Speaking for the first time on multi-billion banking fraud, Reserve Bank of India Governor Urjit Patel on Wednesday highlighted some fundamental fissures that exist in the regulation of public sector banks. This comes after the apex bank faced public anger for not being able to detect country's biggest banking scam in its annual audit. However, Urjit Patel in a statement issued on Wednesday said that the Reserve Bank's regulatory powers over PSBs banks were limited. He listed out seven things that the RBI cannot do when it comes to PSBs. Among them are:
- RBI cannot remove directors and management at PSBs.
- RBI cannot force a merger in the case of PSBs.
- RBI cannot remove the Chairman and Managing Director at PSBs.
- RBI cannot trigger liquidation of PSBs.
- PSB's banking activity does not require license from RBI, hence, RBI cannot revoke their licenses.
- In some cases there is duality of Managing Director and the Chairman - they are the same - implying the MD is primarily answerable only to himself or herself.
The RBI Governor referred to World Bank's Detailed Assessment Report which made critical observations on apex bank's power over state-owned banks. It said: "The RBI has also limited legal authority to hold PSB Boards accountable regarding strategic direction, risk profiles, assessment of management, and compensation. 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."
The report had also observed that the central bank's very limited authority under the Banking Acts to hold the PSB Boards accountable has become problematic. Under the law and according to custom, the RBI cannot hold PSB Boards accountable for assessing and- when necessary- replacing weak and nonperforming senior management and government-appointed board members.
Suggesting the ways banking scams can be reduced, Patel said that the criminal investigation of frauds and attached penalties can serve as an effective deterrence if reporting and investigation were expedient and penalties were adequately severe relative to the gains from fraudulent activity. He, however, also made it clear that no banking regulator can catch or prevent all frauds.
The RBI Governor said: "There has been a tendency in the pronouncements post revelation of the fraud that RBI supervision team should have caught it. 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 was referring to the scams at Punjab National Bank and subsequent revelations about more frauds at other public sector banks.
Delivering a lecture at the Gujarat National Law University, he 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." Patel also said there has been a "knee-jerk reaction" on the recent banking fraud. He added that there's a need for participants (all stakeholders concerned) to address some fundamental issues that are the root cause of such frauds and related irregularities in the banking sector.