The Reserve Bank of India (RBI), hiding behind its role as India’s monetary authority, has escaped all external scrutiny and accountability regarding its second role—as regulator of banking and finance companies—which is marked by repeated failures. Until a few years ago, these failures were largely hidden by force-merging failed institutions with public sector banks (PSBs). This trick is no longer possible with non-performing loans of banks soaring past Rs 10 lakh crore and the collapse of several ‘systemically important’ shadow banks exposing the high cost of failed supervision.
Maverick politician and economist Dr Subramanian Swamy has filed a public interest litigation (PIL) in the Supreme Court, seeking a probe by central bureau of investigation (CBI) into the ‘illegal acts of RBI officials’, leading to various scams. The petition lists 10 big scams and says, “not a single RBI official has been brought to justice despite RBI retaining the power to monitor, regulate, supervise, audit and direct the functioning of all banking companies in India.” Dr Swamy’s petition is brief and is focused on making RBI officials subject to CBI investigation. RBI’s failures, argues the petition, has inflicted huge losses on depositors, investors and shareholders, causing a ‘loss of faith in India's banking system’. The petition prays for the CBI or ‘any other competent authority to investigate illegalities committed by RBI officials’ in the discharge of their functions.
Several issues raised by Dr Swamy go back at least 30 years to the securities scam of 1992, when the RBI governor believed that his phones were tapped and he was being watched by the same CBI. The pressure fizzled out soon after the JPC (joint parliamentary committee) report. Despite the Harshad Mehta and Ketan Parekh scams in less than a decade; collapse of four banks specifically due to these scams; and two JPCs, the only real change at RBI was computerisation of the public debt office and establishment of the Clearing Corporation of India in 2001.
RBI has ensured that changes in the supervision structure were merely cosmetic. It scuttled the demand to make its department of bank supervision independent and got away with a mere name change. Had RBI’s role as a monetary authority been separated from that of banking regulator, at least parts of the organisation could have been subjected to a statutory audit. Instead, over the decades, RBI has turned so powerful, that it routinely ignores or sidesteps even the Supreme Court’s rulings on information sharing and transparency.
Dr Swamy’s petition says that banking frauds alone have caused losses in excess of Rs3 lakh crore; but CBI has not even given a cursory look at RBI’s failure, although it has opened investigations in some of them. The petition lists 10 specific scams involving sums of over Rs100 crore. These are: Kingfisher Airlines (FIR No RCBSM 2015E 0006), Bank of Maharashtra-Private Sugar Companies in Uttar Pradesh (FIR No RCBD1/2018/E/0002), Nirav Modi-Punjab National Bank (FIR No.RC0772018E0001), Rotomac Global (FIR No RC0062020A0004), Lakshmi Vilas Bank (FIR No.189/19), Infrastructure Leasing and Financial Services -IL&FS (Criminal Case No 20 of 2019, Mumbai), PMC Bank scam (Economic Offences Wing Mumbai), Yes Bank (FIR No RC2192020E0004) and First Leasing Company of India (FIR No RCMA1 2017 A 0017). The petitioners say they had attempted to find out RBI’s mechanism to deal with its own officials for lapses or dereliction of duty in bank frauds, as well as action initiated in such cases, but did not receive any satisfactory response.
Wilfully Blind to the IL&FS Scam
The PIL’s choice of cases is curious; not all of them are being investigated by CBI. Even in IL&FS, the petition refers to a criminal investigation in Mumbai, while it is the serious frauds investigation office (SFIO) that had raised the suspicion of collusion by an RBI official. SFIO asked RBI to conduct an internal investigation to find out why there was no action against IL&FS for ignoring RBI's directions in connection with its inspection reports which had raised specific issues. We suspect the buck stops rather high in RBI on this one, since a forensic audit report mentions a discussion between IL&FS’s founder Ravi Parthasarathy with a deputy governor RBI, before its collapse.
Indeed, in the IL&FS case, Moneylife has reported how multiple complaints to successive RBI governors were ignored. In 2017, a whistle-blower, Mahesh Inamdar, wrote to the RBI governor and the IL&FS board calling attention to Rs1 lakh crore of PSBs’ exposure being at serious risk. No action was initiated.
Earlier, in 2013, AIDQUA Holdings (Mauritius) wrote an explosive, 21-page letter to B Mahapatra, executive director RBI, calling attention to the scandalous dealings of IL&FS. This too was ignored (IL&FS’s Tirupur Project: Destructive Impact of RBI’s Failure To Act). A third letter was written by Umesh Baveja, founder of RAHI Aviation and a victim of IL&FS’s crooked dealings, to his classmate, governor Raghuram Rajan, in August 2015. Again, nothing happened. Had RBI acted on any of these warnings, various investors, including pension funds, may have avoided a loss. Instead, the government is spending hundreds of crores of rupees on legal, audit and consultancy fees to try and salvage what it can out of the over Rs94,000 crore of outstanding loans.
Another important case, which is not mentioned in the PIL, is that of ICICI Bank where the whistle-blower openly posted his allegations against Chanda Kochhar on a publicly accessible blog for two years. RBI took its time to act and the board defended her. Ironically, RBI governors, once out of office have been more forthcoming about the protected institution that is allowed to be a law unto itself. As I wrote earlier, Dr D Subba Rao, in his book, has written “sporadic and voluntary mechanisms for accountability are inadequate” for a “public policy institution (he omits the words regulator and supervisor) with such a powerful mandate.” He admits that the only oversight on RBI was its appearance before the standing committee of parliament on finance, a couple of times a year.
He wrote this in the context of failing finance companies and the rash of Ponzi schemes (such as Saradha, Alchemy, MPS Greenery and Sahara) which did not affect the RBI directly. “I admitted to the committee that our balkanized regulatory structure in the non-banking financial space, straddling so many different regulators and regulations, was bewilderingly complex and confusing with regulatory overlaps and cracks,” he says. Even today, this ‘balkanized’ regulation seems to be hampering action against the plethora of lending apps charging usurious interest rates that are driving people to suicide. It is similar to how RBI had failed to check usurious lending and multiple loans by microfinance companies until it blew up into a political storm in Andhra Pradesh, after a spate of suicides.
It will be interesting to see how RBI fights Dr Swamy’s petition. So far, the central bank has resisted all attempts by the apex court to force it to be more transparent and forthcoming about banks and their supervision, to the point that it has even defied court orders. Moneylife has reported in detail the long battle waged by Right to Information (RTI) activists, in this context.
As I wrote earlier, the role of RBI’s officials on bank boards, which is also raised in the PIL, was extensively discussed by the JPC in 1992; but nothing changed. National Housing Bank (NHB), a 100% subsidiary of RBI and the realty regulator which had shamelessly bailed out Harshad Mehta by providing funds to repay State Bank of India, is also making news again. NHB, which failed to supervise Dewan Housing Finance Ltd, wants a preferential claim to Rs2,436.67 crore in the resolution process, while retail depositors will lose 60% to 75% of their investment. Will anyone at NHB be held accountable?
Personally, I have reservations about whether a politically-controlled CBI, whose own success rate is extremely patchy and controversial, will be effective. In the past, intemperate actions focused on highly publicised arrests have not been followed up with quick charges or conviction. On the other hand, allowing RBI to get away unquestioned, as it has for decades, is very damaging too.