National banking regulator, Reserve Bank of India (RBI) needs to have higher control over Public Sector Banks (PSBs), RBI governor Urjit Patel said on Wednesday in Gandhinagar. He also warned that increasing frauds in commercial banks and financial institutions pose a severe threat to the financial sector as a whole.
Patel was delivering the inaugural lecture at Centre for Law & Economics, Centre for Banking & Financial Laws at Gujarat National Law University in Gandhinagar. He advocated legal reforms granting RBI more powers to regulate PSBs. As of now, PSBs have multiple regulations. On the other hand, RBI has more powers to regulate private banks creating a sort of disparity.
“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,” said Patel.
He has a clear roadmap of what requires to be done. Accordingly, legislative changes to the Banking Regulation Act are needed to make RBI's banking regulatory powers fully ownership neutral, that too fully and not piecemeal. “That is a minimum requirement,” he said.
On why regulator cannot prevent all frauds
RBI governor said that it is unrealistic to expect that the regulator is able to prevent all frauds. “There has been a tendency in the pronouncements post revelation of the fraud that RBI supervision team should have caught it. While that can always be said ex post with any fraud, it is simply infeasible for a banking regulator to be in every nook and corner of banking activity to rule out frauds by “being there”. If a regulator could achieve such perfect 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,” he said.
He advocated various mechanisms to deter frauds and other irregularities are in place so that fraud incidence is low and magnitudes contained as frauds have happened at banks in regimes with varying levels of banking regulatory quality and in both public and private banks.
Hinting about the recent fraud at Punjab National Bank (PNB), the claimed that RBI had identified the exact source of operational hazard –through which it now understands the fraud had been perpetrated. “RBI had issued precise instructions via three circulars in 2016 to enable banks to eliminate the hazard. It turns out ex-post the bank had simply not done so. Clearly, the internal processes at the bank failed in allowing the operational hazard to remain in place in spite of clear instructions to close it,” said Patel.
Frauds a threat to financial sector
Patel said that frauds in commercial banks and financial institutions are fast emerging as a major threat to the financial sector as a whole. He informed that in last five financial years, frauds have increased substantially both in volume and value terms. The volume of frauds has increased by 19.6 per cent from 4235 to 5064, the value (loss incurred) has increased by 72 per cent from Rs97.5 billion to Rs167.7 billion.
THE NEW NEELAKANTHA
He expressing deep anguish over a spate of banking frauds and said that like the 'Neelakantha', the central bank will consume poison and face brickbats, but will persist with an endeavour to become better with each trial.
"The Reserve Bank of India also feel the anger, hurt and pain in the banking sector frauds and irregularities." He termed these practices amounting to a looting of our country's future by some in the business community, in cahoots with some lenders and that RBI is doing all it can to break this unholy nexus.
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 "Urjit Patel")
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