AMN / Gandhinagar
Breaking his silence over mega PNB scam, Reserve Bank of India (RBI) governor Urjit Patel Wednesday put onus of fraud on the finance ministry.
Defending RBI, Patel said that the current legislation does not give sufficient regulatory control to RBI over state-owned banks.
“RBI’s regulatory powers over public sector banks are weaker than those over the private sector banks,” said Patel in a speech delivered at the Gujarat National Law University (GNLU) in Gandhinagar.
Responding to charges of laxity on part of the RBI in detecting the fraud, Patel said: “There has been a tendency in the pronouncements post revelation of the fraud that RBI supervision team should have caught it… 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”.
While the Banking Regulation Act allows the central bank to regulate all commercial banks in India, Section 51 of the amended Banking Regulation Act does not allow RBI to remove the chairman, directors and management of PSU banks; further, it does not allow the regulator to move ahead either with liquidation of PSU banks or to order forced mergers of state-owned banks.
“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. 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 as I will explain are in fact far too regular”.
Read full Article-Banking Regulatory Powers Should Be Ownership Neutral
Governor has blamed the diluted regulatory structure for the lapses in oversight and thereby put the ball back in the court of the Union government. In the process, Patel has revived the blame game on the over $2 billion PNB fraud. His remarks have also provided fodder for the opposition to politically target the ruling Bharatiya Janata Party (BJP).
A finance ministry spokesperson refrained from responding immediately, saying “it is not proper to comment at the moment”.
Patel called on the government to strengthen the Banking Regulation Act, 1949 to ensure that the regulator has enough teeth to adequately regulate PSU banks and to make its regulatory powers “ownership neutral”. According to him, the amendments made to the Banking Regulation Act have led to “emaciation” of RBI’s powers with respect to corporate governance issues at PSU banks, one of the reasons for financial frauds at banks.
In addition to the Banking Regulation Act, PSU banks are also regulated by the government of India (GoI) 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 landscape of banking regulatory terrain: a system of dual regulation, by the finance ministry in addition to RBI,” Patel said.
Comparing the corporate governance structure at private banks with that of PSU banks, Patel said that complete regulatory control over private banks incentivizes the private lenders to invest more in governance, creating deterrence against regulatory violations and frauds.
Arguing in this vein, Patel seemingly made out a case for PSU bank privatization. The government should decide “what do with the public sector banking system going forward as part of optimising over the best use of scarce national fiscal resources,” he said.
Commenting on its revised framework for resolution of stressed assets, Patel said that the new framework along with the insolvency and bankruptcy code attempts at breaking the promoter-bank nexus, one of the reason that encourages fraud.
To be sure, on 12 February, RBI came out with revised framework for stressed assets resolution. The new framework requires proactive resolution of stressed accounts before they turn into non-performing assets (NPAs). The central bank has also done away with other pre-IBC (Insolvency and Bankruptcy Code) restructuring schemes such as Strategic Debt Restructuring and Scheme for Sustainable Structuring of Stressed Assets (S4A), among others.
“The IBC along with RBI’s revised framework will help break the promoter-bank nexus which has led to crony capitalism and attendant NPA or credit misallocation problem as ever-greening suited some borrowers and some lenders under the earlier framework. In turn, this will prevent the erosion of growth from the emergence of zombie firms and sectors,” said Patel.