Stating that the recommendations of the Nachiket Mor committee on financial inclusion are credit positive for banks, international rating agency Moody's has stressed that the main issue is implementation of the panel's politically sensitive suggestions.
"The recommendations in the report, if fully implemented, would be a significant credit positive overhaul of the Indian banking system. The key issue, of course, is its implementation, since some of these issues are politically controversial," Moody's Investors Service said in a note.
It pointed out that proposals on priority sector lending (PSL), including deregulation of interest rates, are welcome and will benefit state-run ones which have higher stress on their PSL books.
"Deregulating interest rates on PSL loans, so that banks have the flexibility to price risk as they deem appropriate, is one of the key recommendations in the report and is credit positive for India's banks," it said.
The Committee on Comprehensive Financial Services for Small Businesses and Low Income Households, headed by ex-ICICI Bank executive Mor, presented its report last week. It recommended that banks be asked not to lend below the base rate and makes a case for benefits such as interest subvention or loan waivers to be directly passed to the borrowers.
According to the agency, the historical data around giving loan waivers to farm debt have created a "moral hazard" among borrowers, which results in non-repayment.
The note said the recommendations made by the committee are in line with the general direction of banking reforms initiated by RBI Governor Raghuram Rajan after he assumed office in September.
"Although we believe that the probability of full implementation of the recommendations is low because of political resistance, nevertheless the report increases the probability of some reform," it said.
