RBI must create a new route map for banking supervision that is accountable to both the State and the taxpayer
Representative image/Credit: Pixabay Image
When the then RBI Governor Raghuram Rajan submitted a 17-page note to Parliament in 2015 and started off banking reforms, he would not have imagined that it would lead to more bank frauds. Most politicians and bureaucrats knew that the matter was a proverbial hornet’s nest, and the UPA government in its last months did not stir it. But it took off in 2015.
The banking reforms were necessary to avoid a systemic failure like that which happened in Argentina in 2002, in the US in 2008, or in Greece in 2015. Once the stressed assets were identified by banks and ratified by the RBI, they had to be liquidated. So, the bankruptcy law was drafted and passed by both Houses. Thereafter, the massive National Company Law Tribunal (NCLT) infrastructure was set up, with 24 courts in a dozen cities, complete with 60 judges, appellate tribunals and thousands of insolvency professionals and agencies, besides the insolvency regulator Insolvency and Bankruptcy Board of India (IBBI). With the infrastructure in place by 2018 and half of the dozen largest defaulters liquidated, many thought that the reforms would go smoothly.
But that was not to be. Just as bad debts of Rs 3 lakh crore from commercial banks were being liquidated, frauds of over Rs 2 lakh crore resulted in major implosions in the non-banking finance companies (NBFC) sector. The IL&FS scam broke first. As the infrastructure major was funding small and medium enterprises in the highway sector, the government rushed to prop it up, without restructuring – a poorly done patchwork to save a moth-ridden edifice from crumbling. Soon, the two NBFCs of the Wadhawan group, DHFL and HDIL, turned defaulters in quick succession. After frauds hit the PMC Bank, RBI confirmed that 181 fraud cases in Urban Co-operative Banks (UCBs) were noticed during 2018-19. The GDP, which was already tanking due to the banking crisis that had disrupted industrial credit flow, went into a negative tailspin when the pandemic lockdown was announced.
The anti-money laundering acts were tightened in 2018 and 2019, but frauds grew. Why?
It happened largely because the supervisory level at banks and regulatory authorities were stalling action. Whereas the average fraud detection time was 22 months for frauds below Rs 100 crore, in the case of large frauds, it was detected and reported only after 55 months on average. So, while new laws were being put in place, the frauds doubled each year after 2017 to cross Rs 1.85 lakh crore in 2019-20. Importantly, 38 economic offenders fled the country in the last five years while the reforms took place.
Though the Union law ministry had done its work quickly, the regulatory bodies, the finance ministry and the enforcement departments under it were found wanting. Reacting to the PNB fraud, the then RBI chief Urjit Patel said in the central bank’s defence that “no bank regulator can catch or prevent all frauds.” He later quit, citing ‘personal reasons’ after IL&FS imploded under a spate of mega frauds.
The apathy to nail defaulters was also evident in other regulators. The Central Vigilance Commission (CVC) did a detailed analysis of the top 100 frauds till March 2017 but surprisingly stopped short of naming the borrowers and the bankers involved in the frauds, something that a vigilance commission is paid to do by the taxpayer.
Grant Thornton’s forensic analysis revealed that five rating agencies – CARE, ICRA, India Ratings, Brickworks and CRISIL — which assigned a total of 429 ratings in the period 2011 to 2019 failed to downgrade IL&FS, which helped it fraudulently amass public funds at a low cost. The SEBI, which had nailed the Sahara Group initially and forced it to refund Rs 24,000 crore to investors looked the other way as the old guard retired. Out on bail, Sahara’s Subroto Roy again raised an astounding Rs 86,673 crore from several depositors for four Sahara Co-operatives and is now unable to make repayments.
Making regulators accountable
Though the largest NPAs and frauds have been at the public sector banks, their top brass have not been investigated. They must be made accountable, as Chanda Kochhar and Rana Kapoor are being. The reforms at the regulators’ level is also needed, starting with the RBI. Its record in regulating both the NBFC sector and co-operative banks is extremely poor. This is natural as apart from three dozen commercial banks, there are 11,000-odd NBFCs, 1,500 UCBs and 96,000 Rural Cooperative Banks. It has neither the manpower nor the skills to regulate so many diverse financial institutions.
The RBI’s headcount stands at half of its 1997 workforce of 33,084 – roughly one person per seven financial institutions. No wonder it is said to practice ‘tick box supervision’ with dozens of major frauds festering for years without resolution. The RBI needs to expand and retrain its staff with skillsets to analyse and detect frauds. It needs to monitor all rating and other regulatory agencies, creating a new route map for banking supervision that is accountable to both the State and the taxpayer.
(The writer is a journalist and author of three books on economic governance)