Address ownership issue: Functioning of PSBs seeks urgent corrective action

The crisis in public sector banks is the result of many factors. The finance minister has rightly stressed the role of auditors, regulators, bank managements themselves, and, of course, businessmen. What is missing in this list is the government itself, which is the primary shareholder in these banks, as well as the authority that appoints and dismisses bank managements. Public sector banks therefore have a dual regulatory structure, coming as they do under the supervision of the government (specifically the department of financial services in the finance ministry) and the Reserve Bank in its role as regulator. It is evident that both have to share the responsibility for the many weaknesses that have been shown up in the public sector banking system. Consequently, they have to work together to resolve issues. The finance minister’s frustration at the systemic flaws that keep cropping up is understandable, but public friction between the government and the central bank does not help.

In the immediate case of bank guarantees having been given fraudulently on a massive scale, with either collusion from above or failure of detection for several years, the primary failure is of bank managements that did not impose safety checks, or follow the prescribed procedures. This is a matter that goes well beyond the appointment of the top officials, and concerns the entire operational dynamic in these banks. The question is whether this can be changed, and how.

The quality of audit and inspection is the next question that must be addressed. The information filtering through is that inspection reports did point to the specific lacuna that has enabled this particular fraud, following which the RBI issued regulatory instructions. It would seem that bank managements did confirm subsequently that the required changes had been made — which, on the face of it, does not seem to have been so in reality. If bank managements misled the regulator, there is clear cause for penal action. On the RBI’s part, subsequent inspections should have followed up on the regulatory instructions of 2016, to check compliance on the ground. Regulation does not obviate the need for supervision.

The underlying issues have to be addressed. If it is the case that, in the totality of circumstances under which government banks operate, it is proving impossible to improve the performance of these banks, then the issue of changing ownership cannot be evaded for much longer — though it is an open question whether “fit and proper” people can be found to take over these banks. The finance minister is right to point out that privatising the banks requires a degree of political consensus, but it is the government’s responsibility to try and build that consensus, difficult as it may be in today’s polarised political atmosphere. Nor is it anybody’s case that fraud does not take place in private banks. The difference is that, in their case, the tax-paying public does not pick up the tab — as it does in the case of government-owned banks. The bill for keeping these banks going has been climbing from year to year, and has reached mammoth proportions. Corrective action should not be postponed.