Events Leading To Urjit Patel’s Resignation Credit Negative, Says S&P

The Indian government’s increasing involvement in the affairs of the Reserve Bank of India could undermine the "hard-fought improvements" in the banking sector made by the last two governors, said S&P Global Ratings.

The credit rating company views the developments leading to the resignation of former Governor Urjit Patel as credit negative, it said in a statement. However, it doesn't see any material change in the central bank's level of independence when it comes to adoption of policy and is awaiting any changes to the banking system at the next RBI board meet in January 2019.

The RBI has a new governor—former bureaucrat Shaktikanta Das—who took to the helm after Patel shocked the institution with a surprise resignation. This came after months of tension between the central bank and the Centre on issues of banking regulations and capital reserves.

“The RBI has traditionally shown greater independence than many regional peers and a robust institutional culture,” the statement said. “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.”

Das, on his first day in office, had assured that he would do everything in his power to uphold the institution’s autonomy and credibility. He also spoke of the RBI’s accountability to its stakeholders, including the government, and said that he will undertake consultations with them wherever necessary.

Both during the press conference and his first RBI Board meeting on Dec. 14, Das steered clear of controversial topics that had earlier caused friction with the government.

“The RBI’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,” S&P said. “However, this is off a low base and continues to face headwinds.”

The statement said the recognition of stressed assets in banks improved significantly after the RBI’s circular on Feb. 12, 2018, which eliminated previous schemes for restructuring. “This simplified recognition and associated provisioning for stressed assets.”

The central bank’s Prompt Corrective action framework—another matter of contention—is an appropriate way to recapitalise distressed banks given the fundamental issues they face, it said.