Reserve Bank of India Governor Urjit Patel. Express Photo by Pradip Das Reserve Bank of India Governor Urjit Patel. Express Photo by Pradip Das

RBI Governor Urjit Patel took on critics of the Indian central bank who had attacked the regulator after the recent fraud in state-owned Punjab National Bank for supervisory failures saying that there was “anger, hurt and pain” in the central bank over “looting” by some in the business community and its helplessness in dealing with the situation as the regulator is constrained by inadequate legal powers to supervise and manage public sector banks.

In his strongest comments to date, the Governor also made it clear that the central bank would not go back on its current approach of a clean-up of the credit culture in the country and prompt recognition and resolution of bad loans until the churn was complete and stability achieved.

“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,” Patel said. “Success has many fathers; failures none. Hence, there has been the usual blame game, passing the buck, and a tonne of honking, mostly short-term and knee-jerk reactions.” “All these appear to have prevented the participants in this cacophony from deep reflection and soul searching that can help solve fundamental issues that are the root cause of such frauds and related irregularities in the banking sector, which are in fact far too regular,” he said in a speech at the Centre for Banking & Financial Laws, Gujarat National Law University, Gandhinagar.

This is seen as a veiled attack, especially on the government, which was quick to direct its fire against the central bank soon after PNB revealed that it had been hit by a major fraud. According to Patel, the RBI’s legal powers to supervise and regulate PSU banks are also constrained — it cannot remove public sector banks’ directors or the management, who are appointed by the government of India (GoI), nor can it force a merger or trigger the liquidation of a state-owned bank. The RBI has also limited legal authority to hold public sector bank boards accountable regarding strategic direction, risk profiles, assessment of management, and compensation, Patel said, quoting the Detailed Assessment Report (DAR) on the Basel Core Principles (BCP). Seeking more powers, he said legal reforms are thus highly desirable to empower the RBI to fully exercise the same responsibilities for PSBs as now apply to private banks, and to ensure a level playing field in supervisory enforcement.

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Patel then countered the criticism of the RBI especially on the supervisory front in the wake of the fraud saying, “I see what we have undertaken for cleaning up the credit culture of the country – in particular, the comprehensive regulatory overhaul announced by the Reserve Bank on February 12 for prompt recognition and resolution of NPAs at banks — as the Mandara mount or 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,” he said referring to the clean-up of bank balance sheets now underway.

“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. “I do wish more promoters and banks, individually — or collectively through their industry bodies, would reconsider being on the side of Devas rather than Asuras in this Amrit Manthan,” Patel said.

Patel said under the Banking Regulation Act, the regulator cannot supersede the boards of public sector banks as they are banking companies under the Companies Act. Similarly, it cannot remove the Chairman and Managing Director and also cannot force a merger in the case of PSU banks.

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Highlighting these infirmities, Patel said, the legislative reality has in effect led to a deep fissure in the landscape of banking regulatory terrain: a system of dual regulation, by the Finance Ministry in addition to the RBI. The RBI data on banking frauds suggests that only a handful of cases over the past five years have had closure, and cases of substantive economic significance remain open. As a result, the overall enforcement mechanism — at least until now — is not perceived to be a major deterrent to frauds relative to economic gains from fraud, he said.

Picking holes in the system, Patel said 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,” he said.

On the criticism that the RBI should have detected the fraud earlier, Patel said there has been a tendency in the pronouncements post revelation of the fraud that the RBI supervision team should have caught it.

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