Major fraud case should accelerate reforms at Indian banks: S&P

March 10, 2018

SINGAPORE The recent fraud case at India’s Punjab National Bank (PNB) underscores the urgent need for reforms at India's public sector banks, says ratings agency Standard and Poor’s, which points out that the fraud comes as the sector continues to reel from soaring non-performing assets in an extended downcycle.

"We expect further losses at India's public sector banks but the bulk of  previously unacknowledged stressed assets have already been recognised," said S&P Global Ratings analyst, Deepali Seth-Chhabria.
“By our estimates, the ratio of stressed assets in the country's system is more realistically around 13%-15%, compared with an official rate of 12.3% in the first half ended September 30, 2017.”
Last month the Indian Government charged employees of the State-owned PNB with issuing fraudulent letters of undertaking, or bank guarantees, against which other lenders gave foreign currency loans.
The alleged US$2 billion fraud underscores weaknesses in internal controls and risk-management in India's banking sector, S&P says. “Reports say regulators have given banks until April 30, 2018 to upgrade their systems to prevent this specific type of fraud from occurring again.”
Over the past three years, the agency notes, the Government of India and the Reserve Bank of India (RBI) have introduced an array of new guidelines and standards to strengthen bank balance sheets and improve the sector's overall health.
“Authorities have characterised such efforts in terms of "4Rs": Recognition, Recapitalization, Resolution, and Reform,” S&P says.
“We believe India has made good headway in three of these categories.
“Recognition of stressed assets has notably improved (contributing to a string of losses at public-sector banks). Resolution has benefitted from the introduction of a bankruptcy code and could also benefit from stricter timelines on recovery plans after defaults. And the Government has committed to inject a massive Indian rupee 2.1 trillion (US$32 billion) into public-sector banks.
“This will help them meet regulatory capital levels despite heavy losses in the recent quarter.
“In our view, the "missing R" is reform. We believe the PNB fraud case will hasten the impetus for improving banks' governance, risk-management practices, and internal controls.”
S&P expects the 4Rs and other initiatives to strengthen the Indian banking system in the medium to long run. “In the next year, however, we project continued losses for many public-sector banks.”