In a broadside against the government, which has been critical of the role of the banking regulator in failing to spot the massive fraud at the Punjab National Bank, Reserve Bank of India (RBI) governor Urjit Patel on Wednesday said the central bank had “very limited authority” over public sector banks as its power to govern has been curtailed. Speaking at a function at Gandhinagar, the central bank governor indicated that RBI is actually helpless, as neither it has power to replace the board of public sector banks, or force a merger, nor it can revoke license of a bank for any activity undertaken, as a series of amendment of the Banking Regulation (BR) Act by the government has taken away all the powers of the central bank in favour of New Delhi. Banking regulatory powers are not ownership neutral in India, Patel said, adding “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.” Such fissures or fault lines are “bound to lead to tremors such as the most recent fraud”, he added, responding to criticism that the regulator had not been alert to detect such cases. “The BR Act exemptions for PSBs mean that the one agency — the regulatory — that can respond relatively quickly against banking frauds or irregularities cannot take effective action.” Patel said the RBI had more power over private sector banks than over PSBs and added that a level field should be created for regulations so that PSBs were in the same league as their private peers. He also said PSB chiefs were actually aware of the powerlessness of the RBI. “MDs at PSBs find it comfortable to tell the media that business will be as usual for them under the RBI’s Prompt Corrective Action (PCA) framework, as even if they do not meet the stipulated restrictions, the ultimate authority over their tenure is with the government and not with the RBI,” Patel said. Private sector banks have the market to fear if things go wrong, as fund-raising becomes difficult. For PSBs, there is no such compulsion. “It is an open issue whether centralised government control alone can be effective enough at designing and implementing governance of banking franchise comprising over two-thirds of the sector’s deposits and assets. It would be better instead to restore regulatory and market discipline,” the RBI governor said. Patel also criticised the government for having separate chairman and managing director for a bank, stating that “they are the same” and that it implied that the “MD is primarily answerable only to himself or herself”. The central bank would take action against the bank in concern (PNB), he said. But, how much penalty could be imposed was already set by the BR Act.
In the past, whenever the central bank had imposed a penalty on banks, it was usually not more than Rs 50 million, which is effectively nothing.