Big bank loot: Dual regulation to blame?

Reserve Bank of India governor Urjit Patel is an angry man. Facing flak for the failure of the central bank in detecting the Rs 13,000-crore PNB scam, Patel says it is not feasible for the Reserve Bank to be in every nook and corner of the banking activity to detect fraud.

Invoking Lord Shiva, Patel says he is ready to play Neelakantha and consume all the poison if the government wishes so. But he will do so while faulting the government for the dual regulation.

Governor Patel’s frank chat with the law students in Gujarat has opened a new front in the blame game over India’s biggest bank scam ever.


Remember, addressing the ET Global Business Summit recently, Finance Minister Arun Jaitley took a dig at the Reserve Bank, saying that regulators should have their third eye open always.

Jaitley went on to say that in India while politicians are accountable, regulators often go scot-free.

Patel, however, blames the dual regulation by the Reserve Bank and the government for the deep fissures in banking regulation.

No one doubts there are structural deficiencies in regulation of banks, but is Governor Patel right in wishing away the RBI’s responsibility? On ET NOW’s India Development Debate, bankers and former regulators discussed the governor versus government stand-off over the big bank loot.

Here are some notable quotes:

Hemindra Hazari, Market expert
It was a multi-level systems failure within PNB and the RBI. The RBI cannot now say that it doesn't have enough powers. The RBI has the power to remove the directors and CEOs of private sector banks, but what have they done with those powers? Look at the divergences that some of the new private sector banks have reported. This should have led to the removal of the CEO, CFO and the auditor. This is where the RBI should have stepped in, but It didn't do anything.

Pratip Chaudhuri, Former Chairman, SBI
It is the bank management which is at fault. The RBI's role is to keep a second pair of eyes. For instance, you install traffic lights, but somebody has to ensure that people are observing the traffic rules. The moment motorists feel that nobody is watching them, then there will be chaos. The RBI has to make its own interventions more meaningfully. It doesn't help to say, I don't have the powers.

Anand Sinha, Former Deputy Governor, RBI
I agree with governor Patel on the basic premise that you can’t expect the central bank to guard very nook and corner. It does not mean the RBI should not introspect where the failures were. Whenever anything of this kind happens, things tighten. The final solution lies with the bank management. There has to be a debate on long-standing reforms in public sector banks. Patel has indicated privatisation without saying it directly. My personal view is that privatisation is desirable.