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Breaking his silence on the country's biggest banking fraud, RBI Governor Urjit Patel on Wednesday termed it a loot of the country’s future by some in the business community, in cahoots with some lenders.
The RBI Governor also underlined the fundamental fissures that exist in the regulations of banks in the country and expressed threats of tremors due to limited control of the regulator over public sector banks (PSBs).
Addressing a lecture on ‘Banking Regulatory Powers Should Be Ownership Neutral’ at Gujarat National Law University, Gandhinagar, Patel stated that a model of dual regulation of banks in India — by the RBI and the government — leads to the fissures in the banking industry.
The RBI regulates all commercial banks under the Banking Regulation (BR) Act, 1949, but additionally, all PSBs are regulated by the government of India under the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970, the Bank Nationalisation Act, 1980, and the State Bank of India Act, 1955.
“This legislative reality has, in effect, led to a deep fissure in the banking regulatory terrain, a system of dual regulation, by the Finance Ministry in addition to RBI... The RBI will undertake actions against the bank that it is empowered to, but this set is limited under its BR Act powers over PSBs,” Patel stated.
Indicating the need for greater autonomy and regulatory powers for the apex bank, Patel stated that “the BR Act exemptions for PSBs mean that the one agency — the regulator — 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 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,” Patel told the gathering.
PNB fraud
Referring to the recent over $2-billion fraud at Punjab National Bank (PNB), Patel said: “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...I speak today to highlight some fundamental fissures that exist in the regulation of banks, in particular, PSBs.”
“We are doing all we can to break this unholy nexus,” Patel said indicating a move towards an overhaul of the banking regulations in the country.
Indicative of churning for elixir as part of the SamudraManthan of the modern day Indian economy, Patel urged the promoters and banks to be on the sides of the Devas rather than the Asuras .
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,” he said.
Observing that there has been a tendency in the pronouncements post revelation of the fraud that the RBI supervision team should have caught it, Patel said no banking regulator can catch or prevent all frauds.
“While that can always be said ex post with any fraud, it is simply infeasible for a banking regulator to be in every nook and corner of banking activity to rule out frauds by ‘being there’,” he said.
Referring to PNB, Patel said the RBI had identified, based on cyber risk considerations, the exact source of operational hazard — through which “we understand” now the fraud had been perpetrated.
In particular, he said, the RBI had issued precise instructions via three circulars in 2016 to enable banks to eliminate the hazard.
“It turns out ex post the bank had simply not done so. Clearly, the internal processes at the bank failed in allowing the operational hazard to remain in place in spite of clear instructions to close it,” he said.
Bad loans
Patel also flagged the issue of rising bad loans (or NPAs) saying that the problem needs immediate attention.
“Its magnitude is larger than the ₹8.5-lakh crore of stressed assets on bank balance sheets and its significance stems from several practices in the promoter-bank credit relationship that need immediate attention.”
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