PSU Bank scam a loot of the country's future: RBI Governor

The Reserve Bank of India headquarters in Fort Mumbai

The Reserve Bank of India headquarters in Fort Mumbai

The RBI had issued two circulars in 2016 to banks on strengthening the Society for Worldwide Interbank Financial Telecommunication (SWIFT) system, the misuse of which was unveiled last month in the Rs 12,600 crore fraud on state-run Punjab National Bank (PNB), Parliament was informed on Tuesday. Indeed, frauds have happened at banks in regimes with varying levels of banking regulatory quality and in both public and private banks.

Delivering the inaugural lecture at National Law University, Gandhinagar, Patel said, "There has been a tendency in the pronouncements post revelation of the fraud that RBI supervision team should have caught it".

Indicating the need for greater autonomy and regulatory powers for the apex bank, Patel stated that "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".

"In plain simple English, these practices amount to a looting of our country's future by some in the business community, in cahoots with some lenders.I speak today to highlight some fundamental fissures that exist in the regulation of banks, in particular, public sector banks (PSBs)", Urjit Patel said, adding that RBI too felt anger, hurt and pain at the banking sector frauds and irregularities.

He said that the RBI can not remove directors and management at PSBs as the relevant sections of the BR Act is not applicable to them. Similarly, the section of the BR Act that provides for supersession of a bank board is also not applicable in the case of PSBs.

"These, and other structural reforms to the banking sector, would enable India to grow sustainably at respectable rates", Dr Patel added. "Hence, for example, MDs at PSBs find it comfortable to tell media that business will be as usual for them under RBI's Prompt Corrective Action framework as 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", Dr Patel said. "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".

From an economic standpoint, this weakened market discipline should imply that the government would prefer stronger regulatory discipline of these banks, not weaker, he said.

"In the specific case at hand, RBI had identified, based on cyber risk considerations, the exact source of operational hazard - through which we understand now the fraud had been perpetrated".

The central bank chief suggested that internal processes at PNB failed by allowing operational hazard to remain in place in spite of clear instructions to close it.

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