Mar 14, 2018 07:54 PM IST | Source:

RBI Guv Urjit Patel breaks silence on PNB fraud, blames 'deep fissures' in regulatory terrain

Speaking publicly for the first time on the Rs 13,600-crore fraud that broke out at Punjab National Bank, Reserve Bank of India Governor Urjit Patel today blamed "deep fissure in the landscape of banking regulatory terrain" that allowed the scam to take place.

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Speaking publicly for the first time on the Rs 13,600-crore fraud that broke out at Punjab National Bank, Reserve Bank of India Governor Urjit Patel today blamed "deep fissure in the landscape of banking regulatory terrain" that allowed the scam to take place.

Patel was delivering a lecture at the Gujarat National Law University, and called for strengthening of governance at public sector banks through improvement in top management and board member appointments, bringing in ownership neutrality in banking regulatory powers, and improving market discipline by considering a variety of diverse ownership structures.

“Under the law and according to custom, the RBI cannot hold PSB Boards accountable for assessing and– when necessary– replacing weak and non-performing senior management and government-appointed Board members,” Patel said addressing an inaugural lecture at Centre for Law & Economics, Centre for Banking & Financial Laws Gujarat National Law University in Gandhinagar.

Since the scam broke out in February 14, the RBI’s role among other auditors has been under heavy criticism.

“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”… From the RBI’s standpoint, legislative changes to the BR Act that make our banking regulatory powers fully ownership neutral – not piecemeal, but fully – is a minimum requirement, Patel pointed out.

According to him, India’s legislative system of dual regulation, by the Finance Ministry in addition to RBI has in effect led to a “deep fissure in the landscape of banking regulatory terrain”.

All commercial banks in India are regulated by the RBI under the Banking Regulation (BR) Act of 1949. Additionally, all public sector banks are regulated by the Government of India (GoI) under the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970; the Bank Nationalisation Act, 1980; and the State Bank of India Act, 1955.

Stating that the central bank’s legal powers to supervise and regulate PSBs are also constrained and that it cannot remove PSB directors or management, who are appointed by the government of India (GoI), nor can it force a merger or trigger the liquidation of a PSB.

“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.

In a suggestion to the Government, Patel said that as the owner of public sector banks it must consider making  important contributions by:

  1. Making banking regulatory powers neutral to bank ownership and leveling the playing field between public sector and private sector banks; and,

  2. Informing itself about what do with the public sector banking system going forward as part of optimising over the best use of scarce national fiscal resources.

Talking about the prevention of frauds in the banking system, Patel said that investigations and penalties will serve as deterrence for potential frauds, bring in more market discipline putting in place better governance mechanisms and hold larger capital buffers to bear losses when fraud materialises.

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 percent from 4235 to 5064, the value (loss incurred) has increased by 72 percent from Rs 9,750 crore to Rs 16,770 crore. Share of frauds in [loan] advances portfolio continued to be high at 86 percent of the frauds reported during 2016-17.

Read here: Full Text Speech of Governor Urjit Patel

Refocus on Stressed Assets Resolution

Stating that the resolution framework that RBI released last month remains "somewhat under-appreciated in terms of its importance", the RBI chief highlights it has taken steps in the last one year with a focus on reference to the Insolvency and Bankruptcy Code (IBC) of certain large value stressed accounts, covering approximately 40 percent of banking sector’s overall exposure to the stressed assets.

On February 12, in an overhaul of resolution framework, RBI said that for large loans over Rs 2,000 crore, a resolution plan must be implemented within 180 days from the date of default, failing which these would be referred under the IBC.

This threshold would be brought down only gradually over a period of two years to enable the IBC infrastructure to install in parallel the required capacity to handle more cases. At present, the non-performing asset (NPA) loan accounts under IBC have  180 days (extendable up to 270 days) to come up with an effective resolution, failing which the assets are sent for liquidation.

RBI has already nudged banks to resolve about 40 accounts under the IBC, over and above the loan accounts that lenders choose to be taken to the insolvency courts.

Hence, the IBC along with RBI’s revised framework, according to Patel, will help break the promoter-bank nexus which has led to crony capitalism and misallocation problem as restructuring of NPAs (non-performing assets) suited some borrowers earlier.

He believes this is the fundamental reform required to strengthen the credit culture at origination, default, asset quality recognition and resolution stages.

In conclusion, Patel said, "We at the Reserve Bank of India also feel the anger, hurt and pain at the banking sector frauds and irregularities.

With some help of Indian mythology, Patel ends by saying, " 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..."
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