Govt takes on Urjit Patel on lack of regulatory power

RBI enjoys equal authority over private, public banks, says minister in Rajya Sabha

In its first official response to the Reserve Bank of India (RBI) Governor Urjit Patel’s statement that the central bank does not have enough regulatory powers over public sector banks, the government has said there was no ground for such assertion.

Minister of State for Finance Shiv Pratap Shukla told the Rajya Sabha on Tuesday that the regulations framed by the RBI apply equally to both public and private sector banks.

“Fraud is an act of commission and the regulatory measures instituted by the RBI apply equally to public and private sector banks. As such perpetration of frauds is not linked to ownership structure,” Shukla said, in a written reply.

This is a direct rebuttal of the governor’s speech at an event in Ahmedabad last month in which he pitched for making bank regulation ownership-neutral. Patel had said that the regulator had “very limited authority” over state-run banks since it neither had the power to replace the boards of these banks or force a merger, nor could it revoke the licence of a bank for any activity undertaken. This was not the case when it came to private sector banks, he had argued.

Finance ministry officials said, on conditions of anonymity, that the Banking Regulation Act, 1949, under which the RBI is the regulator and supervisor of the banking system, did not differentiate between public and private sector banks.

The RBI has also reverted to the government’s February missive, in the wake of the ~130-billion scam at Punjab National Bank (PNB) reported earlier this year, seeking its response on lapses in the banking system.

“The RBI has apprised that there are no ‘systematic irregularities’ in the banking sector in India, though banks may currently be faced with some transient operational issues in their functioning,” Shukla said.

The regulator told the government that its detailed set of guidelines issued to banks to institutionalise robust and effective internal controls would help in minimising the incidence of frauds.

Days after PNB reported the fraud related to ~13.9 billion worth fake letters of undertaking issued to group of companies led by Mehul Choksi and Nirav Modi, the finance ministry had raised questions on whether it exercised its regulatory power under various provisions of the Banking Regulation Act to detect the scam.

The government feels that the RBI has enough regulatory powers to give directions to banks, audit its books, decide policy on loans, direct changes in management, and approve appointment and removal of auditors in banks, according to the various provisions of the Banking Regulation Act.

“The government has always consulted the RBI in appointing the top management of every bank. It has never raised an objection as such,” said a senior finance ministry official.

The RBI has now informed the government that the fraud at PNB took place due to failure of all the three lines of defence, despite an elaborate audit infrastructure operational at the Delhi-based bank.

“In case of PNB, there has been a failure of all lines of defence resulting in perpetration of such large value fraud, despite an elaborate audit infrastructure being operational in the bank,” the government said, citing the RBI’s assessment.