PNB scam: Govt hits back after Urjit Patel points out RBI's inadequate legal powers

Emphasising the need for more coordination between the government and the Central bank, Chief Economic Advisor Arvind Subramanian on Monday said that independence is not acquired merely by law but also good decision making and actions.

Subramanian's comments came after the RBI's governor Urijit Patel defending the RBI’s role, said that the system of dual regulation by the finance ministry and the RBI “has led to a deep fissure in the landscape of banking regulatory terrain”. This “fault line is bound to lead to tremors such as the most recent fraud”.

Governor Patel asked for more policing power over public sector banks which are also regulated by the government.

Replying to questions from students of Jesus and Mary College in the national capital, Subramanian said, “Independence is not acquired through the law but a large part is acquired through reputation and the history of good and effective decision-making. When you say a central bank has credibility, it gets credibility not just because it’s independent… After all, if you are independent and make a series of bad decisions, you lose credibility. So, what is important is not just what is there in the law but actual practice of a central bank.”

He further added, “independence but also coordination (is) very important. Second, what is more important than independence is your credibility and reputation, and you can get that either legally or you can acquire it through actual practice”.

Earlier this month, breaking silence over the scam at PNB, Patel had said: “I have chosen to speak today to convey that we at the Reserve Bank of India 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,” Patel added.

Earlier, the government had been critical of the role of RBI and auditors in detecting the fraud at PNB.

Differentiating between public and private sector banks, Patel said the RBI’s powers over state-owned banks were limited as they could not remove directors, replace management, push through a merger or initiate liquidation.

“The Banking Regulation 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. 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.”