RBI feels anger, hurt and pain at banking sector frauds: Urjit Patel

AHMEDABAD: Breaking silence over a spate of banking frauds ranging from Vijay Mallya and Nirav Modi cases, RBI Governor Urjit Patel on Wednesday said that people at “Reserve Bank of India (RBI) feel the anger, hurt and pain” at the banking sector frauds and irregularities and like the 'Neelakantha', the central bank will consume poison and face brickbats, but will persist with endeavour to become better with each trial.


The RBI governor was delivering a lecture at Gujarat National Law University (GNLU) in Gandhinagar on "Banking Regulatory Powers Should Be Ownership Neutral". The lecture was kept secret that even faculties and students were not aware until he landed at the varsity on Wednesday afternoon.

"I have chosen to speak today to convey that we at the Reserve Bank of India also feel the anger, hurt and pain at the banking sector frauds and irregularities. In plain simple English, these practices amount to a looting of our country’s future by some in the business community, in cahoots with some lenders. As safeguards of your deposits at banks, and starting with the Asset Quality Review of banks announced by the Reserve Bank in 2015 – since ably conducted by our supervisory teams and as acknowledged objectively by experts of reputed multilateral agencies, we are doing all we can to break this unholy nexus," said Patel.

“I see what we have undertaken for cleaning up the credit culture of the country – in particular, the comprehensive regulatory overhaul announced by the Reserve Bank on February 12th for prompt recognition and resolution of NPAs at banks – as the Mandara mount or the churning rod in the Amrit Manthan or the Samudra Manthan of the modern day Indian economy. Until the churn is complete and the nectar of stability safely secured for the country’s future, someone must consume the poison that emanates along the way. If we need to face the brickbats and be the Neelakantha consuming this poison, we will do so as our duty; we will persist with our endeavours and get better with each trial and tribulation along the way. I do wish more promoters and banks, individually – or collectively through their industry bodies, would reconsider being on the side of Devas rather than Asuras in this Amrit Manthan," added Patel.

Observing that there has been a tendency in the pronouncements post revelation of the fraud that RBI supervision team should have caught it, Patel said no banking regulator can catch or prevent all frauds.

“While that can always be said ex post with any fraud, it is simply infeasible for a banking regulator to be in every nook and corner of banking activity to rule out frauds by 'being there',” he said. Referring to the most recent bank fraud case without naming Punjab National Bank (PNB), Patel said the RBI had identified, based on cyber risk considerations, the exact source of operational hazard through which “we understand” now the fraud had been perpetrated.

Patel said the RBI had issued precise instructions via three circulars in 2016 to enable banks to eliminate the hazard. “It turns out ex post the bank had simply not done so. Clearly, the internal processes at the bank failed in allowing the operational hazard to remain in place in spite of clear instructions to close it,” he said.

Patel said the RBI will undertake actions against the bank that it is empowered to but this set is limited under its Banking Regulation Act powers over Public Sector Banks (PSBs).

Noting that “success has many fathers; failures none”, Patel said there has been the usual blame game, passing the buck, and a tonne of honking, mostly short-term and knee-jerk reactions. “These appear to have prevented the participants in this cacophony from deep reflection and soul searching that can help solve fundamental issues that are the root cause of such frauds and related irregularities in the banking sector,” he said.

On the issue of rising bad loans (NPA), he said that the problems needs immediate attention. “Its magnitude is larger than Rs 8.5 lakh crores of stressed assets on bank balancesheets and its significance stems from several practices in promoter-bank credit relationship that need immediate attention”.

The RBI has been clamping down on the failure to recognise asset quality as non-performing as per its norms by requiring that banks, whose “divergence” exceeds by 15 per cent of the true non performing assets (NPAs) as per the norms, disclose the divergence.

This should restore some market discipline against such practices, especially in the case of private sector banks, Patel said.