Making an indirect case for privatisation or reducing the role of state-owned lenders, Reserve Bank of India governor Urjit Patel said on Wednesday that the government should decide what to do with public sector banks (PSBs) if it wanted to optimize the use of taxpayer money. The central bank’s governor crumbled no words while making a pitch for withdrawal of legal amnesty from RBI regulations that PSBs enjoy, saying it had led to considerable emaciation, if not complete removal, of RBI powers over corporate governance.
Speaking on the fraud at the Punjab National Bank for the first time, Patel said, “We at RBI 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.” In a pointed allegation at PNB, Patel said the fraud was essentially an operational failure with the bank ignoring instructions.
Patel chose his lecture at Gujarat National Law University, Gandhinagar, to rebut finance minister Arun Jaitley’s charge that regulators who need to keep a “third eye” constantly open are, unfortunately, not accountable.
“RBI had identified — based on cyber-risk considerations — the definite source of operation hazard, through which we now understand that fraud, has been perpetuated. In particular, the RBI had issued decisive instructions via three circulars in 2016 to enable banks to eliminate the hazard. It turns out, ex post, the bank had easily not done so,” said Patel. He added that while RBI will initiate action against the bank, its powers over PSBs would still be limited under the Banking Regulation Act.
The governor said fraud was one of the largest problems bothering RBI, with 86% of such cases taking place in the loans and advances portfolio of banks. The central bank had also detected serious gaps in credit underwriting standards in a number of big-value frauds. These included accepting liberal cash-flow projections, non-monitoring of cash flows, gold-plating (inflating value) of projects and diversion of funds. Describing loan-fraud incidents as a problem of greater significance than PNB-type frauds, Patel said that RBI had initiated a clean-up through its new norms on non-performing assets (NPAs). He compared RBI measures to the mythological Amrit Manthan: “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,” said Patel.
According to Patel, there are three deterrents to fraud — investigative or legal action, market discipline and regulatory discipline. As far as investigation goes, he said, RBI data showed that only a handful of cases over the past five years had closure and those of substantive economic significance remained open. “As a result, the overall enforcement mechanism, at least until now, is not perceived to be a major deterrent to frauds relative to the economic gains from fraud,” he said. Market discipline also did not apply to PSBs because of the perceived sovereign guarantee. “This should imply that the government should prefer a stronger regulatory discipline of these banks… the situation in India is exactly the reverse; RBI’s regulatory powers over PSBs are weaker than over private sector banks,” said Patel.
“Managing directors of PSBs find it comfortable to tell media that business will be as usual for them under RBI’s prompt corrective action framework because 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,” said Patel.
Besides not having the power to remove directors and management, Patel said that RBI cannot supersede a PSB’s board as in case of private banks. It cannot also force mergers, trigger liquidation or withhold a banking licence from a PSB. All these are possible in the case of private banks.