The Govt, not RBI, controls public sector banks: Urjit Patel  

Two weeks after Finance Minister Arun Jaitley blamed the RBI for the PNB fraud, Reserve Bank of India Governor Urjit Patel on Wednesday blamed the finance ministry for not giving RBI sufficient power over public sector banks. The RBI Governor broke his silence in an address at the Gujarat National Law University at Gandhinagar.

Finance Minister Jaitley was quoted last month as saying, "We must always remember that regulators have a very important function. They ultimately decide the rules of the game and they have to have a third eye kept perpetually open and turned towards the sector. But unfortunately, in (the) Indian system, we politicians are accountable, the regulators are not."

The RBI Governor conceded that banking frauds had increased during the last five years. Quoting a RBI study, he said, “During the last five financial years, frauds have increased substantially both in volume and value terms. During this period, while the volume of frauds has increased by 19.6 per cent from 4235 to 5064, the value (loss incurred) has increased by 72 per cent from Rs. 97.5 billion (Rs. 9,750 crores) to Rs.167.7 billion (Rs. 16,770 crores). Share of frauds in [loan] advances portfolio continued to be high at 86 per cent of the frauds reported during 2016-17 (in terms of amount involved).

But Patel lamented that while the RBI has far more control over private sector banks, its has little say over public sector banks which look up to the finance ministry. The weak legal framework over PSBs deters the RBI from exercising better control over PSBs, he hinted.

Referring to operational failures in the second largest public sector bank, the RBI Governor stated, “ In the specific case at hand, the Reserve Bank had identified, based on cyber risk considerations, the exact source of operational hazard –through which we understand now the fraud had been perpetrated. In particular, the RBI had issued precise instructions via three circulars in 2016 to enable banks to eliminate the hazard. It turns out ex post the bank had simply not done so.”

Patel called upon the owner of public sector banks, the Government, to level the playing field between public sector and private sector banks. It was time for the Government, he suggested, to take a long-term view about what to do with public sector banks in optimising scarce financial resources.

On a more philosophical note, Patel offered to drink poison if that helped cleanse the system.

He went on to draw a parallel from myths and said, “I have chosen to speak today to convey that we at the Reserve Bank of India also feel the anger, hurt and pain at the banking sector frauds and irregularities. 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.”

“As safeguards of your deposits at banks, and starting with the Asset Quality Review of banks announced by the Reserve Bank in 2015 – since ably conducted by our supervisory teams and as acknowledged objectively by experts of reputed multilateral agencies, we are doing all we can to break this unholy nexus.”

“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.”

“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.”

“I do wish more promoters and banks, individually – or collectively through their industry bodies, would reconsider being on the side of Devas rather than Asuras in this Amrit Manthan.”