Mumbai: Reserve Bank of India (RBI) governor Urjit Patel broke his silence on Wednesday on the PNB fraud, putting up a blistering defence for the regulator and sought to put the onus on the finance ministry instead.

In a speech laced with melodramatic phrases delivered at the Gujarat National Law University (GNLU) in Gandhinagar, Patel claimed, “RBI’s regulatory powers over public sector banks are weaker than those over the private sector banks."

Effectively, the governor has blamed the diluted regulatory structure for the lapses in oversight and thereby put the ball back in the court of the Union government. In the process, Patel has revived the blame game on the over $2 billion PNB fraud. His remarks have also provided fodder for the opposition to politically target the ruling Bharatiya Janata Party (BJP).

A finance ministry spokesperson refrained from responding immediately, saying “it is not proper to comment at the moment".

Patel called on the government to strengthen the Banking Regulation Act, 1949 to ensure that the regulator has enough teeth to adequately regulate PSU banks and to make its regulatory powers “ownership neutral". According to him, the amendments made to the Banking Regulation Act have led to “emaciation" of RBI’s powers with respect to corporate governance issues at PSU banks, one of the reasons for financial frauds at banks.

Patel said that the current legislation does not give sufficient regulatory control to RBI over state-owned banks.

While the Banking Regulation Act allows the central bank to regulate all commercial banks in India, Section 51 of the amended Banking Regulation Act does not allow RBI to remove the chairman, directors and management of PSU banks; further, it does not allow the regulator to move ahead either with liquidation of PSU banks or to order forced mergers of state-owned banks.

In addition to the Banking Regulation Act, PSU banks are also 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.

“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," Patel said.

Comparing the corporate governance structure at private banks with that of PSU banks, Patel said that complete regulatory control over private banks incentivizes the private lenders to invest more in governance, creating deterrence against regulatory violations and frauds.

Arguing in this vein, Patel seemingly made out a case for PSU bank privatization. The government should decide “what do with the public sector banking system going forward as part of optimising over the best use of scarce national fiscal resources," he said.

Responding to charges of laxity on part of the RBI in detecting the fraud, Patel said: “There has been a tendency in the pronouncements post revelation of the fraud that RBI supervision team should have caught it… It is simply infeasible for a banking regulator to be in every nook and corner of banking activity to rule out frauds by “being there".

Commenting on its revised framework for resolution of stressed assets, Patel said that the new framework along with the insolvency and bankruptcy code attempts at breaking the promoter-bank nexus, one of the reason that encourages fraud.

To be sure, on 12 February, RBI came out with revised framework for stressed assets resolution. The new framework requires proactive resolution of stressed accounts before they turn into non-performing assets (NPAs). The central bank has also done away with other pre-IBC (Insolvency and Bankruptcy Code) restructuring schemes such as Strategic Debt Restructuring and Scheme for Sustainable Structuring of Stressed Assets (S4A), among others.

“The IBC along with RBI’s revised framework will help break the promoter-bank nexus which has led to crony capitalism and attendant NPA or credit misallocation problem as ever-greening suited some borrowers and some lenders under the earlier framework. In turn, this will prevent the erosion of growth from the emergence of zombie firms and sectors," said Patel.

Remya in New Delhi contributed to this story.

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