Fear banking system is being used to launder money: Mundra

As the alleged Bank of Baroda fraud case gets murkier by every minute, Reserve Bank of India (RBI) deputy governor SS Mundra, says the central bank is keeping a close track of the developments, but refrains from commenting on the bank-specific issue.

Speaking exclusively to CNBC-TV18, Mundra says it is unrealistic to expect a fraud to be detected at a branch level. He believes the Indian banking sector is, in the wake of such alleged scams, in need of a centralised surveillance system.

While he admits there is some complacency among banks in following the Know-Your-Customer (KYC) norms, he says the biggest fear right now is that the Indian banking system may be used as a conduit for money laundering activities.Below is the verbatim transcript of the interview.Q: There is a reason why I said at least India Inc very keenly wants to hear you today. This sudden news about a near Rs 6000 crore of money going out of a Bank of Baroda branch. Apparently the branch usually has Rs 45 crore remitted and now in a short span of time Rs 6000 crore. Isn't it too late for an alert system?A: I would not really like to comment on individual instance because you know it is still under investigations and various agencies are working on it but having said that I would actually like to speak about some generic or larger issue on this.Two things come out very clearly. One is, there are cases of individual indiscretion. Now, indiscretion whether it is on account of a performance pressure or it is on account of something else time would tell.The second thing - these cases are detected by the institution's internal system first. What it indicates that while systems in place but by the time you report there is a substantial lag and that is exactly what you are also pointing out. So, this brings us to the point that there has to be a better system of surveillance which is more real time.However there are some issues which are even larger than this. This is a specific issue. Those larger issues, if there is vacuum either at the board level which is required to set the direction or at the CEO level or the missing middle problem, if there is a gap in any of these there can be manifestation. If gap is cumulatively at all the three places at the same time, I think we need to think much more comprehensively on that.Q: Have you alerted other banks or are you starting a surveillance on other banks on account of the one discovered at Bank of Baroda (BoB)?A: From the information which has come till now there are obviously linkages. So, we would need to look at the wider ramifications of this.Q: Let me come to the non-performing loan (NPL) issue. I have a host of questions on it. First in the latest credit policy you pointed out that you have told banks that where there is a difference of view between the supervisor and the bank in terms of asset classification the banks have to disclose it. First, when are those rules coming, is it effective for this result season?A: We are trying to put the final framework in this but maybe there is a possibility as the coming - the March 16 account disclosure. We should be able to put the framework in place.Q: But why in the first place should there be a discrepancy? When the supervisor says this is wrong it is wrong, isn't it? Your view has to prevail, doesn't it?A: What we are trying to say, that in any situation large account there will be technical issues, it is quite possible that while closing the account bank has not treated as NPA. In subsequent supervisor review it has been found that no, it should be treated. We give the bank opportunity to present their case. We admit we don't admit but finally if it crystallises that no it is an NPA by the time you have closed the previous year's book rather than reinstating the whole thing it will come as a disclosure. So, it doesn't mean that they are not required to do. They are required to do and also disclose.Q: Let me come to 5:25. We don't have a system where it will figure in the first place. SBI is saying that they think the pipeline is Rs 30,000 crore. SBI is one quarter of the banking system. So, let us assume for the overall system it is Rs 1,20,000 crore.A: Of course, that will be a very simple arithmetical assumption but yes, okay, I go with it.Q: But even Rs 1 lakh crore. It is not that an unusually high number, are you happy with the way 5:25 is applied?A: Now, as you mentioned - larger issue let us understand. All the regulation which we have put in place, say, in the last one year or two year whether it is the whole Central Repository of Information on Large Credits (CRILC) platform or the JLF or the 5:25. The whole point is very clear that if there is a problem then recognise it, don't postpone it but if there are productive capacity in the economy and if there are justifiable reason that the productive capacity in the economy should not be put to jeopardy. So, there is an enabling mechanism. 5:25 is a mechanism of that kind.Now, I agree, you put any framework in place and there was always a possibility that it is not really used with the sense of responsibility which when we put the regulation we expect but then you have to keep on putting a check and balance it. This is of a very recent vintage, 5:25 has been introduced recently. But our team on a random basis and on an ongoing basis keep on picking up the cases which are being dealt under 5:25 and examining if they are meeting the framework, they will continue. If they are not meeting the framework we would have our usual regulatory and supervisory action but the sum and substance we need to give it time. Q: So, you will disallow Bhushan, will you disallow Ratnagiri?A: I would refrain from commenting on individual cases but each case as it comes would be examined in greater detail. We would expect it to completely match with the framework which has been provided.Q: Let me come to the whole issue of capital. There are various numbers, governments number has been Rs 1,80,000 crore which is at 65 rupee USD 28 billion. There are lots of brokerages which go with USD 40 billion as required capital. Are you happy with this USD 27 billion calculation?A: These calculations have been happening. Couple of years back probably the first time calculation was done by RBI and the figure which was estimated was something like Rs 2,40,000 crore. Having said that, it will be a moving figure. You cannot do calculation, arrive at a figure and say it is final. Why it is a moving figure, one is how the growth itself is coming. If credit is growing in the system at 10 percent our credit is growing in the system at 15 or 20 percent, it can completely change the calculation.What is the focus of banks going forward? If banks continue to finance the assets which invite higher risk worth 150 percent compared to something which is 35 and 50 percent and those shifts are happening, that will be the second determinant.Third is how is your profitability and how much you are able to retain that profit. So, it will be a moving figure. Q: My more immediate point is that Rs 1,80,000 crore over the next four years is split up as, Rs 1,10,000 crore from the market and Rs 70,000 crore from the government. Even in the current year the market contribution doesn't look like being met at all. We are seven months into the year. So, right now is RBI telling the government to find more capital?A: Whatever figure, even if I take Rs 1,10,000 crore and Rs 70,000 crore, of course the government has said Rs 70000 crore but if there is a need they would be prepared to and probably they will have more fiscal space to do so. But is not that it is equally divided over a four year period because whatever government has provided and whatever little banks have done from the market, as far as their capital adequacy level which is required for the existing set of framework is not inadequate.Q: The point is for the current level of required NPL recognition capital is inadequate? Would you agree?A: There would be need of - I think the banks can do with some more capital. However as I mentioned the system level capital adequacy  is much within the framework, may be slightly better than what is prescribed under Basel III but as we move into the next two years and more Basel III norms start setting in there would be a need of capital. That is why again referring to the same conference  I gave 2-3 calls to the bankers, first one we have already discussed about dealing with the asset quality problem and secondly I said be opportunistic in raising the capital.Q: What is your sense as both a former commercial banker under current supervisor that we are going to see period of greater stress, we cannot still say the system has plateaued in terms of stress?A: General sense and what the banking community is also expressing confidence looking at their individual portfolio that it looks like okay, at least there would be similar kind of a level if not reduced level but incremental level may not be there. But I would say these all things would be deeply related to two major factors and one is of course the global events. We can't say that we are completely insulated. The Governor also mentioned other day that if we pick up how much we import and how much we export as a percent of Gross Domestic Product (GDP) put together it works out almost 50 percent of GDP and that being the case we can't say that we are not somewhere related to be global system. That being the case there are issues of unhedged exposure would continue to remain a matter of concern. Q: The reason why I am asking you is the SMA 2 number for one bank, one very large bank was 2.7 percent. In fact I can tell you this is a brokerage report which said that ICICI Bank had an SMA 2 number of 2.7 percent in FY14. It rose to 5.7 percent in FY15. Now, what does the system level rise - this is a huge rise, over double. Is the system level stress risen doubly at the SMA 2 level?A: I did say in your interview on that and you extracted the comment on that percent also from the bank itself. So, why do you want me to comment on it?Q: I want to ask you on the system level has there been a doubling of SMA 2?A: No, system level, year end, March quarter is always a stand out, a little different from the other quarters. So, there are fluctuations but it is not that there is a complete different trend which is obtained.Q: Why don't you all disclose the SMA 2 numbers at some regularity, then the investors are not overly scared?A: We have been examining this data. We found that there is still room for the refining the data and more robustness in the information. So, while I appreciate that it is important to bring disclosure but at the same time to bring the disclosure till we are completely convinced and that is something which we are already working on. Our team is working on it. So, that readiness, that stress should come, then we will look into it.Q: Speaking of disclosures, should you not be telling banks also to give us more data on the 5:25? Disclosures should be mandatory isn’t it, how much is done and how much is going to be done?A: This is also a very recent vintage, this is something which we are also observing. Have some patience.Q: You all announced a prompt corrective action of Indian Overseas Bank (IOB). The triggers that you gave are 10 percent net non-performing loans (NPLs) which the bank has not reached or has it? Was that the trigger? The ROA of 0.25 percent was triggered two quarters ago but you all didn't do it at that time. I am unable to find out what was the immediate trigger.A: You don't look any of these triggers on a quarterly basis. It is again – this is a very responsible act and it is also act which is meant to bring the serious outcome. So you would also appreciate that it cannot be on a quarterly basis – this kind of triggers come but when the trend is consistently in that direction that is where you bring it and you know, this is not something which is invoked every other day but at the same time there was another instance. So they were taken into PCA. They have also released – now they have released from the PCA. So this is how it is.Q: Are you fearing that a couple of other banks also are coming in to PCA?A: I think if this kind of message is there. It also serves a purpose for bringing the other banks. So even without asking the – school teacher is not asking someone to kneel down... (Interrupted)Q: Are you firm on marginal costing though as an input into base rate?A: Looks like it is a direction where we should move. As I said, the modalities and the fine prints can always vary, but we would look into all the arguments.Q: What modality can vary? If the marginal cost changes in the previous quarter, the base rate changes in this quarter. What more modality difference can there be?A: There are kind of input where the people have made some suggestion and as we say that when we put something on discussion paper, our team has worked quite hard and they try to put a very robust framework, but going by the past experience, there is always something incremental which can come. So, we never start with the belief that whatever we have said is the last word and we will not be open to the ideas. And if that is the feeling then there is no point in putting a consultation paper.Q: Is it the last word that it will become applicable as of March?A: As I said, after getting all the inputs from the concerned departments, I would look into it, so it would be difficult for me to really make a very definitive statement about this at this point in time.Q: So, it may be extended beyond April?A: I am not telling you it is the other way. I will not be able to make a definitive statement.Q: Let me come to the payment banks itself. How do you see it operating? Do you see the operator sharing the networks because I thought I heard some statement like that from the Governor?A: That would be the ideal thing. Even with the present banking correspondent (BC) network, the ultimate focus is the inter-operateability. So that will be the way forward. But having said that, that will be only a small piece in the whole framework of financial inclusion, which we are talking about. Payment bank is started becoming interoperable whether by sharing a network or any other medium.Q: What is your sense that 18 months down the line or even 12 months down the line, are we going to see a dramatic difference in inclusion?A: It is. In fact, what RBI has been doing for the last two, three years, it was putting a groundwork in place, then the Jan Dhan gave a further flip to it. Everything has been accelerated. Most of the households in the country are creating an account. But, that is just the beginning of it. I think now, a large body of work is before us. And keeping that in view, you must have seen that we have put a committee on this, Deepak Mohanty Committee, which is essentially to look at medium to long-term financial inclusion plan what to do. My sense is you already have a number of players who are in the arena of financial inclusion. You have equally large number of players who are already there, but they are not in the arena of financial inclusion. And on top of that, you will have another set of people who are coming. So, we have to create a framework that all they are brought into this game of financial inclusion. Q: How do you see that happening? My sense was that actually will not some midcap banks actually become endangered species if a large part of their cash and their transaction fees is taken away by the payment banks?A: Of course, the mid size banks which you are talking about, as it is my sense is majority of them are not earning much on the fees of these kind of services. But, very rightly, they will have to find out their niche. Everyone really cannot be everything and remain a poor replica of a universal bank doing all the things at the same time will not really work. They will have to find out their niche going forward, whether it is by geography or by activity.Q: So are you excepting that payment banks will become BCs for universal banks. A: That is exactly I am trying to say, that is why it is very important if there are – see, too few players is a problem too many players are a problem. We have to create a coherence. Why? While the inadequacy of credit is a problem, the abundance of credit is also a problem. So, the people who are coming to the formal financial sector for the first time and if there is a overzealous lender all over and individuals become over-indebtedness that itself is a problem.Coupled with see if you are having a credit bureau for every one as you are envisaging and everyone has a credit history and then one gets over-indebted and then defaults then your lifetime credit history becomes a problem. So, I think there are lots of sensitivity.Q: Does the regulator have the bandwidth for this?  I mean in the first place for regulating so many small banks and payment banks what about your own bandwidth?A: I don't think that – if any parent can say that now we have brought the children on earth and now we won't be able to sustain them. We are conscious of that and naturally it will have to be. Of course the technology is getting more and more efficient so that becomes a big help.