Describing the lack of strict governance as the “elephant in the room,” Das said this had led to elevated levels of non-performing assets, capital shortfalls, fraud and inadequate risk management.
“The role of independent boards in fostering a compliance culture by establishing the proper systems of control, audit and distinct reporting of business and risk management has been found wanting in some public-sector banks leading to build-up of NPAs,” Das told an audience in the western Indian city of Ahmedabad.
State-run lenders control about 60% of India’s banking industry. They are owned by the government, with the Reserve Bank of India having limited supervision and legal powers to bring about changes in management, unlike privately-owned ones over which is holds more sway. That creates an uneven playing field leading to question marks about the efficacy of central bank regulations over state-run institutions.
India’s banking sector has the highest ratio of stressed assets in the world, with many bad loans to companies in sectors such as energy and steel. A crisis in shadow banking has also raised further concern that banks, which have 7% of their loans to non-banking finance companies, will face a fresh spate of debt defaults.
Das said that while the number of NPAs has declined recently, the provision coverage ratio has increased to 60.5% from 48.3% a year ago. The capital adequacy ratio in the banking system has also climbed to above the Basel requirements, he said.