The Reserve Bank of India (RBI), as a banking regulator, is obliged to maintain the stability of the banking system and to ensure that it does nothing to engender a run on the banks through knee-jerk actions. In India, this has been interpreted to allow RBI to enjoy complete lack of accountability to the public, until its failure to initiate action borders on criminal negligence.
What is worse, its policy of forbearance has led to banks operating like a cabal that has captured the regulator through multiple cosy relationships. The victims are we, the people. We are affected through increasing cost of services (to fund the losses due to bad loans), the regular failure of cooperative banks (failed supervision) and disruption caused by drastic action following every scam (failure of leasing and finance companies in the 1990s which hurt thousands of fixed deposit-holders).
And, yet, RBI remains comfortably protected in its ivory tower. It is not questioned for its failures (failed supervision of National Housing Bank, Global Trust Bank, cooperative banks and overseas corporate bodies). All these are dwarfed by the criminal neglect of the gigantic bad loan problem, which has been ignored and buried by three successive governors, even after the bank unions had begun to agitate about the problem and warn about the consequences. Individual officials have never been questioned for their inaction in half a century.
Can this continue? At a time when the pressure to privatise public sector banks (PSBs) is mounting and the government has introduced a Bill to use depositors’ and shareholders’ money to recapitalise banks (Financial Resolution and Deposit Insurance Bill 2017), it is imperative that we demand transparency and accountability at the supervisory level as well.
Plenty of individuals have been fighting lonely battles to shine the light on RBI’s inspection, supervision and redress mechanism; but, policy-makers are unmoved, even though bad loan figures are already mind-numbing.
Consider these. On 6th March, finance minister (FM)Arun Jaitely told the Rajya Sabha that loans worth Rs81,683 crore were written-off by PSBs in 2016-17 alone. While the FM claimed that these technical write-offs are for tax benefit and capital optimisation (and borrowers continue to be liable for repayment), this is mere eyewash.
It is abundantly clear that recovery from loans written off, in the biggest cases that are now being sold under bankruptcy law provisions, is less than 20%. The losses are real and will eventually be paid by the exchequer. In fact, Dr KC Chakrabarty, former deputy governor of RBI, has repeatedly called such write-offs a massive scam.
These write-offs have burgeoned to unsustainable highs and are still mounting. Check out the third quarter results posted by six leading PSBs. Corporation Bank announced a stand-alone net loss of Rs1,240 crore (against a net profit of Rs159 crore in the previous comparative period); Central Bank of India’s losses increased to Rs1,664 crore; the giant State Bank of India reported a loss of Rs2,416 crore (its bad loans are a massive Rs1.99 lakh crore); Syndicate Bank’s loss was Rs870 crore, United Commercial Bank’s was Rs1,016 crore and Andhra Bank’s Rs532 crore.
The losses are covered by the public exchequer through frequent recapitalisation of banks. This essentially means that the poorest Indians, who have no food to eat, are being deprived because taxpayers’ money is funding the loot by our biggest industrialists. The government has already announced a Rs211-lakh crore recapitalisation package for PSBs over a two-year period; but experts believe that this figure would eventually double. The Nirav Modi-Geetanjali and Rotomac scandal alone will add over Rs20,000 crore to the estimated Rs52,717 crore lost by banks to financial frauds in the five financial years from April 2013.
Public anger over the ease with which businessmen have defrauded banks and fled India, while flaunting dizzyingly lavish lifestyles is extremely high. It is also clear that the government was clueless about the source of the loot, when it disrupted the economy with a painful demonetisation programme which yielded zero results. Here, too, the government is busy arresting junior officials, without attempting to fix the lax and non-transparent regulation, inspection and supervision structure. This structure has systematically thwarted every attempt by individuals to blow the whistle on mounting frauds. RBI ought to have been warning the government, instead of going along with an ill-planned demonetisation exercise that tied up precious resources and disrupted operations. Let me cite just three examples of specific whistle-blowing that were ignored.
The chief vigilance officer of Punjab National Bank (PNB) had emailed RBI deputy governor SS Mundra and the Central Vigilance Commission (CVC) seeking a special investigation of the Brady House branch of PNB where the Nirav Modi scam was hatched. It was ignored.
ZB Inamdar, a senior manager at Bombay Mercantile Cooperative Bank, has filed a public interest litigation (PIL), after a decade-long attempt to get RBI to act on detailed and specific complaints of large-scale corruption by the management. The Bank is now on the verge of collapse and Mr Inamdar was systematically victimised.
In July 2012, a Bank of Maharashtra (BoM) whistleblower, Devidas Tuljapurkar, raised questions about a Rs150-crore loan sanctioned to Vijay Mallya. He said, the credit approval committee headed by the chairman had altered all key sanction terms, including the loan amount, interest rate and security. Instead of investigating the complaint, RBI forwarded it to the Bank in a manner that exposed the whistleblower who was then threatened with dismissal. It was only media coverage that forced the Bank to step back. It also ensured that loan exposure to Mr Mallya, which could have touched Rs1,000 crore, remained in check. Ironically enough, like PNB, BoM bagged the best-bank award at the prestigious BANCON that year.
The Corporation Bank officers’ union has long played the role of a strong whistleblower; but it was, eventually, defeated by government inaction and the Bank is now making huge losses. Even before the Nirav Modi scam erupted, the union newsletter had highlighted the sharp increase in bank frauds.
RBI’s failure to act on these complaints is particularly egregious, since it ignored many specific warnings. Moreover, it had framed a detailed process for reporting wrongdoing under the Protected Disclosures Scheme for private sector and foreign banks. PSBs are already under the CVC. This is in line with a Supreme Court order that top officers of private banks are also public servants and subject to the Prevention of Corruption Act and, hence, subject to CVC scrutiny.
Worse, it has used legal firepower to defy orders of the Central Information Commission (CIC) and the Supreme Court to release information related bank fraud, defaults and findings of inspection reports as well as action taken. The Securities and Exchange Board of India’s (SEBI) attempt to force immediate disclosure of defaults has been stymied by banks, apparently with support from the finance ministry and RBI. But what happens when the regulator refuses to act on complaints?
It smacks of regulatory capture. This is already evident from the RBI’s silence over mis-selling of insurance, mutual funds and wealth management products, despite intense pressure from consumer organisations demanding action. In February, the Caravan magazine published an anonymous letter by a civil servant about how KMPG, a consulting major, was able to capture significant assignments by hiring children and relatives of government bureaucrats. A similar investigation into the progeny and relatives of RBI officials employed with banks and other regulated entities will reveal startling information. Is it any wonder that even the banking ombudsman has a pathetic record of redress?
Bank privatisation is not the golden answer to the banking mess. This is because, while businessmen are busy cheating PSBs, private banks are busy cheating retail investors with rampant mis-selling of products and usurious charges. Putting the savings of the entire nation in the hands of private banks will create another set of problems. Interestingly, both these issues have the same roots: lax and corrupt banking supervision. When will the government put RBI in its crosshairs and launch a long overdue clean-up?