Amid criticism from several quarters including the government for failing to prevent banking frauds in the light of the recent scam at state-run lender Punjab National Bank, Reserve Bank of India’s Governor Urjit Patel said on Wednesday that no banking regulator can catch or prevent all banking frauds.
“There has been a tendency in the pronouncements post revelation of the fraud that RBI supervision team should have caught it,” Dr Patel said in a speech at the Gujarat National Law University, Gandhinagar.
He said it is simply not feasible for a banking regulator to be in every nook and corner of banking activity to rule out frauds by “being there”.
RBI deeply pained
Mr. Patel said RBI is also deeply pained by the banking frauds and termed these incidents as ‘loot’.
“I have chosen to speak today to convey that we at the Reserve Bank of India also feel the anger, hurt and pain at the banking sector frauds and irregularities. In plain simple English, these practices amount to a looting of our country’s future by some in the business community, in cahoots with some lenders,” Dr Patel said.
Mr Patel, in fact went on to say that banking regulatory powers in India are not ownership-neutral. He pointed out that RBI does not have to power to supersede public sector bank board as their are not registered under the Companies Act like private sector banks. He said nor RBI cannot remove any directors of public sector banks neither liquidate a government-owned bank.
“The BR Act exemptions for PSBs mean that the one agency – the regulatory – that can respond relatively quickly against banking frauds or irregularities cannot take effective action. Hence, for example, MDs at PSBs find it comfortable to tell media that business will be as usual for them under RBI’s Prompt Corrective Action framework as even if they do not meet the stipulated restrictions of the framework, the ultimate authority over their tenure is with the government and not with the RBI,” Dr Patel said.
He said RBI has undertaken cleaning up the credit culture of the country and referred the recent stringent circular on NPA as the churning rod in the Amrit Manthan or the Samudra Manthan of the modern day Indian economy.
“Until the churn is complete and the nectar of stability safely secured for the country’s future, someone must consume the poison that emanates along the way. If we need to face the brickbats and be the Neelakantha consuming this poison, we will do so as our duty; we will persist with our endeavours and get better with each trial and tribulation along the way,” he said.
He called for making banking regulatory powers neutral to bank ownership and leveling the playing field between public sector and private sector banks.
He said it is an open issue whether centralised government control alone can be effective enough at designing and implementing governance of banking franchise comprising over 2/3rds of the sector’s deposits and assets.
“It would be better instead to restore regulatory and market discipline.
These, and other structural reforms to the banking sector, would enable India to grow sustainably at respectable rates,” Dr Patel added.
