Patel’s Resignation Highlights Risks To RBI’s Policy Priorities: Fitch

The resignation of Urjit Patel as Reserve Bank of India governor highlights the risks of increased government influence on the central bank, which in turn could undermine the efforts to address the bad loans problem, said Fitch Ratings.

Patel resigned abruptly from the post of the governor on Dec. 10, nine months before his term was scheduled to come to an end in September 2019.

The Government, on Tuesday, appointed former Economic Affairs Secretary Shaktikanta Das as the new governor.

The RBI's efforts to address bad loan problems have the potential to improve banking-sector health over the long term and its commitment to inflation targeting has supported a more stable macroeconomic environment in recent years.

"Increased government influence on the central bank could undermine this progress," Fitch said.

A rollback of measures that address long-standing bad-loan problems and restrict the growth of weakly capitalised banks could have a "negative impact" on the credit profiles of affected banks and may increase risks in the financial system, it said.

The rating agency said the full implications of Patel's resignation will only become clearer once there is some indication of the RBI's policy approach under his replacement, Shaktikanta Das.

"The central bank's stance may still remain unchanged," Fitch said.

However, with general elections due by May 2019, there will be "political incentive" for the government to push for more supportive RBI policies, it added.

Fitch said Patel's resignation came after months of escalating government pressure on the RBI to ease some of the strains created by its clean-up of the banking sector.

Increased bad loan recognition has led to higher credit costs - particularly for state banks - and weaker capitalisation in recent years. Capital constraints have, in turn, held back lending, while 11 state banks have fallen under the RBI's "prompt corrective action" framework, which allows the central bank to directly restrict their lending.

Problems in the non-bank financial sector following the recent default of Infrastructure Leasing & Financial Services Ltd. have further reduced credit availability, Fitch said.

"The government has unsuccessfully pushed the RBI to relax the PCA thresholds to allow some troubled banks to step up lending. Calls to dilute provisions in a new regulatory NPL framework that has accelerated bad loan recognition this year and to provide emergency liquidity to non-bank financial institutions have also been dismissed," Fitch said.