other emerging markets, the agency added.
Quoting media reports, S&P said the Reserve Bank of India's unwillingness to approve the initial request of three years for Shikha Sharma as managing director and chief executive at Axis Bank was due to a number of risk management and governance issues that have emerged at the bank.
These issues include deterioration in asset quality and underreporting of nonperforming loans.
Axis Bank board had asked the Reserve Bank of India (RBI) to approve the reappointment of Shikha Sharma for six months ending December 31, 2018. This is after the central bank declined an earlier proposal to give her a three-year term ending June 30, 2021.
About ICICI Bank, the rating agency said the investigation is underway for an alleged conflict of interest associated with the bank's loan to the Videocon group in 2012. Chanda Kochhar is the managing director and CEO of ICICI Bank.
The Central Bureau of Investigation (CBI) is conducting a preliminary enquiry into whether the CEO's husband, Deepak Kochhar, benefitted from bank's decision to participate in the consortium loan. The ICICI Bank 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, S&P added.
On December 21, 2017, S&P had revised down the assessment of Axis Bank's stand-alone creditworthiness to reflect higher risks associated with asset quality and underreporting of non-performing loans (NPAs).
While the effect of our assessment is the same as ICICI Bank, Axis’ risk management is seen as weaker than that of private sector peer HDFC Bank Ltd. (BBB-/Stable/A-3).
Axis Bank's gross non-performing asset ratio of 6 per cent is similar to ICICI Bank's 8 per cent but significantly higher than HDFC Bank's 1 per cent.
Similar to other banks, Axis continues to take steps to recognise and resolve asset quality issues and improve provisioning levels. 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).
The bank has restructured the reporting lines so that operational controls now report to a central point rather than the relevant business heads, it said.