P J Nayak report implementation can improve ratings of public sector banks, says Fitch Ratings

MUMBAI: Fitch Ratings today hinted at an upward revision of state-run banks' credit ratings if the government lets RBI implement key suggestions of P J Nayak panel report which it termed as wider sectoral reform push by the central bank.

"Should the (PJ Nayak report) recommendation lead to a greater separation between the state and bank, it could necessitate a reassessment of our current assumptions on the propensity for extraordinary support for these banks. This has been an important factor underpinning the capitalisation of many PSUs, as this reassessment could have a potential impact on their issuer default ratings," Fitch said in a note.

However, it added that the passage of the specific recommendations surrounding a reduction in state ownership would require significant political and legislative hurdles to be cleared, and therefore remains highly uncertain in the near-term as it sees lack of political support necessary for its passage.

The RBI appointed Nayak committee, which submitted its report on May 13, addresses governance issues at both private and state-owned banks, while the focus of the recommendations targets public sector banks.

The report called for bringing down government stake in public sector banks below 50 per cent.

Noting that many of the recommendations do not require legislation and hence have a much higher likelihood of implementation, it said the report implementation will help strengthen corporate governance standard, particularly at the state-owned banks.

The report called for measures to bring about a level playing field between public and private sector banks, as with an earlier RBI report concerning creation of a new financial institutions resolution regime.

The report also called for bringing down state control and lowering reduction in state ownership to below 50 per cent, repealing of the Parliamentary Acts through which public sector banks have been constituted as statutory bodies.

It also called for creation of a bank investment company to hold state equity stakes, and 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.