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PNB fraud: Urjit Patel calls for more powers over state-run banks

PNB fraud: Urjit Patel calls for more powers over state-run banks

Speaking at the inaugural lecture at Centre for Law & Economics, Centre for Banking & Financial Laws Gujarat National Law University, Gandhinagar, he said a few businesses were in cahoots with the lenders, and the banking regulator was working towards breaking this "unholy nexus".

Patel sought the same powers for the RBI to police state-run banks as it has over private lenders. "This should imply that the government should prefer a stronger regulatory discipline of these banks. the situation in India is exactly the reverse; RBI's regulatory powers over PSBs are weaker than over private sector banks", said Patel. This has, in effect, led to a system of "dual regulation", said Patel, adding that this "fault line is bound to lead to tremors such as the most recent fraud".

"I have chosen to speak today to convey that we at the RBI also feel the anger, hurt and pain at the banking sector frauds and irregularities". As per reports by PTI, Patel made a pitch for "making banking regulatory powers neutral to bank ownership and levelling the playing field between the public sector and private sector banks".

Patel said exemptions in India's Banking Regulation Act meant the regulator can not take "effective action" and even the managing directors at public sector banks realise the "ultimate authority over their tenure is with the government, and not with the RBI". Describing loan-fraud incidents as an issue of greater significance than PNB-type frauds, Patel said that RBI had initiated a clean-up through its new norms on non-performing assets (NPAs).

RBI Governor Urjit Patel also said that like the "Neelakantha", the central bank will consume poison and face brickbats, but will persist with endeavour to become better with each trial.

Patel indicated that the RBI's hands are tied when it comes to public sector banks as it is incapable of removing directors and management at PSBs, cannot force mergers, cannot revoke licences, and cannot trigger liquidation, among other things.

If a regulator could achieve such ideal outcomes, it would effectively imply that the regulator can do anything that banks can do, and by implication, can simply perform the entire banking intermediation activity itself.

He said, "We believe this is precisely the fundamental reform needed in order to strengthen the credit culture at origination, default, asset quality recognition and resolution stages".

In particular, he said the RBI had issued precise instructions via three circulars in 2016 to enable banks to eliminate the hazard.

"The BR Act exemptions for PSBs mean that the one agency - the regulatory - that can respond relatively quickly against banking frauds or irregularities cannot take effective action". "Managing directors of PSBs find it comfortable to tell media that business will be as usual for them under RBI's prompt corrective action framework because even if they do not meet the stipulated restrictions of the framework, the ultimate authority over their tenure is with the government and not with the RBI", said Patel.

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