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RBI Governor Urjit Patel calls for more powers over state lenders in wake of PNB fraud

Reuters  |  MUMBAI 

By and Abhirup Roy

MUMBAI (Reuters) - The of chief said on Wednesday that it had "very limited authority" over and called for reforms to give the regulator more powers to police such lenders in the wake of a $2 billion fraud.

of (RBI) defended the central bank's role in the aftermath of the fraud case and hit back indirectly at the Indian government, which has criticized the role of the regulator and auditors for failing to spot the alleged scam.

In a rare, strongly-worded speech at a in the Western Indian state of Gujarat, Patel said there were numerous limitations in the RBI's powers over state-run lenders, such as its inability to remove directors, replace management, force a merger or initiate liquidation.

While the RBI regulates all banks in India, are also regulated by the government, which owns majority-stakes in them. This has, in effect, led to a system of "dual regulation", said Patel, adding that this "fault line is bound to lead to tremors such as the most recent fraud".

The unravelling PNB fraud, the biggest in Indian history, has stunned the financial sector and pushed the RBI and government to crack down on systems and lending practices.

State-run lenders, sometimes referred to as PSBs, or public sector banks, own two-thirds of India's assets, but are much less profitable than nimbler private sector rivals.

Patel said the government needed to begin, "informing itself about what to do with the public sector system going forward," hinting that a recent $32 billion bailout for the bad-debt laden banks was not the best use of scarce resources.


In the speech posted on the RBI's website late on Wednesday, Patel said the "RBI's regulatory powers over PSBs are weaker than those over the private sector banks", adding the state banks also lacked market discipline.

Patel said exemptions in India's Regulation Act meant the regulator cannot take "effective action" and even the managing directors at public sector banks realise the "ultimate authority over their tenure is with the government, and not with the RBI".

His comments come after last month criticised inadequate oversight of the country's financial sector by auditors and regulators, without naming any body in particular.

"Success has many fathers; failures none," said Patel in his speech. "Hence, there has been the usual blame game, passing the buck, and a tonne of honking."

He noted the central had warned on the potential gaps in systems in 2016, but lamented that PNB did not work to eliminate the hazards.

Reiterating that it was an "operational failure" on the part of PNB, Patel said the regulator would take actions against the second-biggest state bank, but stressed its powers were limited.

In a 4,000-plus word speech Patel called on banks and company backers to behave in godly ways rather than demonic manners - a reference to the battles between the gods and demons of Hindu mythology. Patel said the RBI was willing to face the brickbats as this was its duty, but vowed things would improve.

"We will persist with our endeavours and get better with each trial and tribulation along the way," he said.

(Reporting by Devidutta Tripathy, Abhirup Roy, and Zeba Siddiqui; Editing by and Alex Richardson)

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

First Published: Wed, March 14 2018. 21:01 IST