Mumbai: S&P Global Ratings on Thursday said Indian banks need to improve their risk management, and maintain strong governance processes, practices, and systems.
The commentary comes at a time when two of India’s leading private sector lenders, ICICI Bank Ltd and Axis Bank Ltd, are in the spotlight for over the role of their leaders—Chanda Kochhar and Shikha Sharma, respectively.
“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," S&P credit analyst Michael Puli said in a note.
S&P said that while rating banks, management's ability and expertise to grow the business sustainably is assessed. “We view governance and transparency in Indian banking as a negative factor. This is similar to many other emerging markets."
At Axis Bank, the board has accepted current CEO Sharma’s request to cut short her fourth term of three years that begins on 1 June to seven months. On 2 April, The Economic Times reported that the Reserve Bank of India (RBI) has written to the Axis Bank board to review the extension, citing poor performance and worsening asset quality at the bank.
S&P said that in its view smooth transition and continuity in management will be important for the bank.
The rating agency noted efforts made by Axis Bank to resolve asset quality issues, improve provisioning levels, and restructuring of its operating controls to make it central point rather than the relevant business heads.
“On 21 December 2017, we revised down our assessment of Axis Bank's stand-alone creditworthiness to reflect higher risks associated with asset quality and under-reporting of non-performing loans. While the effect of our assessment is the same as ICICI Bank, we assess Axis's risk management as weaker than that of private sector peer HDFC Bank Ltd," the rating agency said.
At ICICI Bank, CEO Kochhar faces allegations of conflict of interest over grant of loans to a corporate group. On ICICI, S&P said that while the bank’s board has offered full support to the leadership team, in case the allegations against the management prove to be true, they could hit the bank's reputation and expose it to legal and financial risk.