Public sector banks: Buck passing between RBI and Ministry of Finance

Last week, Urjit Patel, among the most reticent and shy governors of the Reserve Bank of India (RBI) in recent memory, broke his habitual silence when, at long last, the finger of blame for frauds in public sector banks (PSBs) pointed towards the RBI. He declared that the central bank’s regulatory authority over PSBs was weaker than that over private sector banks. Mr Patel’s speech made other important and valid points, but his argument that the RBI did not have enough powers over banks was so surprising that it dominated the headlines. Those who know the formal structure of reporting by banks to the RBI and the enormous informal power that it exercises over them were left flabbergasted.

 
Governor Patel had three main arguments. One, PSBs are regulated by the Government of India (GoI) under three Acts. Two, there has been a “complete removal or emaciation of RBI powers on corporate governance at PSBs”. Three, the RBI cannot remove directors or change the management of PSBs, including a bank’s board. Within a day, the ministry of finance babus hit back at him (conveniently hiding behind anonymity), saying that only the RBI had the powers to look at specific loans or other exposures of banks; the government does not have those powers. The RBI reviews lending policies and other practices of all banks annually.

 
Just a few days after this public blame game, I happened to meet a retired bank chairman. His exact words were: “The RBI has enormous powers in real life. It is untrue to say that the RBI has no powers over PSBs. If the RBI calls a bank chairman and asks him to hand over charge, he will have to do it. In several cases, the RBI has got bank officials removed by referring the case to the ministry of finance.”
 

This former bank chairman had an anecdote of how an RBI executive director (ED) — two rungs below the governor and deputy governor — had taken on the most politically connected bank chairman, M Gopalakrishnan, then chairman and managing director of Indian Bank. The ED did this by recording his misdeeds on file with the remark that they should be referred to the Central Bureau of Investigation. Eventually, Mr Gopalakrishnan and two others were convicted of cheating and sentenced to one-year rigorous imprisonment in 2013.

 
Mr Gopalakrishnan was very close to GK Moopanar, a top Congress leader, and, through him, to then prime minister PV Narasimha Rao. So everybody from the cabinet secretary downwards was happy to give him extensions. And yet, an RBI official could do the right thing in the public interest and get results. On the other hand, not very long ago, when bad loans were already a huge problem, the State Bank of India chairman found it difficult to get a meeting with a high-profile RBI governor and kept getting fobbed off to a deputy governor. The governor had no time for the chairman of India’s largest bank. The lesson: Mr Patel’s defence of the RBI was legalistic, referring to Acts and provisions, but the reality is rather different. Indeed, the RBI needs to answer some simple questions:

• Are PSBs outside the purview of the RBI’s supervision and inspection? 
• Don’t PSBs have to file returns and statements to the RBI like the private banks? Who in the RBI reads them? What do they do with them?
• Why have RBI inspectors failed to act on systemic problems in PSBs?
• How often has the finance ministry ignored the RBI’s suggestion to initiate disciplinary action against any bank chairman?
• How come a supposedly helpless RBI has launched a series of schemes, each more convoluted than the other, to make banks handle their bad loans and has from time to time put them under so-called prompt corrective action?
• Doesn’t the RBI have directors on the PSB boards? What is their role? Haven’t they gone along with every major lending decision?
• When has the RBI asked for more powers to make it a more effective banking supervisor and was its request turned down?
• Why has Mr Patel, like his predecessors and deputy governors, chosen a speech in a law university to expose a Niagara Falls-like policy gap, not a well-researched and robust policy paper, which could be open to public feedback and debate?
• And while we are at it, why is the RBI openly siding with the corrupt and the incompetent in refusing to implement the Supreme Court order on the applicability of the Right to Information Act? The main beneficiary of the RBI’s contempt of the court’s decision on RTI is PSBs, over which the RBI claims to have no control!

 

It would be a travesty of justice, however, if all the blame for PSBs’ ills falls on the RBI alone. The faceless babus in the Ministry of Finance, too, have enormous powers, which are rarely deployed in the public interest and used mostly to implement what ministers and other politicians want. There is just one way to stop this buck-passing. The blame game has to be replaced with skin in the game. Perhaps that merits a separate piece. The writer is the editor of www.moneylife.in
Twitter: @Moneylifers