Banks, private or public, do business with public money. Banking regulation should be effective and efficient, which it is not – plain and simple.
The RBI Governor has finally spoken on banking sector fraud and irregularities, choosing to use the occasion of a speech to offer a formal and one might think a considered point of view. After all the lecture (delivered Mar 14 at the Gujarat National Law University, Gandhinagar) comes more than a month after the fraud at PNB hit the headlines. Between then and now, there has been little solace provided to the common citizens, worried now about the safety of their deposits. In that sense, these thoughts come as a welcome departure from what appears to be a new RBI belief that “silence is golden”.
The RBI Governor, Urjit Patel, speaks of the “anger, hurt and pain at the frauds and irregularities”. For once, he puts it plainly: “…these practices amount to a looting of our country’s future by some in the business community, in cahoots with some lenders.” And he adds: “…we are doing all we can to break this unholy nexus”.
Those concluding remarks aside, the bulk of the Governor’s stocktaking and arguments are weak, ill-conceived and may be misleading. When a fraud of an order that stands out as the worst in banking history occurs, the onus is on both the government and the RBI to fix the rot. Whatever the government does, or does not do, there is no getting away from the fact that the RBI is the regulator at the field level and has enough powers, stature and the capacity to act. This the RBI has not done.
Instead, we now have a defence in the nature of what the Governor has called a “fundamental fissure” in the landscape of banking regulation, pointing to the fact that the RBI’s regulatory powers over public sector banks are weaker than the powers over private sector banks. The RBI’s regulatory powers are, therefore, not neutral to bank ownership, a point highlighted in the lecture, with support drawn from what the International Monetary Fund and the World Bank have said in observations as part of the 2017 Financial Sector Assessment Programme (FSAP) of India.
Yet, the RBI has nominees on boards of PSU banks, apart from government nominees, and the two independently or taken together, have a voice that can be loud, even fierce. Allowing for the widely believed position that government nominees may not ask the right questions, given that some of the corporate “loan melas” are politically motivated, still the RBI cannot back out of its responsibilities in checking wild aberration. In fact, it can be reasonably argued that even as a lone voice, the RBI nominee will pull a punch far ahead of all other board members, given that this is the voice after all of the central bank. There are many ways to signal displeasure, if the RBI knows how to conduct itself and does its job well. This of course cannot and will not happen when the RBI nominee is waiting to take the cue from the others, and following the herd rather than doing the job that the RBI ought to. And if the lack of authority comes in the way, as the RBI Governor has sought to argue, then why have the RBI on PSU boards at all?
There are bank Managing Directors who find it comfortable to defy standards, like those proclaiming that they’ll run “business …as usual” because the ultimate authority over their tenure is with the government. But we must also ask, operationally, how many bank MDs will have the courage to disobey the central bank and particularly the Governor’s orders on credit discipline and market discipline? Moreover, how comfortable will the government be to protect an errant MD, once the RBI blows the whistle? And how often will the government step in to do so?
The Governor’s speech in general communicates a sense of helplessness, and if this is the correct internal view of where the RBI finds itself, then it is a damning indictment of the RBI by the RBI. It would seem that the RBI is in the quest for some legal force, as if this is a panacea when it has obviously lost any moral force or soft power or even the power that accrues to guardians who mean well for their wards. This signals the bankruptcy of the mission, the purpose and direction within one of our prime institutions.
The Governor does one worse when he argues that the “temptation to engage in fraud at the level of employee or employees is always present in banks”. This is a derogatory statement and paints all bank employees with one brush. Such a statement could weaken the morale of the employees. It begs the obvious next question: is this temptation any less in the central bank, and could we therefore not then ask that the investigation into fraud extend to cover RBI nominees and the entire regulatory process?
Another statement signalling helplessness is the argument that it is simply infeasible for a banking regulator to be in the every nook and corner to rule out frauds. First, if the regulator cannot prevent fraud in any case, why blame the dual nature of control over banks and why lament that powers are limited because what cannot be regulated in general cannot suddenly become regulator-conducive just because a law or an order is passed. Also, the fraud in reference here is an outcome of a systemic failure that has enabled fraudsters take advantage of regulatory lapses. One expects the regulator to address this in all honesty. The question the Governor must answer is how the so-called “dual regulation” comes in the way of the banks’ operational risk management, risk culture, credit culture and discipline, internal control framework and external audit function. Moreover, even in the dual regulatory framework, the RBI is technically better equipped to supervise these aspects.
In the RBI’s defence, the Governor has mentioned the bigger issue of stressed assets resolution and the revised framework of prompt recognition of and resolution of stressed assets. These measures are welcome and helpful. But one has to recognise a vicious circle here — bank fraud is also the root cause of stressed assets because corporate biggies then get to believe that they can get away with public funds. By not addressing frauds as an important (though not the only) cause of stressed assets and instead looking to resolve stressed assets as a solution to stopping frauds is keeping the cart before the horse.
The need of the hour is not to be defensive or start a blame game. Banks, private or public, do business with public money. Banking regulation should be effective and efficient, which it is not – plain and simple. Certificates from the World Bank and the IMF won’t solve that problem.
Rattanani is a journalist and Pattnaik is a former Central banker. Both are faculty members at SPJIMR.
(Syndicate: The Billion Press)