The epic size of the $2 billion PNB fraud was a shocker, but more damning is there are none to take the blame. Finance Minister Arun Jaitley said often politicians were accountable, and not regulators, provoking RBI Governor Dr Urjit Patel to publicise governance pratfalls—regulations for public and private banks aren’t tied at the hips. The usual ‘blame game, passing the buck and a tonne of honking,’ created ‘fissures and fault lines’ between RBI and the government, sinking both into a credibility quicksand. While no amount of clamour can fix what was broken at PNB, effective regulation can prevent future occurrences, but first, regulatory powers should be ownership neutral.
Currently, all banks are regulated under the Banking Regulation Act, 1949. Additionally, the government regulates PSBs under the Banking Companies Act, Bank Nationalisation Act and SBI Act. This dual regulation meant the BR Act is selectively applicable to PSBs, which ended up as largely favourable. For instance, if RBI’s capital adequacy norms come into play, PSBs would have been consigned to the funeral pyre by now. The downside is, RBI cannot respond effectively against frauds or irregularities. Take PNB. Though it was an operational failure, RBI’s actions will be limited and unlike in private banks, it cannot remove the CEO, directors, supersede the board or trigger liquidation. Patel wants to make a clean break and is batting for legal reforms before the situation lurches from disaster to catastrophe.
As the governor rightly noted, it’s impossible to catch or prevent all frauds, but critics say RBI cannot cry victim when it has board and subcommittee level presence in PSBs. Enforcement and regulation are key, but Patel doesn’t have a prayer of picking up the slack unless ownership changes (privatisation) or until the regulator is given more teeth. The bottom line is, the chaos on the surface is indicative of the chaos underneath and it’s time to level the playing field before PSBs blow their tops.