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

The Reserve Bank of India governor Urjit Patel on Wednesday dubbed the multi-crore mega bank fraud on state-owned banks by Nirav Modi and Mehul Choksi to be a "loot of the country's future".

"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, however, said that it was not possible for any regulator to pre-empt or stop all the frauds or irregularities in the system.

Patel said this while delivering a lecture on 'Banking Regulatory Powers Should Be Ownership Neutral' at Centre for Law & Economics, Centre for Banking & Financial Laws, Gujarat National Law University in Gandhinagar.

Seeking greater autonomy in regulating state-owned banks, the banking regulator hinted at fundamental fissures that exist in the regulations of the banks, primarily due to dual control over PSBs. The RBI regulates all commercial banks under the Banking Regulation (BR) Act, 1949, but additionally, all public sector banks (PSBs) are regulated by the government of India under the banking companies (Acquisition and Transfer of Undertakings) Act, 1970, the Bank Nationalisation Act, 1980 and the State Bank of India Act, 1955.

"This legislative reality has in effect led to a deep fissure in the landscape of banking regulatory terrain, a system of dual regulation, by the Finance Ministry in addition to RBI...  The RBI will undertake actions against the bank that it is empowered to but this set is limited under its BR Act powers over PSBs," RBI governor stated.

He said that government as owner of the state-owned banks must contribute by making banking regulatory powers neutral to bank ownership and levelling the playing field between the public sector and private sector banks. He went on to add that government must also consider "Informing itself about what to do with the public sector banking system going forward as part of optimising over the best use of scarce national fiscal resources."

Highlighting the need to address the Rs 8.5 lakh crore stressed assets lying on the balance sheets of Indian banks, the RBI governor bat for regulator's revised framework it released last month for prompt recognition and resolution of stressed assets. "The RBI has been clamping down on the failure to recognise asset quality as non-performing as per its norms by requiring that banks, whose 'divergence' exceeds by 15% of the true NPAs as per the norms disclose the divergence," he said. "However, ultimately there also needs to be a framework in place for time-bound resolution of the underlying stress in assets that limits the discretion of banks to delay the recognition of stress, ever-green 'zombie' or living-dead borrowers, and poorly allocate credit."