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RBI chief Urjit Patel strikes back, says govt meddling in state-owned banks allows NiMo-type scams

 

RBI governor Urjit Patel. File photo/ Prem Singh

Mumbai: RBI governor Urjit Patel on Wednesday rejected the finance ministry's criticism that regulatory lapses at the central bank had enabled Nirav Modi and Mehul Choksi to carry out the Rs 12,600-crore scam.

Patel contended that a system of dual regulation that placed levers of governance in the hands of the finance ministry had weakened oversight over state-owned banks.

In an uncharacteristic outburst, Patel said "some fundamental fissures exist in the regulation of banks", adding that the RBI's regulatory powers over public sector banks "are weaker than those over the private sector banks".

The harsh words from the RBI governor echoed the views expressed by his predecessor, Raghuram Rajan, in an interview with a television channel on Tuesday.

"There has been the usual blame game, passing the buck, and a tone of honking, most short-term and knee-jerk reactions" that prevent the participants from introspecting and finding ways to solve the "fundamental issues that are the root cause of such frauds and related irregularities in the banking sector," Patel said in a lecture at the Gujarat National Law University at Gandhinagar.

The RBI governor said the problem of oversight stemmed from the fact that the banking regulatory powers of the central bank were "not ownership neutral".

The government is the principal shareholder of the state-owned banks and, in that capacity, picks the members of the bank boards and decides on key appointments at these banks.

The RBI oversees banks under the provisions of the Banking Regulation Act but many of these provisions do not apply to public sector banks. As a result, the RBI cannot remove directors and management of state-owned banks and it cannot supersede the bank board in the event of serious operational lapses.

"In some cases, there is a duality of managing director and chairman - they are the same - implying that the MD is primarily answerable only to himself or herself," he added.

Patel said the government "has not so far been interested in fundamentally modifying the ownership structure".

He said the original idea of bank nationalisation had led to "complete control over credit allocation to the economy" - and fostered a system of weaker regulation over state-owned banks.

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