RBI Governor Urjit Patel has finally broken his silence. It was a much-overdue response since the blame game that ensued after the PNB fraud ended up at his doorstep. Patel raised the issue of multiple regulations governing PSBs - that account for two-thirds of India's banking - apart from the umbrella Banking Regulation Act 1949. For instance, the Banking Companies (Acquisition and Transfer of Undertaking ) Act 1970, the Banking Nationalisation Act 1980 and the State Bank of India Act 1955.
The State Bank of India alone has a quarter of the total deposits and advances in India and the RBI doesn't have the power to remove directors, CMDs, or force mergers or liquidation. The burning question is: Has the RBI ever recommended suspension, merger or liquidation of a PSB? It does, after all, have the power to nudge banks, raise alarms on the risk management side and issue directives on provisioning.
Experts insist that deteriorating asset quality and the scope to commit fraud is due to operational failure that built up over decades. PSBs have institutionalised lax credit standards over the decades, with RBI policies only helping banks to evergreen loans.
Another fundamental problem has been that government nominees on PSB boards are inactive, skipping meetings for the most part. Even Chief Economic Advisor, Arvind Subramanian has flagged the problem earlier.
The Rs 12,968-crore question, however, is: what is the long-term solution? And, who is going to come up with it?