oppn parties Banking: Stop The Blame Game and Take Corrective Measures

News Snippets

  • Media person Rajat Sharma resigns as DDCA president
  • Shiv Sena, NCP and Congress postpone meeting the governor of Maharashtra
  • Shiv Sena not to attend the NDA meeting on 17th November, says break up "a formality"
  • Shiv Sena says that the confidence the BJP is showing about forming the government in Maharashtra is based purely on its expectation of getting numbers through horse trading
  • Anil Ambani resigns as director of the bankrupt Reliance Communications
  • India beat Bangladesh by an innings and 150 rums inside three days in the first Test. Indian pacers excel after Mayank Agarwal's double century
  • Sena-NCP-Congress work out a common minimum programme, will form the government soon and it will last 5 years, says Sharad Pawar
  • Income Tax Appellate Tribunal upholds the decision to withdraw the charitable status of Young India, making it liable to pay Rs 145 in income tax. Rahul Gandhi and Priyanka Vadra are the majority shareholders in the company
  • CBI raids offices of Amnesty International across India
  • Supreme Court quashes NCLAT order against Arcelor Mittal and paves the way for the company to take over ailing Essar Steel
  • Finance Minister Nirmala Sitharaman says concerns of telcos will be addressed and no company will close down
  • Government thinking of providing higher insurance coverage on bank deposits
  • Mayank Agarwal scores a double century as India take firm grip on the first Test versus Bangladesh
  • Supreme Court warns Rahul Gandhi to be more careful in future but drops contempt proceedings in the "chor" case
  • In a flip-flop, Vodafone CEO says sorry to the government, sys no plan to exit India
Supreme Court dismisses plea for review in Rafale case, says no need for roving inquiry, maintains clean chit to government
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Banking: Stop The Blame Game and Take Corrective Measures

By Sunil Garodia

About the Author

Sunil Garodia Editor-in-Chief of indiacommentary.com. Current Affairs analyst and political commentator. Writes for a number of publications.
The blame game has started. Urijit Patel, the RBI governor has said that the regulator needs more punitive powers as it cannot be “in every nook and corner of banking activity to rule out frauds by “being there”.” The finance ministry has countered this by saying that the RBI has enough powers and cited various provisions of the Banking Regulation Act to prove its point. Who is right?

Let us take the case of the RBI. It is precisely because no regulator can be present everywhere that regulation needs eyes and ears and someone to monitor and make sense of what they report. For all practical purposes, the eyes and ears of the banking sector are the various systems of checks and balances – which include software, linkups, norms, guidelines and audits – put in place by the RBI.

At the centre of the PNB scam is the fact that the corrupt officers in the bank kept the LoUs off the books and did not report it via the Swift messaging system. Further, despite regular prodding by the RBI, PNB had not integrated Swift with its Core Banking System (CBS). The RBI says it has no powers to take action in such a situation. But, as The Economic Times has pointed out in its editorial, why didn’t the RBI inform the government or the parliament or the public at large about this serious lapse? As a regulator, did it not think it fit for the owners of the bank to know that those who were running the show were bypassing norms and guidelines and it could lead to unpleasant situations? This was a serious lapse on part of the RBI.

Then, while independent auditing can lead to the reporting of most cases of non-adherence to norms and guidelines, this audit has to be carried out precisely and with ample time in hand. The process of bank audit is such that one feels that many things get overlooked. Let us take the PNB scam. Since the LoUs were kept off the books and not reported via Swift, the auditor who conducted the concurrent audit at the end of the month had no inkling that any such instrument was in fact issued. Further, during concurrent monthly audit, daily transaction reports and cash reports are prepared by bank officers and presented to the auditors. The auditors then examine these for irregularities. If LoUs are kept off the loop, how will the auditor check? This underscores the importance of linking Swift with CBS and the RBI lapse in not reporting it to the government earlier.

The government, on its part, must ensure a level playing field. The RBI has considerably less powers when it comes to regulating PSBs vis-à-vis its powers to regulate private banks. There is no logic why this discrepancy should exist. Just because the government owns the PSBs does not mean they needs lesser regulation. In fact, given political interference, PSBs need greater regulation. The government must pay heed to the IMF report in this regard and bring in a law to give powers to the RBI to treat both PSBs and private banks equally.

Instead of throwing the ball back into each others’ court, both the government and the RBI should sit down together to work on eliminating systemic deficiencies. They can also take the help of other stakeholders like the Institute of Chartered Accountants of India (ICAI), banking software developers and other banking experts, both from India and abroad. The bottom line is that the PSBs are bleeding. This means that money for development is being wasted in recapitalizing these white elephants. Everything that needs to be done to stop this must be done without delay. If this means the RBI needs more powers, the finance ministry should not stand in the way.