Governor Patel said RBI was the guard of people's deposits at banks. He added that it would do its best to break the "unholy nexus" between businessmen and bankers. "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," Patel said while delivering a lecture at the Gujarat National Law University.
The RBI chief's comments came after Union Finance
Minister Arun Jaitley, without naming any body in particular, recently criticised the inadequate oversight of the financial sector by regulators and auditors.
Here are the top 10 statements RBI Governor Urjit Patel made on the Nirav Modi scam at PNB:
1) RBI feels anger and hurt over bank frauds:
In a rare and strongly worded speech, the RBI chief said that the central bank was not detached when it came to the spate of banking frauds in the country, adding that the regulator, too, felt pain and anger over such incidents. "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," Patel said, adding, "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."
2) Patel slams 'dual regulation', calls for reforms:
In the wake of the Nirav Modi scam at PNB, Patel said that the RBI had "very limited authority"
over state-run banks. The RBI chief called for reforms to give the regulator more powers to police such lenders. Patel said that there were numerous limitations to the RBI's powers over state-run lenders – its inability to remove directors, replace management, force a merger, or initiate liquidation.
Further, Patel defended the central bank's role in the aftermath of the PNB fraud case and hit back, albeit indirectly, at the Modi government. Patel's remarks came after Jaitley, without naming anybody in particular, recently criticised the inadequate oversight of the financial sector by regulators and auditors.
Patel also made a pitch for "making banking regulatory powers neutral to bank ownership", thereby "levelling the playing field between public sector and private sector banks".
The RBI regulates all banks in India. However, state-run lenders are also regulated by the government, which owns majority stakes in them. This, according to Patel, has effectively led to system of "dual regulation". Patel added that this "fault line is bound to lead to tremors such as the most recent fraud". Patel said the government needed to begin, "informing itself about what to do with the public sector banking system going forward," hinting that a recent $32 billion bailout for the bad-debt laden banks was not the best use of scarce resources.
3) 'RBI can't catch all banking frauds':
The RBI chief said that there was a tendency to blame the RBI supervision team
for not having caught the fraud after it was revealed. He added that no banking regulator could catch or prevent all frauds. "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'," he said.
4) RBI had warned banks of vulnerabilities exploited by Nirav Modi & co: Referring to the PNB fraud
, the RBI chief said that based on cyber risk considerations, the central bank had identified the exact source of operational hazard through which the fraud was perpetrated. Further, Patel said that the RBI had issued precise instructions through three circulars in 2016 to enable banks to eliminate that 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," he said. Patel also said that the RBI would undertake actions that it was empowered to take against the bank, adding, however, that this set was limited under its Banking Regulation Act powers over PSBs.
5) RBI ready to be 'Neelakantha':
Patel also invoked Hindu mythology and said that the RBI had commenced the clean-up of India's credit culture
– as the Mandara mount, or the churning rod, in the Amrit Manthan
, also called the Samudra Manthan
– of the country's economy. He added that until the churn was completed and the nectar of stability safely secured, someone would have to consume the poison that would emanate along the way.
"If we need to face the brickbats and be the 'Neelakantha' consuming this poison, we will do so as our duty; we will persist with our endeavours and get better with each trial and tribulation along the way," the Governor said.
6) RBI wants borrowers to adopt ‘godly ways’:
Keeping with the mythological references, Patel called upon the borrowers to also stick to the side of the law and conduct themselves in a godly way. He wished that more promoters and banks, individually or collectively through their industry bodies, would reconsider being on the side of "Devas rather than Asuras
in this Amrit Manthan
7) RBI chief lets the bankers have it:
Tearing into banks, the RBI governor said the lenders had often fudged accounts
, or refused to recognise the true asset quality of the loans while disbursing even more loans, "so as to keep the accounts artificially in full repayment on past dues, protracted control for promoters over failed assets, and effectively granting them the ability to divert cash and assets, often outside of our jurisdictional reach".
8) RBI to break bank-promoter nexus:
Patel also said that the RBI would break the nexus between bankers and company promoters
to curb crony capitalism. "The IBC (Insolvency and Bankruptcy Code) along with the RBI's revised framework will help break the promoter-bank nexus, which has led to crony capitalism and an attendant NPA/credit misallocation problem as ever-greening suited some borrowers and some lenders under the earlier framework," Patel said.
9) Patel flags threat from NPAs:
Moving on from the issue of banking frauds, Patel flagged the issue of rising non-performing assets
(NPAs) and said that the problem needed immediate attention. "Its magnitude is larger than Rs 8.5 trillion (Rs 8.5 lakh crores) of stressed assets on bank balancesheets and its significance stems from several practices in promoter-bank credit relationship that need immediate attention," the RBI chief said.
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 per cent of the true non-performing assets (NPAs) as per the norms, disclose the divergence.
10) Patel alleges 'blame game':
Taking another apparent swipe at the central bank's detractors, Patel said that in the wake of the PNB fraud, the routine of passing the buck had started. "Success has many fathers; failures none
," said Patel in his speech, adding "Hence, there has been the usual blame game, passing the buck, and a tonne of honking."
"These appear to have prevented the participants in this cacophony from deep reflection and soul searching that can help solve fundamental issues that are the root cause of such frauds and related irregularities in the banking sector," he said.
With agency inputs