RBI GOVERNOR IS HIDING HIS INSTITUTION’S LEGAL POWERS IN ACADEMIC PRINCIPLES
Judged by the sub-headline of the attached newspaper report, the RBI Governor is angry, very angry, at the brickbats his institution has received over the huge bank fraud recently disclosed in the Punjab National Bank, reportedly the second largest among the 20-odd public sector banks in our country.
Speaking at a function in Gujarat early this month (reported in the attachment), Urjit Patel, the RBI Governor, not only was angry but seemed to have lost his cool by going into the emotional rhetoric of proclaiming his institution’s willingness to “be the Neelakantha consuming the poison … churning from the rod in the Amrit Manthan or the Samudra Manthan of the modern day Indian economy.”
The International Monetary Fund (IMF) commended the RBI for the remarkable progress in strengthening banking supervision.
Perhaps because of misreporting, he seemed to have cited the document called Detailed Assessment Report on the Basel Core Principles to lament the limited legal authority to hold public sector banks accountable regarding strategic directions, risk profiles and assessment of management. The legal powers of the RBI to supervise and regulate the Public Sector Banks (PSBS), he said, are also constrained — it cannot remove a PSB’s directors from the management who are appointed by the Government of India, nor can it force a merger or trigger its liquidation.
Before we come to nail Mr Patel on his perspective of his institution’s legal powers, a word on the Basel Core Principles. In its report released on January 19, 2018, the International Monetary Fund (IMF) commended the RBI for the remarkable progress in strengthening banking supervision. A key achievement is the implementation of a risk-based supervisory approach that uses a complex supervisory assessment framework to guide the intensity of supervisory actions and the allocation of supervisory resources. Also, most of the Basel III framework (and related guidance) has been implemented and cooperation arrangements, both domestically and cross-border, are now firmly in place.” That is why, perhaps, Mr Patel chose the other day to bask in that praise.
While that’s human, it must also be pointed out that an international Paper “Journal of Financial Stability” found that “Using data from over 3000 banks in 86 countries, we find that neither the overall index of BCP compliance nor its individual components are robustly associated with bank risk measured by individual bank Z-scores. We also fail to find a relationship between BCP compliance and systemic risk measured by a system-wide Z-score.” [The Z-score is a risk measure commonly used in the empirical banking literature to react a banks probability of insolvency].
Now let us go to the RBI’s powers which Mr Patel considers, so to say, “impotent” for effective supervision and regulation of PSBs.
One learns that, soon after his speech in Gujarat recently, apart from its own view, “The Economic Times” an unnamed Government official citing at least 10 clauses in “The Banking Regulation Act, 1949 (BRA) as amended by its version of 2017 (30 of 2017) to brush aside Mr Patel’s tirade about inadequate powers for his institution.
Without going into the details of each of those alleged 10 clauses — for time constraints of the readers and space reins of this article —
Let me just look at some of the legislative provisions which do not block the RBI’s prime role in regulation and supervision of the PSBs.
Could the Reserve Bank have put a brake on the LOU loans by Punjab National Bank to the Choksi-Modi duo?
Firstly, and most importantly, Mr Patel mentions “exemptions to PSBs” as resulting in the “only agency — the regulator — that can respond relatively quickly against banking fraud or irregularity cannot take effective action.” The truth is that none of the 56 Sections of BRA includes the word “exemption”; moreover, Section 4 on “Interpretation” does not even mention the phrase “public sector banks” or “nationalized banks” or “public sector banking”. Each of all the banks to which BRA is applicable is referred to as “a banking company”.
The Reserve Bank cannot remove public sector banks’ directors appointed by the government? See Section 36AA dealing with “Powers of Reserve Bank to remove managerial and other persons from office.” Its first two clauses say as follows:
Quote
“(1) Where the Reserve Bank is satisfied that in the public interest or for preventing the affairs of a banking company being conducted in a manner detrimental to the interests of the depositors or for securing the proper management of any banking company it is necessary so to do, the Reserve Bank may, for reasons to be recorded in writing, by order, remove from office, with effect from such date as may be specified in the order, 2[any chairman, director,] chief executive officer (by whatever name called) or other officer or employee of the banking company.
(2) No order under sub-section (1) shall be made 3[unless the chairman, director] or chief executive officer or other officer or employee concerned has been given a reasonable opportunity of making a representation to the Reserve Bank against the proposed order: Provided that if, in the opinion of the Reserve Bank, any delay would be detrimental to the interests of the banking company or its depositors, the Reserve Bank may, at the time of giving the opportunity aforesaid or at any time thereafter, by order direct that, pending the consideration of the representation aforesaid, if any, 4[the chairman or, as the case may be, director or chief executive officer] or other officer or employee, shall not, with effect from the date of such order—
(a) 5[act as such chairman or director] or chief executive officer or other officer or employee of the banking company;
(b) in any way, whether directly or indirectly, be concerned with, or take part in the management of, the banking company.” Unquote
The remaining six clauses of the above Section 36AA do not provide any leeway to any banking company, private or public.
With the BRA before one’s eyes and Mr Patel’s lament on his institution’s alleged inadequate power, one can go on and on.
Could the Reserve Bank have put a brake on the LOU loans by Punjab National Bank to the Choksi-Modi duo? Yes, yes. See Section 21 of the BRA on “Power of Reserve Bank to control advances by banking companies.” Its clauses 1 and 3 say:
Quote
“(1) Where the Reserve Bank is satisfied that it is necessary or expedient in the public interest or in the interests of depositors or banking policy so to do, it may determine the policy in relation to advances to be followed by banking companies generally or by any banking company in particular, and when the policy has been so determined, all banking companies or the banking company concerned, as the case may be, shall be bound to follow the policy as so determined.
(3) Every banking company shall be bound to comply with any directions given to it under this section.” Unquote
With the BRA before one’s eyes and Mr Patel’s lament on his institution’s alleged inadequate power, one can go on and on.
One can only suggest to him the following:
(a) Forget the academics Basel III Framework of Core Principles and get down to the practical. Given the interconnectedness of the banking industry and the reliance that the national (and global) economy hold on banks, it is important for regulatory agencies to maintain control over the standardized practices of these institutions.
(b) Question his Inspection Department as to why it did not, allegedly, inspect the PNB’s villain (the Brady House Branch in south Mumbai) for as many as the last nine years. Or was that Inspection done only from the RBI’s Head Office in Mumbai?
(c) Ask the RBI-appointed external auditors of the PNB as to why they could not, over some five years, detect the mismatch between SWIFT and the core banking functions? And sack them if they were found technically deficient and/or morally corrupt. Don’t forget you have the power to do that.
Rbi Governor is Angry by PGurus on Scribd
Note:
1. Text in Blue points to additional data on the topic.
2. The views expressed here are those of the author and do not necessarily represent or reflect the views of PGurus.
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WHat this suggests is any governmental official, be it any, when they blabber something in public, first thing a common man should do is check the facts, due-diligence of what has been blabbered by a public official.
Shameful cheating by Mr. Patel to save Mr. Modi.
Pardon me, but all Gujjus have become rich by scamming the systems and cheating public money, Reliance is a greatest example!! I hope the bigger Gujju is not cheating whole country- that will be a record.
Whats interesting further is such rampant cheating by public officials provide more fodder to so called-breaking India forces!! Alarm Alarm