The Reserve Bank of India (RBI) governor has returned the compliments to the government in the blame game for the fraud at Punjab National Bank (PNB), with a side kick to truant public sector banks (PSB). I have my sympathy for the RBI because of what the governor called “dual control” over PSBs but find it difficult to agree that this has made the RBI helpless.
The RBI has always had a nominee director on the boards of banks; so also, the government. No large credit proposal or any other matter brought to the board could be passed without the RBI nominee agreeing to it. Assuming the RBI nominee was overruled, the nominee director would have surely reported it to his superiors. Besides the RBI gets numerous statistical reports, its own annual report etc. It is not known what the RBI did with all such information flows. The former governor used the whip on the banks even within the constraint of ‘helplessness’.
The governor is ill-advised in his comments on PSBs accusing them of fudging accounts, and for hand in glove deals with the large borrowers. He mentioned how RBI's annual financial audits revealed such maladroit actions of banks to conceal true bad debt position.
First, the accounts are approved by the audit committee, the board and the statutory auditors, and then approved by the shareholders; in this procedure, the RBI and the government. Nominees are participants. Second, the RBI's financial audit is a post-mortem, and in a sense, innocent buyers/sellers of shares are misled by the retroactive action of the RBI. The RBI should be doing the financial audit of major loans in the banks say, in the last quarter of the financial year which would avert the so called ‘fudging’.
The truth is when bank lending to large projects including infrastructure was growing fast, possibly without critical appraisal, the RBI kept quiet or it did not have sufficient data. The banks were flooded with deposits post the worldwide financial crisis 2008 and had to invest in projects and/ or in government scrips; One worthy RBI deputy governor called investment in government securities as ‘lazy banking’.
Sorry, the governor fails to justify his being a mute witness to the irregularities in banks, notwithstanding his allegorical reference to Lord Neelakantha drinking poison.
P V Maiya, Bengaluru
