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  3. P J Nayak report implementation to improve ratings of public sector banks: Fitch Rating

P J Nayak report implementation to improve ratings of public sector banks: Fitch Rating

28 May 2014 Evaluate

The RBI committee report to review the country's bank board governance standards, has found acceptance with yet another global rating agency, Fitch Rating, which hinted at an upward revision of state-run banks' credit ratings if key suggestions of P J Nayak panel report, which it termed as wider sectoral reform push by the central bank, were implemented. Earlier, Moody’s had termed Nayak report credit-positive for state-run banks.

Fitch, in its note highlighted that should the PJ Nayak report recommendations lead to a greater separation between the state and bank, it could necessitate a reassessment of its current assumptions on the propensity for extraordinary support for these banks, which has been an important factor underpinning the capitalization of many PSUs as this reassessment may have a potential impact on their issuer default ratings.

However, it highlighted that the implementation of the specific recommendations, which require reduction in state ownership would be not be easy as this would be surrounded with significant political and legislative hurdles, to remain highly uncertain in the near-term due to lack of political support necessary for its passage. On the flip side, the global credit rating agency noting that many of the recommendations not requiring legislation, will have a much higher possibility of implementation, which could help strengthen corporate governance standard, particularly at the state-owned banks.

Principal recommendations of PJ Nayak’s report focuses on eliminating various constraints on public sector banks as a result of their state control, which have a bearing on the quality of their governance. The report also calls for creation of a bank investment company to hold state equity stakes, moving to a uniform bank licensing regime for all banks irrespective of ownership, creation of a dedicated bank boards bureau made up of experienced, retired bankers to select the board and management team for start-run banks among other things.

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