“Success has many fathers, failures none, Hence, there has been the usual blame game, passing the buck, and a tonne of honking, mostly short-term and knee-jerk reactions,” RBI Governor Urjit Patel said.
A cardinal mistake committed by the government soon after state-owned Punjab National Bank disclosed on February 14 that it had been hit by a major fraud was to point an accusing finger at the banking regulator for its supervisory failures and at bankers and auditors for sleeping at the wheel. For, when the government, the owner of public sector banks which still control a dominant share of the country’s banking business, indulges in such a blame-game even before the full contours of the Letter of Undertaking (LoU) scam involving firms promoted by jewellers, Nirav Modi and his uncle Mehul Choksi, are visible, there is bound to be a push back. That has come in the form of not just a ban on LoUs and letters of comfort for trade credit by the RBI, which will raise the cost of capital for many firms, but also a veiled attack by the RBI Governor. “Success has many fathers, failures none, Hence, there has been the usual blame game, passing the buck, and a tonne of honking, mostly short-term and knee-jerk reactions. All these appear to have prevented the participants in this cacophony from deep reflection and soul-searching that can help solve fundamental issues that are the root cause of such frauds and related irregularities in the banking sector, which are in fact far too regular”, Governor Patel said in a rare and hard-hitting speech in Gandhinagar on Wednesday.
He may be right. A calmer approach could have helped, as seen in the past when fires were doused in the corporate and financial sector in 2008 and 2009. Instead, in this case it has led to the central bank chief showing the mirror to the government — pointing out how the RBI’s hands are tied — with no powers to remove the directors on the management of PSU banks who are appointed by the government or to force a merger or trigger liquidation of a state-owned bank and its limited legal authority to hold these bank boards accountable. Patel has also said that the RBI was ready to face brickbats and be the “neelkantha”, consuming the poison.
Clearly, the greater challenge is governance reform in banks. Having been slow in recognising and acting on the bad loans mess, the government should now swiftly settle the issue of separation of ownership and control. Privatisation does appear to be an easy option but it is important to debate whether such an option should be exercised during a crisis or when some of the top private banks in India themselves have been found out reporting a divergence in their bad loan numbers in consecutive quarters. The speed and efficiency with which the government goes about its task will count much more this time — not just because of the fiscal consequences of another bill for recapitalisation but also because of the recovery underway and the need to revive animal spirits. India cannot have a banking sector which is hobbled and a set of bankers who are loath to lend when the upturn comes.