PNB Scam Opens Pandora's Box: Serious Questions About RBI Role as Regulator

Talking about the Punjab National Bank fraud, Urjit Patel, Governor, Reserve Bank of India (RBI), has said that there was “anger, hurt and pain” in the central bank over the looting by some in the business community and the bank’s helplessness in dealing with the situation as the regulator is constrained by inadequate legal powers to supervise and manage public sector banks, as it has no powers to remove directors, management or supersede boards of public sector banks.

Patel was in tune with the Hindutva idiom when he said, “If we need to face the brickbats and be the Neelakantha consuming the poison, we will do so as our duty.” This timely statement needs to be examined closely since it has large policy implications and goes at the root of governance of not just the public sector banks (PSBs) but also other private and foreign the banks.

The only other time when the Governor, RBI, had referred to the bank’s limited statutory powers in defence of its role as a regulator was during the enquiry by the joint parliamentary committee (JPC) on the bank scam in 1991. Deposing before the committee, Governor, RBI, had stated: “We are not in a position to proceed against the public sector banks except with the concurrence of the government. If we are to have a clear system perhaps we may have to amend the law in such a way that RBI can take action against those chairmen also, whether in the public or private sector, but after giving a notice to them.”

Agreeing with the above observation, the JPC had recommended: “the government should seriously examine the suggestion of the then Governor. The committee is of the view that if this entire system of selection and appointment of executives/directors is not totally revamped, our nationalised banking industry will not only [not] recover, it will pull our entire economy down with it.”

The JPC had also recommended that “more deterrent and penal action should be taken in order to ensure that all banks fall in line with the guidelines/ instructions of RBI.” The committee had suggested that “the penal clauses in the Banking Regulation Act and other relevant Acts should be reviewed with a view to enabling RBI to impose graded penalties and other types of punishments commensurate with the seriousness of the irregularities.

It is also necessary to review all relevant legislations relating to banks and other financial institutions so that they keep pace with the technological changes and other developments.” (pp. 205-206, 215 of JPC report) When the JPC report was submitted in December 1993, Manmohan Singh was the finance minister. Unfortunately, no action was initiated by him to make legislative changes as above though this matter came entirely within the purview of the finance ministry.

Debashis Basu and Sucheta Dalal have brought out in their book, The Scam—Who won, Who lost, Who Got Away, that when the bank scam shook Parliament in late April 1992, the first reaction of the finance minster, who had earlier been Governor, RBI, was that the matter should be left to the RBI to handle. He was even reluctant to make a categorical statement in Parliament. Some members of the opposition and of his own party seized upon the weakness and were baying for his blood. (p. 269) Manmohan Singh should have known that real powers to deal with the PSBs were with the government i.e. finance ministry, and not with the RBI!

Granting that RBI’s powers are limited, it will be useful to know in how many cases the RBI had brought serious lapses and irregularities in PSBs to the notice of the government and action was proposed against those responsible, and the decision taken by the government thereon. Was the advice rendered by the RBI overlooked by the government? If these matters had been in the public domain, there would have been some check on the government’s handling of the PSBs.

During the last four decades, almost all major political parties have been in power in the centre. The fact that legislative changes have not been brought about by any of them shows the vested interests they have in not letting go of the leverages of power.

It must also be noted that the public perception of RBI being the supreme regulator of all banks (including the PSBs) has been perpetuated over the years by the RBI itself. This was also underlined by the committees appointed by the RBI such as the A. Ghosh committee on frauds and malpractices in banks (1992), Rashid Jilani committee (1995) and so on.

The working paper No. 505 pertaining to frauds in the Indian banking industry prepared by the Indian Institute of Management, Bangalore, in March 2016 has raised important issues such as credibility of audit firms and credit rating agencies, lack of requisite standards of corporate governance and so on. None of these committees has talked about the handicap of the RBI due to lack of statutory powers to supervise the PSBs.

A related question is of restructuring of PSBs. M. Narasimham committee’s two reports submitted in 1991 and 1998 had, inter alia, dealt with this subject. But due to its large political overtones, the recommendations were shelved. The committee appointed by the RBI to review governance of boards of banks in India, under the chairmanship of P.J. Nayak, has in its report submitted in March 2014 dealt with this issue, though, according to me, it was not a part of its terms of reference. The committee’s report is problematic for various reasons.

The committee was asked to examine how the boards of the banks could be made more effective. It has come to the conclusion that it can be only if the government divests its ownership and control of the banks and entrusts this responsibility to a separate company to be set up for the purpose. It is not clear which stake-holders were consulted by the committee.

What is the guarantee that any such company will be kept away from government control? After all, the main question is of the political philosophy and ideology of the government. The committee’s thinking is based entirely on enhancing the financial returns of the government. This can be a highly debatable objective. The committee is also anxious to remove three main constraints of PSBs, namely, vigilance commission, the central bureau of investigation (CBI) and the right to information (RTI).

I believe that whatever be the ownership pattern of banks, public accountability and transparency must continue to be their mainstay. I would not consider it advisable to keep the PSBs outside the purview of the RTI.

The definition of corruption and fraud advocated by the committee is also problematic. The committee has argued that fraud must manifest itself through existence of self-benefit. The committee is of the view that deviation from procedure must not constitute the sole basis for initiating criminal action. This would clearly be self-defeating.

It is as a result of the Nayak committee recommendations that the bank boards bureau (BBB) was established by government in April 2016, under the chairmanship of Vinod Rai, former Comptroller and Auditor General of India (C&AG). Appointment of former C&AG as chairman should have been avoided. Constitutional functionaries such as C&AG must not be appointed in any government posts after retirement. Rai should also not have accepted this responsibility in the larger interest of constitutional probity.

The Bureau has recently been reconstituted. Unfortunately, enough information is not available in public domain to judge as to how far it has served the purpose of its creation. It is reported that Bureau’s recommendations have been overlooked in some cases.

The Bureau is reported to have submitted a series of proposals to the government regarding its future work. These must be made public to give an opportunity to the civil society to express its views thereon. It must also be made mandatory to make public each recommendation of the Bureau which has not been accepted by the government and the reasons therefor.

The recent happenings in private sector banks such as ICICI, Axis Bank and so on too have raised questions about the role of RBI as a regulator. At least in these cases, the RBI cannot take an alibi of lack of statutory powers. The misdemeanours in some prominent private sector banks during the period following demonetization of high denomination notes had shaken public confidence. In these cases too, RBI’s role and actions were far from reassuring. In some money-laundering cases too reportedly only fines were imposed on the banks.

It is high time the legal framework governing the banking industry is thoroughly reviewed and revised. But who will bell the cat? Our law-givers have no time to make laws!

(Madhav Godbole is a former home secretary and secretary, justice, government of India.)