The recently detected fraud at Punjab National Bank underscores an urgent need for reforms in PSU banks, S&P Global Ratings said today.
"We expect further losses at India's public sector banks but the bulk of previously unacknowledged stressed assets have already been recognised," S&P Global Ratings analyst Deepali Seth-Chhabria said.
This fraud comes as the sector continues to reel under soaring non-performing assets in an extended downcycle.
"However, tighter regulatory standards combined with generous capital injections should strengthen bank balance sheets," S&P said.
S&P said it estimates the ratio of stressed assets in the country's system is more realistically around 13-15 per cent, compared with an official rate of 12.3 per cent in the first half ended September 30, 2017.
Last month, PNB reported that it has detected frauds to the tune of Rs 12,700 crore following which some of its employees were charged with issuing fraudulent letters of undertaking, or bank guarantees against which other lenders gave foreign currency loans.
"The alleged USD 2 billion fraud underscores weaknesses in internal controls and risk-management in India's banking sector," S&P said.
Over the past three years, the government of India and the RBI have introduced an array of new guidelines and standards to strengthen bank balance sheets and improve the sector's overall health.
"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 benefited from the introduction of a bankruptcy code and could also benefit from stricter timelines on recovery plans after defaults.
The government has committed to inject a massive Rs 2.1 lakh crore (USD 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 said.
The alleged fraud at PNB highlights an inherent weakness in the governance and transparency standards in the Indian banking system as a whole," Seth-Chhabria said.
For the next year, moreover, S&P projected continued losses for many public-sector banks.
"Our credit outlook on the sector is stable, because we believe the process of upgrading recognition standards is almost complete," Seth-Chhabria said.
Meanwhile, the government's capital infusions and extraordinary support will be a key rating factor for India's public-sector banks, S&P said.
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