Urjit Patel, governor of the Reserve Bank of India (RBI) is clearly furious. Having taken the blame for the badly-managed and futile demonetisation programme, he is apparently unwilling to be targeted for the Rs13,000 crore Nirav Modi-Gitanjali Gems banking fraud as well, especially when RBI is being blamed for failed supervision. Speaking at a law university in Gandhinagar, he described the public anger that erupted after the Nirav Modi-Gitanjali scam as a ‘tonne of honking’ and a ‘cacophony’. His short view: RBI has very little control over public sector banks (PSBs).
This is, perhaps, the first time in decades that the banking regulator is being held accountable–and with good reason. So, when finance minister (FM) Arun Jaitley said that regulators “have to have a third eye which is perpetually to be open and looking at the sector,” the governor also responded with a mythological reference saying RBI, like
Neelkantha (Lord Shiva), would ‘consume the poison’ (of blame) thrown up by the
samudra manthan (churning of the ocean) in the interest of the stability of India’s economic future.
We need to remind both, Mr Jaitley and Dr Patel, that it is the people who have been consuming the poison of bad loans and have kept PSBs alive. They have done this, first, by allowing the exchequer to fork out their money to recapitalise PSBs; and, second, by paying extortionate charges for banking services while banks earn a fat spread on their money. The government and RBI have been blind to the rising public anger over this loot.
If the RBI really feels ‘anger, hurt and pain’ over bank frauds, it should step out of its ivory tower and listen to criticism with an open mind, instead of dismissing it as cacophony. The flaunting of ill-gotten loot by many industrialists has gone on for far too long and must end before it erupts as public unrest. So let’s look at whether Dr Patel’s long lament about inadequate regulatory power holds water.
• RBI’s control over banks, including PSBs, is not merely about appointing and sacking directors or liquidating and merging banks. Its writ extends over every aspect of everyday banking activity. That is why the central bank has always controlled banks through moral suasion alone. Had banks ignored RBI’s writ, like Dr Patel claims, there would have been a bigger meltdown. More importantly, the Securities and Exchange Board of India (SEBI) and the ministry of corporate affairs got their statutes amended to give themselves draconian powers over companies, their boards and employees. Has it improved governance?
• On the other hand, Vimla Vishwanathan, a former executive director of RBI, could refer the activities of M Gopalakrishnan, chairman of Indian Bank, to the Central Bureau of Investigation (CBI) even though he was extremely close to former prime minister PV Narasimha Rao and the powerful Congress leader GK Moopanar. It ensured Mr Gopalakrishnan’s exit after at least five extensions granted by the government and his eventual conviction and jail.
• Governor Patel says that RBI does not have the power to sack a bank chairman. Would he then care to explain how Archana Bhargava, chairman and managing director (CMD) of United Bank of India, had to leave? She was allowed to resign on health grounds, after an investigation under the direct supervision of the then RBI governor Raghuram Rajan indicted her, but also let her off. It is well known that Ms Bhargava’s elevation as CMD, despite vigilance investigations against her, was due to her powerful political connections with the
Congress. Her sudden exit only establishes that politically connected bank chairmen can also be removed if RBI records misdemeanours and demands action instead of protecting bankers based on perception of their political power.
• RBI has nominee directors on bank boards which clear all major loan proposals. Had these directors objected to dubious loans, in writing, it is unlikely the bank would dare to clear them without triggering vigilance and audit actions. Maybe, Dr Patel should check if there are other reasons why his watchdogs on bank boards refuse to bark or bite. A mandatory annual disclosure by senior RBI officials of close relatives employed at regulated entities, usually with choice overseas postings, or CSR foundations, would be extremely revealing.
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Dr Patel has said, “It is simply infeasible for a banking regulator to be in every nook and corner of banking activity to rule out frauds.” That is correct. But what has RBI done after its own investigation has exposed fraud? Or when whistleblowers provided specific, documentary evidence? Here are three examples. RBI investigated the Rs7,000 crore Winsome Diamonds fraud five years before Nirav Modi-Gitanjali and more. What steps did it take to root out the fraud? It apparently “issued precise instructions via three circulars in 2016 to enable banks to eliminate the hazard.” Did its banking supervision department verify whether letters of undertaking (LoUs) issued to jewellers were backed by adequate security or any security at all? Now, when the scam is Rs14,000 crore and counting, it has banned all LoUs and punished honest exporters in a typical case of throwing the baby out with the bathwater. What does any of this have to do with inadequate powers?
• The case of Bombay Mercantile Cooperative Bank is even more egregious. In this case, ZB Inamdar, a manager at the bank, filed a public interest litigation after all attempts to get RBI to act decisively failed. RBI told the court that the central registrar of cooperatives (CRC) was responsible for regulating the Bank. The CRC, in turn, has passed the buck back to RBI in writing. RBI’s only action, so far, is to destroy the Bank’s ability to do business rather than change the management. What additional powers does RBI need, in such a case?
• Governor Urjit Patel’s claim that RBI has better control over private banks and cannot force a merger or trigger liquidation of PSBs also doesn’t bear out. With due respect to Y Venugopal Reddy, our most celebrated RBI governor in recent times, the failure of Global Trust Bank (GTB), a private sector entity, was entirely due to RBI’s failed supervision. Ramesh Gelli’s cowboy-style of banking, his curious connections with Ketan Parekh and his coterie of powerful industrialist friends were no secret. Yet, RBI officials treated GTB with kid-gloves because of its Hyderabad links to the central bank. When the private bank was about to go belly up, Oriental Bank of Commerce (OBC), a PSB became Neelkantha and swallowed the GTB poison. Although Dr Reddy has claimed that OBC offered to acquire GTB, this was clearly a government sanctioned bailout at the cost of OBC shareholders.
• In fact, questions about RBI’s supervision of private banks start with its secretive, discretionary, flawed policy of licensing new banks. A majority of the new private banks, licensed in the 1990s, were taken over, not because of RBI’s power to merge them, but due to market forces. Many of the promoters had strange antecedents and couldn’t run the banks. RBI was so public-sector-oriented that it licensed UTI Bank (now Axis Bank) and IDBI Bank as ‘private banks’ when they were public sector-owned; the latter is in deep trouble under RBI’s benign supervision. In fact, supervision of private banks reveals the capricious freedom that the regulator enjoys, rather than a lack of powers.
• The biggest source of public anger today is RBI’s silence over the loot of consumers through high charges, mis-selling of third-party products, pathetic grievance redress by the banking ombudsman, its arrogant and hands-off approach to consumer issues, especially during and after demonetisation. Contrast this with the easy loot by large industrialists, their access to RBI and its fervent attempts to hide names of wilful defaulters, even from the Supreme Court. Is it any wonder that people have erupted in a ‘tonne of honking’ and ‘cacophony’ of anger?
Ultimately i blame game with poison being consumed by the general public
NiMo says NaMo at Davos & NaMo says its Chiddu at fag end of his term.Amen Mahesh