Punjab National Bank’s staggering loss in the fourth quarter of 2015-16 should trigger questions on the manner in which banks and their regulator, Reserve Bank of India, approached their jobs in the last four years. The loss, Rs 5,367 crore, is the largest ever loss reported by an Indian bank in the last 26 years.

Provisioning by banks has increased significantly over the last two quarters following RBI’s asset quality review. According to RBI’s deputy governor S.S Mundra, “the exercise was aimed at tracing the sources of pain and pressure points so that remedial procedure could be administered.”

It leads to the question if RBI was earlier lax in supervising the banking system.

Mundra’s diagnosis of the problem suggests that RBI has failed to do its supervisory job properly. While Mundra does not explicitly say that, it is difficult to avoid the conclusion that the central bank was lax.

According to Mundra, the bad loan problem could be traced largely to a combination of the global economic downturn in 2008, corporate imprudence, and governance failure at banks.

Governance failure at banks encompassed ‘pretend and extend’ approach to stressed loans. Perhaps banks were hoping a reversal in the relevant business cycle would help everyone. But it is worth asking if the extent of regulatory forbearance extended by RBI allowed the ‘pretend and extend’ culture to flourish.

A look at some lending data suggests that banks between 2013 and 2015 were lending relatively aggressively to steel and power sectors, two areas where there are a lot of bad loans today.

A part of the lending could have been on account of a judgement call on the viability of the relevant project. A part, however, could have been on account of unwillingness to accept reality.

It is in this situation that RBI should have done better.

Most of the banks in trouble are owned largely by the government. The government cannot be expected to safeguard public interest beyond a point. After all, when there is the taxpayer to recapitalise banks which make bad decisions, what kind of incentive does the government have to improve its performance?

When the majority shareholder does not care beyond a point and the regulator fails, the taxpayer has to foot the bill. A big one at that.