On Monday, S&P Global Ratings expressed scepticism over allowing corporate ownership in banks given India's weak corporate governance amid large corporate defaults over the past few years.
"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.
It added that the Reserve Bank of India (RBI) will face challenges in supervising non-financial sector entities at a time when the health of the financial sector is weak.
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 percent, from 15 percent at present.
The recommendation is to allow corporates to control banks after necessary amendments to the Banking Regulation Act, 1949 to prevent connected lending and exposures between the banks and other financial and non-financial group entities.
In addition, the group proposed the strengthening of the supervisory mechanism for large conglomerates.
"In our view, the working group's concerns regarding conflict of interest, concentration of economic power, and financial stability in allowing corporates to own banks are potential risks. 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," S&P said.
The performance of India's corporate sector over the past few years has been weak with large corporate defaults, it said adding that non-performing loans (NPLs) for the corporate sector stood at around 13% of total corporate loans as of March 2020 (around 18% as of March 2018), highlighting the more pronounced risk in India compared with other countries.
The US-based rating agency, however, supported another recommendation from the RBI panel to allow well-managed NBFCs with over 10 years of experience and Rs 50,000 crore of assets to be converted to banks, saying that it could improve financial stability.
Further, S&P said the recommendation to harmonise licensing guidelines for all banks, new and old, will help restore a level playing field for all players.
The RBI's proposal to raise the minimum net worth for all universal banks to Rs 1,000 crore will also ensure better capitalisation and that only promoters with deep pockets can enter the banking sector, it said.
In addition, the recommendations would limit the size of shadow banking in India and ensure stronger supervision, S&P added.