New Delhi, March 16, 2018
RBI had more power over private sector banks than over PSBs and a level playing field should be created in regulating PSBs, the Governor had said
The government has not officially responded to Reserve Bank of India Governor Urjit Patel’s contention that the central bank’s power to prevent or investigate financial scams has been curtailed. Privately however, Finance Ministry officials are exasperated. Senior officials are talking about a ‘lack of leadership’ at the top of RBI, and say the governor’s statements were misleading.
Speaking at a function in Gandhinagar on Wednesday, Patel had indicated that RBI was actually helpless, as neither did it have power to replace the board of public sector banks, or force a merger, nor could it revoke the licence of a bank for any activity undertaken, as a series of amendments of the Banking Regulation (BR) Act by the government had taken away all the powers of the central bank in favour of New Delhi.
“This legislative reality has, in effect, led to a deep fissure in the banking regulatory terrain: A system of dual regulation, by the finance ministry in addition to the RBI.” Such fissures or fault lines were “bound to lead to tremors such as the most recent fraud”, he added, responding to criticism that the regulator had not been alert in detecting cases Rs 129 billion letter of undertaking scam which hit Punjab National Bank.
“The BR Act exemptions for PSBs mean that the one agency — the regulator — that can respond relatively quickly against banking frauds or irregularities cannot take effective action,” Patel had said and added that RBI had more power over private sector banks than over PSBs and added that a level field should be created in regulating PSBs and their private peers. He also said PSB chiefs were actually aware of the powerlessness of the RBI Officials in North Block reacted a day later, on background, and said that such statements from the head of an institution which asserts its independence were unbecoming. “On one hand you say you are independent institution, and on the other, you say that you are helpless. As regulator of banks, has RBI ever come to the government, which is the promoter of state-owned banks, and sought removal of a board, or asked for an investigation?” an official asserted.
“You have the power to take non-performing assets through the bankruptcy process, you have the power to decide which bank requires prompt corrective action, but then you say you cannot govern state-owned banks,” said the person.
Another official said that successive top managements in RBI (governors and deputy governors) had focused on inflation control, foreign exchange management, and other functions of the central bank more than on being a regulator of banks. “Case in point is the inability to appoint a new deputy governor of banking responsible for oversight and regulation of banks. RBI, right now, does not have a senior person from the banking industry,” the second official said.
The last DG in-charge of banks was SS Mundra, who retired in July 2017. He is a former chairman and managing director of Bank of Baroda. In a central bank full of career employees, the DG-banking, who comes from the financial services sector, is considered a link between the RBI and the banks it is supposed to regulate.
The two officials maintained that Patel’s statements will not alter the relationship between North Block and Mint Road. There are differences of opinions at the best of times, due to the nature of the two institutions, they said. “There have been bigger showdowns,” the second person quipped.
[The Business Standard]