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Enforcement mechanism no major deterrent for fraudsters: Patel

Press Trust of India  |  Gandhinagar 

today sought more powers to deal with frauds at public sector banks (PSBs) saying that the current enforcement mechanism is "not perceived" to be a major deterrent for fraudsters relative to gains from such activities.

His comments come almost a month after India's second largest lender, state-owned was allegedly defrauded of around Rs 13,000 crore by billionaire and his uncle in connivance with some employees.

Referring to "very limited authority" of the central bank, Patel said the RBI cannot remove PSB directors and management, it cannot enforce mergers in PSBs nor it can trigger liquidation of

Speaking at here, he highlighted that regulatory powers in are "not" ownership neutral as RBI's regulatory powers over PSBs are "weaker than" those over the

"From the RBI's standpoint, legislative changes to the Regulation Act that make our regulatory powers fully ownership neutral not piecemeal, but fully is a minimum requirement," Patel said.

He urged the government to make regulatory powers neutral to ownership and levelling the playing field between public sector and

Patel said investigative and formal enforcement process takes in India, perhaps for the right reasons, a fair bit of time.

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

"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 added.

He noted that the market discipline mechanism for PSBs is appreciably weaker compared to that at private banks.

"There is implicitly a stronger perceived sovereign guarantee for all creditors of PSBs, and the principal shareholder the government has not so far been interested in fundamentally modifying the ownership structure," he said.

From an economic standpoint, this weakened market discipline should imply that the government would prefer stronger regulatory discipline of these banks, not weaker, he said.

Patel further said that the exemptions in the Regulation Act prevent the regulator from taking effective action in case of irregularities at PSBs.

To further his point, he said that MDs at PSBs find it comfortable to tell media that business will be as usual for them under RBI's Prompt Corrective Action framework "as even if they do not meet the stipulated restrictions of the framework, the ultimate authority over their tenure is with the government and not with the RBI".

He also noted that legislative reality has in effect led to a deep fissure in the landscape of regulatory terrain: "a system of dual regulation, by the in addition to RBI".

(This story has not been edited by Business Standard staff and is auto-generated from a syndicated feed.)

First Published: Wed, March 14 2018. 20:30 IST