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RBI not responsible for PNB scam: Governor

RBI not responsible for PNB scam: Governor

New Delhi, Mar 14 (UNI) Giving a clean chit to Reserve Bank of India in over Rs 13,600 crore Punjab National Bank scam, RBI Governor Urjit Patel on Wednesday said banking regulatory powers in India are not ownership neutral and RBI’s regulatory authority over public sector banks was weaker than that over the private sector banks.

"Dual regulation owing to Finance Ministry’s involvement and weaker market discipline mechanism for public sector banks keep RBI’s role under limitations," Mr Patel said.

Speaking at an event at Gujarat National Law University in Gandhinagar, Mr Patel said, “This legislative reality has in effect led to a deep fissure in the landscape of banking regulatory terrain: a system of dual regulation, by the Finance Ministry in addition to RBI.”

No banking regulator can catch or prevent all frauds, Patel said, adding that it is infeasible for a banking regulator to be in every nook and corner of banking activity to rule out frauds by “being there”.

The RBI Governor said that RBI data on banking frauds suggests that only a handful of cases over the past five years have had closure, and cases of substantive economic significance remain open.

"As a result, the overall enforcement mechanism - at least until now – is not perceived to be a major deterrent to frauds relative to economic gains from fraud," Patel said.

Temptation to engage in fraud at the level of employee or employees is always present, in banks (or in corporations), be it in public sector or private sector. The question then is whether there is adequate deterrence faced by employees from undertaking frauds and enough incentives for management to put in place preventive measures to preempt frauds, Patel said in course of his speech.

Defending the RBI, Mr Patel said, "Success has many fathers; failures none. Hence, there has been the usual blame game, passing the buck, and a tonne of honking, mostly short-term and knee-jerk reactions. These appear to have prevented the participants in this cacophony from deep reflection and soul searching that can help solve fundamental issues that are the root cause of such frauds and related irregularities in the banking sector."

Furnishing a list of regulations that is under operation for banking system in the country, the RBI Governor gave RBI a clean chit in the Rs 13,600 crore financial frauds.

He said all commercial banks in India are regulated by the RBI under the Banking Regulation (BR) Act of 1949. Additionally, all public sector banks are regulated by the Government of India (GoI) under the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970; the Bank Nationalisation Act, 1980; and the State Bank of India Act, 1955.

Besides Section 51 of the amended BR Act explicitly states which portions of the BR Act apply to the PSBs, most common thread across the omissions being complete removal or emaciation of RBI powers on corporate governance at PSBs.

Further, RBI cannot remove directors and management at PSBs as Section 36AA (1) of the BR Act is not applicable to the PSBs. Section 36ACA(1) of the BR Act that provides for supersession of a Bank Board is also not applicable in the case of PSBs (and regional rural banks or RRBs) as they are not banking companies registered under the Companies Act.

He said, the RBI cannot force a merger in the case of PSBs as per Section 45 of the BR Act.

These apart , there are many other clauses that restricts the role of RBI in handling the affairs of the Public Sector Banks, Mr Patel said.


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