No regulator can stop all frauds: RBI Governor Urjit Patel on Punjab National Bank fraud

MUMBAI: Reserve Bank of India Governor Dr Urjit Patel on Wednesday finally broke his silence on the $2 billion PNB fraud, stating that no regulator could catch or prevent all frauds.

Patel attributed the growing incidence of frauds to the central bank’s “limited authority” under the banking acts, and the “deep fissures” in the regulatory terrain.

“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,” he said, adding that such fissures were bound to lead to tremors such as the most recent fraud (at PNB).

Speaking at an event in Gujarat, Patel said the practice of holding the public sector boards accountable too had become problematic. “The market discipline mechanism for public sector banks is appreciably weaker compared to that at private banks.”

“We at Reserve Bank also feel anger, hurt and pain at banking sector frauds and irregularities. Banking frauds amount to looting of our country’s future by some in the business community in cahoots with some lenders. If we need to face brickbats and be the Neelakantha consuming this poison, we will do so as our duty,” said Patel.

According to him, legal reforms were highly desirable to empower the RBI to fully exercise the responsibilities that apply to public sector banks to private banks as well.

“Legal reforms are also desirable to empower RBI to ensure a level playing field in supervisory enforcement,” he said, adding that it was infeasible for the RBI to be in every nook and corner of banking activity to rule out frauds by being there.

Moreover, Patel suggested that it was internal processes at PNB that failed by allowing operational hazard to remain in place despite clear instructions, but hoped that the criminal investigation of frauds and attached penalties would serve as an effective deterrence.

Meanwhile, stressed assets resolution remains the key focus area for RBI, and he expressed the hope that the IBC and RBI’s revised framework would help break the promoter-bank nexus, which has led to crony capitalism and the attendant NPA/credit misallocation.