The RBI has been facing severe criticism over the Rs 13,000-crore scam at PNB, which is being billed as India’s biggest banking scandal. RBI governor Urjit Patel defended the regulator role, saying it is difficult for it to be present everywhere to contain such instances. Patel said the system of dual regulation — by finance ministry and the RBI — has led to fissures in the landscape of regulatory terrain. Patel was speaking Gujarat National Law University. He was responding to the attack that the RBI was not prompt enough on recent cases of fraud. Patel said dual regulation owing to finance ministry’s involvement and weaker market discipline mechanism for public sector banks had a role to play.
“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. 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.”
On the prevention of frauds in the banking system, Patel said that investigations and penalities will serve as deterrance for future.
Patel also said that banks can keep large buffers in their capital structure to bear the losses which occur due to such frauds. Patel said that the RBI is working to break the nexus of some banks and businesses cleary hinting at the PNB scam where diamantaire Nirav Modi colluded with some bank employees to pull off the massive scam.