The real question is what stops RBI from preventing bank frauds

What stopped the Reserve Bank of India (RBI) from preventing frauds in the banking industry? Does the banking regulator need more powers to ensure a transparent, efficient and customer-friendly banking industry? It is curious that RBI Governor Urjit Patel should seek more powers to rein in wrongdoers. It is equally strange that India’s central bank proposes to withdraw its nominees from the boards of large public sector and private banks.

It is pertinent to ask why RBI nominees were silent when Nirav Modi was allowed to swindle billions of dollars worth of depositors’ money from Punjab National Bank. There is little doubt that the RBI and its top officials, including the governor and deputy governors, should have to answer for the huge banking scams that have shaken the very foundations of the banking industry. They cannot disown their role in the decision-making of different banks that lost money to fraudsters.

The very idea of having an RBI or central government nominee on bank boards was to instil confidence among depositors, ensure transparency in working of the boards and be accountable to the stakeholders. While RBI and its nominees failed to discharge their responsibility, claiming they lacked the powers to remedy the situation is unusual. To be sure, RBI is one of the most powerful central banks globally with limited government interference given its autonomy. However, like many regulators and government agencies, RBI seems to have begun a cover up act after reports suggested its nominees had been spectators to “sweetheart deals” owing to a nexus between corrupt bank officials, politicians and industry. The Banking Regulations Act has adequate provisions empowering it to act against an erring chairman, board of directors and big officials. But, it evidently slipped up.

Only recently, yet another regulator, the Securities and Exchange Board of India (Sebi) had proposed the appointment of custodians to protect the interests of retail investors against brokers abusing their absolute powers. These custodians were to act like intermediaries that manage backend operations of foreign portfolio investors.

Given the huge powers that Sebi enjoys, how were the brokers allowed to get away by selling shares of their clients without the latter’s knowledge? How did Sebi allow the portfolios of investors to vanish? Does it not indicate the weakness with the market regulator?

Governments normally come up with new legislations or bring about amendments to existing laws when caught in a bind over scams or misgovernance. This was also the case during UPA-I and UPA-II and the current NDA rule. The Banking Regulation Act was amended several times to book fraudsters. The Insolvency and Bankruptcy Code (IBC) was brought in to provide banks big relief from stressed assets. In fact, many of these amendments have strengthened the hands of RBI to direct banks on stressed or non-performing assets. Against this backdrop it is odd that the RBI should say it does not have the requisite powers to act against recalcitrant bankers. A national debate on this very sensitive issue of regulators’ performance is warranted.