Disagree With Patel’s Arguments On Regulatory Structure Of State-Owned Banks, Says Yashwant Sinha

Ownership of banks does not matter when it comes to regulation, says former Finance Minister Yashwant Sinha.

Yashwant Sinha, former Indian minister of finance. (Photographer: Xabier Mikel Laburu/Bloomberg News.)
Yashwant Sinha, former Indian minister of finance. (Photographer: Xabier Mikel Laburu/Bloomberg News.)

Former Finance Minister Yashwant Sinha said he didn’t agree with Reserve Bank of India Governor Urjit Patel’s argument that the government’s dual role as promoter and super-regulator limited the central bank’s ability to formulate effective rules for public sector lenders.

The government and the RBI have collaborated in the past to resolve issues with public sector banks like in the case of Indian Bank, Sinha told BloombergQuint in an interview. “No governor before Mr. Patel has raised these issues.”

Patel, speaking for the first time after Punjab National Bank reported a nearly Rs 13,000-crore fraud, said it was not possible for the banking regulator to prevent each and every such incident. He urged the government to strengthen the Banking Regulation Act, 1949 to give the regulator enough teeth to regulate state-run banks.

Also Read: RBI Deserves More Powers To Discipline Lenders

Sinha said the RBI’s nominees on PNB's board could have raised the issues before the fraud finally came to light.

Ownership does not matter. It is regulation that matters. The regulator in this case is RBI and therefore RBI should take the blame.
Yashwant Sinha, Former Finance Minister

RBI's approach to a problem at a foreign bank, private bank or a state-owned bank shouldn't be different, Sinha added.

Watch the interview:

Here are edited excerpts from the interview.

The governor of the Reserve Bank of India in the context of PNB fraud made some observations, raised the issues of dual control of public sector banks by the RBI and the government. Is there a case for reform, and is there a conflict of interest here?

I have seen the remarks made by the governor. I will hasten to say that I don’t agree with them. This system has been in operation for decades now. We have tackled one crisis after another in the banking system including in the public sector banks, but no governor before Mr. Patel has raised this issue.

When I was in the Ministry of Finance, we had absolutely no problem with the governor. In fact, if the board of directors or the appointment of a board of directors was an issue, let me remind you, that we had a problem with Indian Bank in Chennai. In consultation with Bimal Jalan, who was the governor of RBI at the time, we superseded the board. We appointed a new managing director. We did all that was needed to be done, all in consultation with the RBI.

If Mr. Patel had a problem with regard to powers to govern or regulate the PSBs, then is there any instance where he would have approached the Ministry of Finance and said this board of directors is useless and I want it replaced?

As far as the current scam at Punjab National Bank is concerned – and I am not talking about the fraud; there is a difference between banking fraud and a banking scam; Punjab National Bank was a scam - the RBI has a director on the PNB board, and so does the Ministry of Finance. The RBI has a huge department for banking regulations. What were all these people doing?

So, it is very difficult to agree that since we don’t have this and that power....Did they bring it to the notice of those who had the power? That’s what we need to do.

Is it not time for the government to act on things like the PJ Nayak Committee Report, which said that government ownership of banks needs to be reduced through a holding company?

I am firmly of the view that the ownership of the bank does not matter as far as regulation of the banking sector is concerned. He talks about conflict of interest and dual control. We have a huge sector of co-operative banks.

There it is not merely dual control, but its triple control. Because the Co-operative Societies Act and the registrar of co-operatives in the state governments also get into the act, and play a role as far as co-operative societies are concerned. Then we have the public-sector banks, then we have private banks, foreign banks. We have branches of foreign banks.

The ownership of the banking system in our country is very diverse. The point cannot be made that it should all be owned by the RBI. RBI is the regulator of the banking system. If they have any problems with the ownership or the role that the owner is playing, then, they should bring it to the notice of the owner.

What will they [RBI] do if a foreign bank were to fall into a problem? They will perhaps recommend the closure of the branch or impose a fine or do what they like. Why can’t they do the same to the public sector banks?

Can the RBI absolve itself of supervisory negligence or oversight, as the case may be, in this specific case of PNB?

One is, they have a director on the board. And the board meets very often. The director should have been alert and should have brought any malfeasance to the notice of the RBI. Second, the RBI department of banking is supposed to regularly inspect banks.

So, they would have periodically and regularly inspected PNB also. Why didn’t the inspectors find out what was happening? In this particular case where the letter of undertaking were involved, under a direction issued by RBI, why was not this particular thing taken care of especially? What was happening to export finance?

You can’t expect a scam of this type to happen, let’s say, as far as agricultural loans are concerned or loans to small scale sectors are concerned. But when you are dealing with export financing, and dealing with a complex organisation where you issue an LoU to your branch and they then issue it or deal with a foreign bank, then it is a system which has to be carefully examined all the time. All those involved have to be on the alert to ensure that nothing was going wrong. I find that all this oversight was missing in the case of PNB.

What are the options left before the ministry now? Will the ministry be open to reform at this juncture or it will be a status quo? Do you think all of this will reach a logical conclusion?

Ownership does not matter. Weren’t all the insurance companies and the banks in the U.S. owned by private people? But yet we had the huge scam in 2008-09. My point consistently was that ownership does not matter, but it is regulation which matters. The regulator is RBI, and therefore it has to take the blame.

But there is a need for banking sector reform, which unfortunately has not happened. Even when we are spending large sums of money on recapitalisation of public sector banks, we are somehow squeamish about going for fundamental reforms in public sector banks. Governor talks about mergers, closure of some banks. By all means, he should make those recommendations in case he feels a bank is not performing.

I would also like to make a point that, when I was finance minister for over 4 years, I did not agree to recapitalise the public-sector banks from government corpus. I said you improve your management, you do what you have to do as board of directors, but you will have to look after yourself. Now the government has taken an easy way out of recapitalising which creates a sense of irresponsibility.

Whatever be the problem, we can always go back to the bank. The bank recapitalisation move, unfortunately, has not been followed by broad and fundamental reforms of the system. We do need reforms which needs to be done in consultation with the RBI. He has raised an academic issue and let RBI and Ministry of Finance discuss it and arrive at a conclusion.

It will be very unfortunate if an impression is created that the RBI and the government are on different pages as far as this is concerned or if they have serious differences of opinion.