S&P ‘sceptical’ of banks’ corporate ownership

S&P Global Ratings on Monday expressed scepticism over allowing corporate ownership in banks given India’s weak corporate governance amid large corporate defaults over the past few years.

Last week, an RBI panel had proposed that large corporates may be permitted to promote banks, as well as raising the cap on promoters’ stake in private sector banks to 26%, from 15% at present. “We are, however, sceptical of allowing corporate ownership in banks given India’s weak corporate governance amid large corporate defaults over the past few years,” S&P said in a statement.

In addition, the RBI would face challenges in supervising non-financial sector entities, and supervisory resources could be further strained at a time when the health of India’s financial sector was weak, it added.

“Corporate ownership of banks raises the risk of intergroup lending, diversion of funds, and reputational exposure. Also, the risk of contagion from corporate defaults to the financial sector increases significantly,” the ratings agency said.