RBI also responsible for failing to ensure public trust in PNB fraud case: Former RBI governor Y V Reddy

The Reserve Bank of India is also responsible for failing to maintain public trust in the banking system in the Rs 13,000 crore scam at the state owned Punjab National Bank according to former RBI governor Y V Reddy and has called for a review of its regulatory and supervisory practices. He also slammed the government for failing to prevent the fraud as an owner of the bank.

Even as its main mandate is financial system stability and depositors' protection, the RBI cannot escape responsibility, according to Reddy. "It cannot escape responsibility for maintaining the trust of the public in the banking system" said Reddy in an address at Shivaji University at Kolhapur on Saturday. "The fraud is of such a magnitude that it affects the credibility of RBI in ensuring the trust of people in banking" He called for a review of its own regulatory and supervisory practices by the central bank.

The Reserve Bank was defending itself for being held responsible for failing to prevent the 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’" RBI governor Urjit Patel said in a public speech in March.


The financial burden of such frauds are ultimately borne by the tax payers and the government is answerable to them. "The tax payers who have entrusted their money to the government owned banks should be asking the government to explain why as the custodian of their money it failed to prevent the fraud"


Delving on the problem of bad loans that have hit lending and profitability of the banking sector in the country, Reddy said it was an accumulated problem arising from the developments after the global financial crisis of 2008. "In retrospect, perhaps, the extra-ordinary measures taken were more than needed and, were continued for longer period than necessary" Reddy said. Banks had also been encouraged to lend to infrastructure, which was not the core competence of the banks, apart from creating asset and liability mismatch. "Disclosures of real position were delayed. So, the accumulated problems came to the open in 2013-14 and in subsequent years"

On the recent raids Reddy expressed doubts on whether the purpose of such an exercise will be served. "Whether the really guilty have been booked; whether they will be punished finally; and whether they act as a deterrent are questions that remain" Reddy said. But in all this depositors are safe as the banks are owned by the government and sovereign cannot be insolvent, he said.