For the first time ever, a government investigator has had the courage to call out to the Reserve Bank of India’s (RBI) weak supervision. The Serious Frauds Investigation Office (SFIO) has blamed RBI for its failure to detect what turned into a massive systemic scandal at Infrastructure Leasing & Financial Services (IL&FS).
The financial sector continues to reel from the repercussion of the IL&FS failure, what with Dewan Housing Finance Ltd (DHFL), finally, defaulting on its interest payment on bonds and the consequent downgrade decimating net asset values (NAVs) of a slew of debt mutual fund schemes. The deleterious impact of IL&FS’s failure even extends to pension fund investments by several private companies.
In the past three decades or more, this is the first time that RBI has been seriously questioned for its lapses even though the damage inflicted on our financial system, because of its repeated failures as a regulator, have been huge. Way back in 1992, the securities scam was primarily about the way RBI ran the government securities (G-Sec) market and failed to upgrade turgid systems and manual processes for trading in government securities.
A decade later, RBI was sleeping at the wheel during the Ketan Parekh scam as well. Every entity that colluded with Ketan Parekh and other scam accused had set up overseas corporate bodies (OCBs) in tax havens with $10 capital and were using them to pump money into the Indian capital market. RBI was blissfully unaware, mainly because it does not ever seek market feedback or engage with stakeholders.
And, yet, every time a major financial scandal erupts, RBI quickly gets into high gear and begins to hand out punishments and penalties. Nobody has questioned how it goes about doing that either.
So here are some interesting aspects to SFIO’s action.
The SFIO charge-sheet filed in the IL&FS Financial Services (IFIN) case says, “Action at the right time may have prevented ballooning of the matter… RBI had repeatedly pointed out non-compliance with group exposure norms and wrong calculation of net owned funds (NOFs) in inspection reports from 2015 onwards. But no penalties were imposed and IFIN was allowed to continue operations without corrective measures. It is only in 2017 that RBI even bothered to increase the pressure and seek classification of group companies to arrive at net owned funds.”
Interestingly, SFIO has attached RBI’s inspection report to the detailed 800+ page charge-sheet filed against IL&FS Financial Services (IFIN) last week. For transparency activists, this is a breakthrough development, since RBI continues to defy Supreme Court’s orders and has flatly refused to provide inspection reports. This time, it is partly in the public domain.
Although SFIO has drawn attention to RBI’s failure, its actions seem tentative. It has merely asked RBI to probe officials in the department supervising non-banking financial companies (NBFCs) for not having acted against IFIN, although major discrepancies were noted in its books as early as 2014. It also asked RBI “to take appropriate action and also initiate suitable policy measures to prevent such fraudulent actions.”
This is like the Securities & Exchange Board of India (SEBI) repeatedly asking the National Stock Exchange (NSE) to appoint its own forensic auditors and conduct investigations in the algo-trading, or co-location scandal. The outcome, not surprisingly, was a weak and wishy-washy report, which SEBI tried to cover up with a biggish penalty.
Will the outcome of SFIO’s directive be any different? Well, see for yourself. Over a month ago Moneylife filed an RTI application asking RBI for the names and designation of officials responsible for monitoring and inspection of IL&FS, action taken against them, if any, as well as a record of any discussion or meeting since July 2018 with regard to the failure of this systemically important shadow bank.
RBI responded by asking us to direct the query to its regional office and the department of non-banking supervision (DNBS) – as if to suggest that the top brass has not even taken cognisance of its own failure in this debacle.
We filed a second RTI application with the DNBS only to get another rejection. RBI refused information under Section 8(i)(j). Under this clause, it can refuse to part with information unless the matter pertains to an issue of larger public interest to justify the disclosure.
Apparently, RBI’s public information officials (PIOs) are still not aware that there is a larger public interest involved, although major infrastructure projects are at a standstill and the entire financial sector is reeling under the impact of IL&FS’s defaults. If that weren’t enough, the information was denied under Section 8(i)(h), which permits denial if the information “would impede the process of investigation.”
When Moneylife filed a first appeal, the matter turned into a farce. The appellate official now chose to deny information under Section 8(i)(g) of the Act, which justifies denial of the names of inspecting officials if it is likely to “endanger the life or physical safety of any person.”
However, the PIO has been asked to reconsider the earlier denial on the ground that it would impede investigation.
I suspect there is another reason why RBI is stonewalling us about information on its failure to rein-in IL&FS. And that is because protection for IL&FS came all the way from the top. Remember a former governor as well as the IL&FS board ignored persistent letters from a whistleblower. This included pseudonymous ones as well as those from known sources and foreign institutional investors.
In December 2018, I wrote about The Destructive Impact of RBI’s failure to Act in the case of New Tirupur Area Development Corporation (NTADCL), where RBI mysteriously and brazenly buried repeated pleas by AIDQUA Holdings (Mauritius), Inc (AIDQUA), a global investment fund which has a 27.89% shareholding in NTADCL.
AIDQUA’s letters in 2013-14 were addressed to an RBI executive director and RBI’s refusal to intervene is also documented. Had it looked at the forensic audit, IL&FS’s dubious method of working and egregious flouting of rules would have been exposed long before its actions led to a collapse. NATDL continues to operate with the same management and without a proper managing director.
As is the case after every major scam or sting operation, RBI begins to investigate after the damage is done and responds with bans and penalties. After the SFIO filed an 840-page charge-sheet, RBI has threatened to cancel IFIN’s licence to operate as a non-banking finance company (NBFC). It has also barred SR Batliboi & Company (associate of Ernst & Young) from handling audits of commercial banks for just one year, starting 1st April.
It is important to note that the only stakeholder entity that RBI engages with is the Indian Banks Association (IBA), which is an unregistered, voluntary association of banks, with doubtful legal standing. Yet, RBI empowers it to take all decisions pertaining to banks, right from deciding service charges for depositors, to negotiating wages and now, even appointing forensic auditors to banks.
This time, however, an accounting firm from Chennai has written to the finance ministry and the RBI governor, among others, to record its objection. It says, “IBA, being an unregistered, unauthorised body, has neither any responsibility, nor any accountability, considering the fact that it is not a body formed under RBI, to be conducting empanelment of firms for the purpose of forensic audit.” In fact, being unregistered, IBA does not even have to follow Central Vigilance Commission’s guidelines of ensuring a level playing field. Will the government or RBI respond? We will be watching the developments.
Unfortunately, as long as the RBI governor’s job remains a much desired posting for our secretaries, nothing will change and the country will keep paying for the regulator’s repeated failures to supervise and stop the corrupt nexus between banks and big business leading to systemic failures and massive defaults that cost India a few lakh crore of rupees every few years.
My hard earned money Rs.1,00,000/- (for which according to 3 years back RBI website, was secured upto Rs.1,00,000/-), I deposited in FD of Kapol bank, Mulund, Mumbai branch & because of corrupt officials of bank, it became insolvent, forcing RBI to put restrictions on it which is extending everytime without any result of merger. I contacted RBI officials, for which they reply...they cannot do anything. I complained to Police & EOW Joint commisioner, but they say banks are governed by RBI, Police cant do anything on this. Police can catch a thief(even thats doubtful now) who loots bank & run away, but they cannot catch the officials who loots the public money sitting on their chairs & positions. I am fighting alone for my hard earned money. if anyone reader knows someone whose money also got stuck in kapol bank, then contact me on 9819993972. We cant trust or rely on RBI or Police now for the banks' frauds...We ll have to fight on our own only......
Kapol bank admin will be handed over to newly elected Board which will look after affairs of the bank. As per revival plan to be submitted and to be approved by RBI, and as per performance of the bank, the restrictions imposed by RBI will be relaxed and bank depositors money will be refunded.
We need not go too far. Just see the one rupee and two rupee coins. That will tell the story of RBI. It appears they don't know any other shape other than round. Ironically, what is interesting is that both one rupee and two rupee coins are of the same size making them difficult to differentiate. What is more intriguing is that subsequent minting also of the same size. Imagine the plight of the commuters and the bus conductors that too in the night. Save and except you, no other daily is willing to publish anything against RBI. Sometime back I sent a feedback to a business daily on the issue of this coin and if my hypothesis is correct it was dumped in the waste bin.
Regulatory authority are made to beaccountable as large chunk of public money is invested by govt on account of recapitalization in the banks. There has to be total transperancy for RBI working. RBI should come within the perview of COMPTROLLAR AUDIT. Stern and punitive action to be taken against culprit official of RBI.
https://www.moneylife.in/article/rbi-in-the-crosshairs-at-last-an-action-that-was-long-overdue/57367.html
It is important to note that the only stakeholder entity that RBI engages with is the Indian Banks Association (IBA), which is an unregistered, voluntary association of banks, with doubtful legal standing. Yet, RBI empowers it to take all decisions pertaining to banks, right from deciding service charges for depositors, to negotiating wages and now, even appointing forensic auditors to banks.
1. This time, however, an accounting firm from Chennai has written to the finance ministry and the RBI governor, among others, to record its objection. It says, “IBA, being an unregistered, unauthorised body, has neither any responsibility, nor any accountability, considering the fact that it is not a body formed under RBI, to be conducting empanelment of firms for the purpose of forensic audit.†In fact, being unregistered, IBA does not even have to follow Central Vigilance Commission’s guidelines of ensuring a level playing field. Will the government or RBI respond? We will be watching the developments.
2. Unfortunately, as long as the RBI governor’s job remains a much desired posting for our secretaries, nothing will change and the country will keep paying for the regulator’s repeated failures to supervise and stop the corrupt nexus between banks and big business leading to systemic failures and massive defaults that cost India a few lakh crore of rupees every few years.
3. Any plan of action by PMO/UFM to address these PRIORATIZED ISSUES?
4. thereat.https://www.youtube.com/watch?v=T7fOf8rUrdw.
5. SATYAMAEVA JAYATHE!!!
The bottomline: our regulatory bodies are long due for an overhaul. And this will take a decade at least. Brace yourselves. It's going to be a bumpy ride either way.
It's the sad reality.
"It can't get any worse than this, right" -- is my wishful thinking.
It's tough to permeate goodness through a rotten & bureaucratic culture even if good people are at the helm. This is what ails RBI, SEBI, IRDA, et al. It's just so difficult to change the culture from within an organisation. Bureaucrats have no sense of vision and purpose. This is exactly the problem.
I'd imagine if we asked any top RBI and SEBI henchmen this question: "What's your vision of RBI/SEBI/et al, and do you feel you and your organisation are invested in it?". I bet they'd look at us as though we're were a bunch of pissed off lunatics. They'd stare right through our faces, into the vast emptiness of the urban chaos, wondering what car to buy with tax payer money, fidling with their phones looking at pictures of their secretary.
This ought to be Modi's first priority -- changing the overall culture of how government functions. I don't care if it is minimum or maximum -- just change it for the better. It takes least 15-20 years to transform colonial/independence era laws and processes into a system built for the future. I'm not sure if tax payers have the patience for that, but I think I'm seeing some visible progress here and there but haven't manifested yet into what we want to see today.
I guess this quote sums up average Indian neta: ‘I used to be indecisive but now I’m not so sure’ -- Boscoe Pertwee.
RBI is not much concerned about the economy or regulating banks and firms. This is because of its attitude of superiority and non-accountability. It thinks it knows finance as even the finance ministry does not know. Instead of making efforts to steer the economy in cooperation with the government, it is prepared to reject government collaboration on grounds of its own autonomy. Some years ago, in a conference which RBI representative presided, an official of a participating bank was saying "From practical banking viewpoint, this is not possible; from practical banking viewpoint, that is not possible" and so on. The RBI officer then asked him "Other than practical banking what banking can be there?" The bank official immediately replied, "Sir, Reserve banking"!
Governor of the RBI is merely a Puppet of the Ruling Party and cannot take decisions in National Interests. In an article which I happened to read on the internet a few years ago after completion of his term one of the Honourable Governors of the RBI either Shri D. Subbarao or Y. V. Reddy had stated that how ever brilliant may be the Governor, as long as there is Political interference in the functioning of the RBI, he can't apply his knowledge for the betterment of the National Economy.
One moot question is: why is the opposition (which is fond of crying "chor, chor" at every imaginable hint of a misdeed), not taking on the Govt inside parliament and outside on these very tangible misdeeds of the RBI which can ultimately be laid at the doorsteps of the Govt ruling the country? Is it because (as is well known) corporate companies often take care of all political parties?
the opposition does not possess the wherewithal/knowledge of RBI/IBA/SEBI.
When SC orders RBI to publish names of big defaulters, RBI + GOI looks the other way round. The opposition is too busy to applies its mind, which is a big SERO.
We were told that RBI is an institution with good integrity. Can it be said now after all these developments ? Behind an impressive facade, something is rotten there. Also there is hardly any searching analysis in the media. Almost all discussions focus only on interest rate as if this is the only responsibility of RBI !!!!! Moneylife is in hopeless minority who dares take up on the high and mighty.
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30-day online access to the magazine articles published during the subscription period.
Access is given for all articles published during the week (starting Monday) your subscription starts. For example, if you subscribe on Wednesday, you will have access to articles uploaded from Monday of that week.
This means access to other articles (outside the subscription period) are not included.
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It is important to note that the only stakeholder entity that RBI engages with is the Indian Banks Association (IBA), which is an unregistered, voluntary association of banks, with doubtful legal standing. Yet, RBI empowers it to take all decisions pertaining to banks, right from deciding service charges for depositors, to negotiating wages and now, even appointing forensic auditors to banks.
1. This time, however, an accounting firm from Chennai has written to the finance ministry and the RBI governor, among others, to record its objection. It says, “IBA, being an unregistered, unauthorised body, has neither any responsibility, nor any accountability, considering the fact that it is not a body formed under RBI, to be conducting empanelment of firms for the purpose of forensic audit.†In fact, being unregistered, IBA does not even have to follow Central Vigilance Commission’s guidelines of ensuring a level playing field. Will the government or RBI respond? We will be watching the developments.
2. Unfortunately, as long as the RBI governor’s job remains a much desired posting for our secretaries, nothing will change and the country will keep paying for the regulator’s repeated failures to supervise and stop the corrupt nexus between banks and big business leading to systemic failures and massive defaults that cost India a few lakh crore of rupees every few years.
3. Any plan of action by PMO/UFM to address these PRIORATIZED ISSUES?
4. thereat.https://www.youtube.com/watch?v=T7fOf8rUrdw.
5. SATYAMAEVA JAYATHE!!!
Obfuscation in focus is found convenient, in managing outside pressures
As Sucheta has forcefully brought out, the cost to the nation is immense - a total waste really
It's the sad reality.
"It can't get any worse than this, right" -- is my wishful thinking.
It's tough to permeate goodness through a rotten & bureaucratic culture even if good people are at the helm. This is what ails RBI, SEBI, IRDA, et al. It's just so difficult to change the culture from within an organisation. Bureaucrats have no sense of vision and purpose. This is exactly the problem.
I'd imagine if we asked any top RBI and SEBI henchmen this question: "What's your vision of RBI/SEBI/et al, and do you feel you and your organisation are invested in it?". I bet they'd look at us as though we're were a bunch of pissed off lunatics. They'd stare right through our faces, into the vast emptiness of the urban chaos, wondering what car to buy with tax payer money, fidling with their phones looking at pictures of their secretary.
This ought to be Modi's first priority -- changing the overall culture of how government functions. I don't care if it is minimum or maximum -- just change it for the better. It takes least 15-20 years to transform colonial/independence era laws and processes into a system built for the future. I'm not sure if tax payers have the patience for that, but I think I'm seeing some visible progress here and there but haven't manifested yet into what we want to see today.
I guess this quote sums up average Indian neta: ‘I used to be indecisive but now I’m not so sure’ -- Boscoe Pertwee.
When SC orders RBI to publish names of big defaulters, RBI + GOI looks the other way round. The opposition is too busy to applies its mind, which is a big SERO.