Concerns over banking -- health of banks, safety of deposits, value of bank shares, NPAs and finally the sheer scale of their vulnerability to frauds -- have been the staple diet of popular imagination for a long while now. The keenly felt need for tighter regulation has livened up the ld debate over the privatisation of public sector banks. Reserve Bank of India Governor Urjit Patel opened a new front last week when he squarely blamed the government for lax control over banks. This is in sharp contrast to the line taken by Finance Minister Arun Jaitley, who put the bank management in the dock, rather than owning up the government's role.
If the RBI has very limited authority over state-run banks, that's a sorry revelation, and a travesty of all we believed about the banking system. In a rare show of eloquence, Patel lamented the lack of a legal framework that offers the RBI as much powers over public sector banks as it has over private sector banks.
Patel said the RBI should be granted more powers to regulate PSBs, which are government-owned. "Legal reforms are thus highly desirable to empower the RBI to fully exercise the same responsibilities for PSBs as now apply to private banks, and to ensure a level playing field in supervisory enforcement," Patel said in a speech at the Gujarat National Law University.
He was referring to the massive trading scam at Punjab National Bank that shook the Indian banking system. He averred that the RBI cannot stop all frauds at all banks, admitting at the same time that rising bank frauds are a major threat to the financial sector as a whole. The central bank chief also said that the apex bank has less control over the public sector banks, which account for the lion's share of frauds and non performing assets.
That the public sector banks have been reckless and largely unaccountable for public money -- just like most government-operated enterprises -- is an understatement but the governor's candid statement amplifies the context further.
He has thrown in some useful statistics on the runaway loot the public sector banks have facilitated in recent years. He said that bank frauds rose both in volume and value terms in the last five years. While frauds increased 19.6 percent from 4235 cases to 5064 cases, the value has shot up by 72 per cent from Rs 97.5 billion to Rs167.7 billion.
Like the general public, the governor is also anguished by what goes on in Indian PSBs. "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. 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," he said.
Most bank frauds happen at PSBs. Vast majority of NPAs are from the PSBs. The least profitability is reported from PSBs. And obviously, they are the least governed as well. It's a paradox. And that's why the governor is asking for legal reforms that give it as much powers on public sector banks as it has got over private sector banks.
That's more than fair a request. In fact, the state should give the RBI more than what it is asking for. Privatise the public sector banks, and bring them under tight oversight of the central bank.
One of the main functions of the RBI, instituted into the charter of its establishment, is to "operate the currency and credit system of the country to its advantage." Governor Patel has painfully realised that the banking system doesn't answer to that hallowed call.
The essence of the RBI Act 1934 is that the central bank has the duty to protect depositors' interest and ensure the health of the banking and financial system. Rising NPAs, massive credit losses and plain bank frauds like the one unmasked in PNB are not only destroying the depositors' trust but dealing them a double jeopardy. If the RBI can't effectively control the PSBs, it can't discharge its basic duties.
Nationalising the banks was seen as the right means for national reconstruction -- the process of giving the country back to the people. However, nearly 50 years later, the reality is that the nationalised banks have failed in this mission. And the graver realty is that they've sold out to those who loot the country. They've become the travesty of the original goals for which they were set up. They've now become the channel through which public money flows out.
(The opinions are the author's own)