Parliament panel nails RBI over bank frauds and NPA

The working of the Reserve Bank of India (RBI) and its regulatory effectiveness has been seriously red flagged by a parliamentary panel. The report of the Standing Committee on Finance on non-performing assets (NPAs) is perhaps the strongest reprimand ever, albeit veiled, for the central bank.

The report expresses serious concerns over how the RBI has been complaining about the lack of power to regulate public sector banks (PSBs), while there are doubts about how effectively it has used its existing powers.

The committee expressed “dismay at the rise in loan-related bank frauds despite RBI nominees on public bank boards”. It has asked RBI to “scrupulously examine systems and procedures of banks to create early warning systems”.

The report asks the government to examine RBI’s demand for greater powers to regulate loss-making PSBs which face NPAs of nearly Rs 7 lakh crore. The committee was not amused by the fact that while the RBI claimed that under the Banking Regulation Act it doesn’t have powers to appoint or remove top PSB officials, the government pleaded before the panel that since RBI is the regulator on the issue of NPAs it can’t directly intervene in the working and decisions of banks.

Saugato Roy, Trinamool Congress MP and a member of the committee said: “The committtee is not satisfied with the working of current RBI. It was Raghuram Rajan [former RBI governor] who ordered an asset quality review. Since then RBI has gone into hibernation. They say we don’t have the wherewithal to go into individual cases.”

The committee members say that the NPAs were generated despite the presence of RBI men as directors in PSBs. While RBI complains that it has inadequate powers to regulate banks the report challenges this claim. It says under Section 51 of the Banking Regulation Act, the RBI has power to inspect banks, bank books and accounts.

According to the panel the government consults RBI in the appointment of senior officers. The RBI deputy governor is a member of the Banking Board Bureau that picks top officials for public banks.

The parliamentary panel has asked the government and RBI to form a committee and examine the lack of regulatory powers, finalise a report within three months and to submit an action taken report within four months.

The Standing Committee on Finance finalised the report after months of deliberations and depositions by RBI governor, top bankers and central government officials. Interestingly the report was adopted unanimously despite it terming the NPAs unearthed during the last few years as “legacy issue”, which is a direct criticism of the United Progressive Alliance (UPA) government.

Manmohan Singh, who headed the UPA government, is a member of the committee which is headed by Congress man M Veerappa Moily. In stark contrast BJP MPs, who are a part of the panel, had stalled a report of the same committee on demonetisation as it termed the move by PM Modi as ill-conceived and disruptive.

Rising bank frauds

The reason for the standing committee’s unflattering observations against the RBI and the banking system is also the increase in bank frauds registered during 2017-18 despite the RBI’s audit mechanism.

The report says total funds involved in bank frauds has increased to Rs 32,040 crore compared to Rs 23,930 crore in 2016-17. The frauds registered by PSBs rose from Rs 19,529 crore to Rs 29,246 crore. If there were 2,709 cases of bank frauds in 2016-17 the number rose to 2,882.

On the issue of write-off of bad loans the panel has said that “write-offs by public banks have grown faster than outstanding loans. In the last quarter of 2018 there was a 37 per cent rise in write-offs while there was just 4.5 per cent rise in the loans issued by public banks.

The report has underlined serious concerns on several issues related to NPAs, bank frauds and working of public sector banks. It has recommended forensic audits and use of technology. The report also asks the government and RBI to improve the presence of ATMs to end shortages. RBI has also been asked to soften the Credit to Risky Asset Ratio norms which are currently tougher than global standards to improve the lending capability of public banks.