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Increasing involvement of govt in affairs of RBI could undermine financial stability: S&P

S&P Global Ratings in its latest report has termed the recent resignation of Urjit Patel as credit negative and said Indian government's sustained and intense involvement in the affairs of the Reserve Bank of India (RBI) could undermine the hard-fought improvements in the banking system over the past few years as well as the long-term financial stability in the country. It added 'We await any changes to banking system regulation at the next RBI board meeting in January 2019'.

The report said it does not anticipate any material change in the central bank's level of independence, especially with regards to its adoption and implementation of prudent policy. It said the RBI has traditionally shown greater independence than many regional peers, and a robust institutional culture but sustained and intense external pressure from the Indian government risks eroding these settings over time, and could also undermine the long-term financial stability in the country.

S&P noted that the Central Bank's actions in recent years have materially improved accountability and transparency in the banking system, since asset quality reviews were introduced by former governor Raghuram Rajan. However, this is off a low base and continues to face headwinds. It added that their assessment of India's banking system continues to factor in its relatively weak governance and transparency.

Observing that the recognition of stressed assets significantly improved following the RBI's circular on February 12, 2018, the report said, this simplified recognition and associated provisioning for stressed assets. It emphasised that more needs to be done to recapitalize public sector banks in general. It said 'In our view, the RBI's Prompt Corrective Action to rebuild capitalisation at distressed banks is appropriate given the fundamental issues these banks face'.

As per the report, resolution of stressed assets is likely to occur within the next 12-18 months, particularly given the new bankruptcy framework and courts. It, however, said restrictions on the RBI's authority to reform governance of public sector banks as a weakness in its mandate. The central bank has demonstrated a willingness and ability to reform governance at private sector banks, which they see as a healthy check-and-balance that supports accountability and renewal of leadership.

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