The recent governance issues in India's banking sector involving ICICI Bank and Axis Bank reiterate the need to improve risk management and maintain strong governance practices, S&P Global Ratings said today.
"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 Global Ratings credit analyst Michael Puli said.
The US-based rating agency assesses management's ability and expertise to grow the business sustainably while rating banks.
"We view governance and transparency in Indian banking as a negative factor," it said.
S&P has 'BBB-' rating with a stable outlook for both Axis Bank and ICICI Bank.
Recently the board of private sector lender Axis Bank had sought RBI nod for the reappointment of managing director and CEO 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.
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According to reports, the RBI's unwillingness to approve the initial request of three-year term was due to a number of risk management and governance issues that have emerged at the bank over the past year or so.
These include a deterioration in asset quality and under-reporting of non-performing loans, S&P said.
Chanda Kochhar, the managing director and CEO of India's largest private sector bank, ICICI Bank, is currently under investigation for an alleged conflict of interest associated with the bank's loan to Videocon group in 2012.
The Central Bureau of Investigation 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 said.
S&P had on December 21, 2017, revised down the assessment of Axis Bank's standalone 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 Bank's risk management as weaker than that of private sector peer HDFC Bank," it said.
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.