Reserve Bank of India Governor Urjit Patel on Wednesday said the central bank feels the anger, hurt and pain at the recent banking sector frauds and irregularities. His comments came after the recent scams at Punjab National Bank, and subsequent revelations about more frauds at other public sector banks. The PNB fraud, now pegged to be around Rs 13,600 crore, is at the heart of this entire controversy, which revolves around diamond merchant Nirav Modi and his partner uncle Mehul Choksi.
Delivering a lecture at the Gujarat National Law University here, 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."
Talking about the initiatives taken by the RBI to clean-up the banking system, he said: "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 12th 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."
He added that 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. "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 added.
In a RBI statement on Wednesday, the RBI Governor also said there has been a "knee-jerk reaction" on the recent biggest 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.
In an observation made in the Financial Sector Assessment Programme (FSAP) of India in 2017, the International Monetary Fund (IMF) and the World Bank (WB) said the Reserve Bank's regulatory powers over banks are not neutral to bank ownership, he stated.
The RBI enjoys a large degree of operational autonomy, but amendments to several legal provisions, and formal grounding of RBI independence in the RBI Act, would provide greater legal certainty, said the RBI governor in a statement.
"The RBI's legal powers to supervise and regulate PSBs are also constrained - it cannot remove PSB directors or management, who are appointed by the government of India, nor can it force a merger or trigger the liquidation of a PSB. It has also limited legal authority to hold PSB Boards accountable regarding strategic direction, risk profiles, assessment of management, and compensation," he said.
The report also suggests that there's a need for legal reforms 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.