Former RBI governor YV Reddy has slammed the government for the multi-crore fraud at state- run Punjab National Bank (PNB) and said as the owner of public sector lenders, it is answerable to taxpayer losses rising out of such financial scams.
In February this year, PNB detected a over Rs 13,000- crore fraud allegedly involving diamantaire Nirav Modi and his uncle Mehul Choksi, a billionaire jeweller, at one of its branches in Mumbai.
"A big fraud has come to light in the recent months involving thousands of crores in regard to one particular bank. It is clear that it is a fraud. Who should be worried most about the fraud?
"Its the owner of the bank who stands to lose the most. The owner (in the PNB case) is the government," Reddy said in a speech at the Shivaji University at Kolhapur on Saturday.
He was speaking on the topic 'Keeping Banks Safe'.
The former RBI governor, who headed the central bank from 2003 to 2008, said it is the taxpayers who pay for the losses due to such banking frauds.
"The taxpayers who have entrusted their money to the government-owned banks should be asking the government to explain why, as the custodian of their money, it failed to prevent the fraud," Reddy said.
He said as the majority shareholder of public sector banks (PSBs), the government should be worried about what the directors it nominated on the their boards were doing (when irregularities were taking place).
"The owner should be worried about the system of monitoring and control of its own investment. That should be the focus of the owner."
He said though the RBI's main responsibility is financial system stability and protection of depositors, it cannot escape responsibility for maintaining the trust of public in the banking system.
"The (PNB) fraud is of such a magnitude that it affects the credibility of the RBI in ensuring the trust of people in banking. To this extent, it has to review its own regulatory and supervisory practices," Reddy said.
He said despite criticisms in some segments of the media, the RBI is held in high esteem by people.
Recently, the government amended laws to acquire powers to direct the RBI to act on the issue of recovery of dues to banks.
"Actions taken by the government and official statements should ideally reinforce confidence in the RBI at this juncture," he said.
Reddy said recently the Central Bureau of Investigation (CBI) took unprecedented actions against some of the bankers allegedly linked to frauds.
These actions are based on conspiracy and implied loss to the government than bad motive or pecuniary gains, the ex- governor said.
"Whether the really guilty have been booked; whether they will be punished finally; and whether they act as a deterrent are questions that remain (to be answered). But, what is certain is that there is a loss of confidence in the integrity of the banking system."
Reddy said interests of depositors are adversely affected when borrowers do not pay principal and interest as scheduled or if non-performing assets are large.
"It affects depositors if a bank does not have enough money to pay them, that is, when the capital is not adequate," the former RBI governor said.
Bank deposits with the private sector, having adequate capital, continues to be as safe as they have ever been, he said.
"The PSBs do not have adequate capital to take care of depositors' interest, but since the majority ownership is that of the government, the deposits are safe. These are not limited liability companies, but institutions established under the law."
The future of the public sector banking, which accounts for a major part of the banking system, is uncertain, he said.
"There should be clarity on the future of public sector banking towards which we should move. The objective for public ownership of banks should be clarified and simplistic comparisons with the private sector banks avoided," he said.
Reddy said there should be clarity in where we want our banking system to go from here.
"Our experience was that a roadmap with a vision statement works well when it is non-negotiable but the path should be non-disruptive.
"We should be able to indicate a bright future for banking system to keep banking safe for depositors and, in fact, for all concerned," Reddy added.
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