(Adds quotes from Patel speech, background and detail)
By Devidutta Tripathy and Abhirup Roy
MUMBAI, March 14 (Reuters) - India’s central bank chief said on Wednesday that it had “very limited authority” over state-run banks and called for reforms to give the regulator more powers to police such lenders in the wake of a $2 billion fraud.
Reserve Bank of India (RBI) Governor Urjit Patel defended the central bank’s role in the aftermath of the Punjab National Bank fraud case and hit back indirectly at the Indian government, which has criticized the role of the regulator and auditors for failing to spot the alleged scam.
In a rare, strongly-worded speech at a law university in the Western Indian state of Gujarat, Patel said there were numerous limitations in the RBI’s powers over state-run lenders, such as its inability to remove directors, replace management, force a merger or initiate liquidation.
While the RBI regulates all banks in India, state-run banks are also regulated by the government, which owns majority-stakes in them. This has, in effect, led to a system of “dual regulation”, said Patel, adding that this “fault line is bound to lead to tremors such as the most recent fraud”.
The unravelling PNB fraud, the biggest in Indian banking history, has stunned the financial sector and pushed the RBI and government to crack down on bank systems and lending practices.
State-run lenders, sometimes referred to as PSBs, or public sector banks, own two-thirds of India’s banking assets, but are much less profitable than nimbler private sector rivals.
Patel said the government needed to begin, “informing itself about what to do with the public sector banking system going forward,” hinting that a recent $32 billion bailout for the bad-debt laden banks was not the best use of scarce resources.
In the speech posted on the RBI’s website late on Wednesday, Patel said the “RBI’s regulatory powers over PSBs are weaker than those over the private sector banks”, adding the state banks also lacked market discipline.
Patel said exemptions in India’s Banking Regulation Act meant the regulator cannot take “effective action” and even the managing directors at public sector banks realise the “ultimate authority over their tenure is with the government, and not with the RBI”.
His comments come after Finance Minister Arun Jaitley last month criticised inadequate oversight of the country’s financial sector by auditors and regulators, without naming any body in particular.
“Success has many fathers; failures none,” said Patel in his speech. “Hence, there has been the usual blame game, passing the buck, and a tonne of honking.”
He noted the central bank had warned on the potential gaps in banking systems in 2016, but lamented that PNB did not work to eliminate the hazards.
Reiterating that it was an “operational failure” on the part of PNB, Patel said the regulator would take actions against the second-biggest state bank, but stressed its powers were limited.
In a 4,000-plus word speech Patel called on banks and company backers to behave in godly ways rather than demonic manners - a reference to the battles between the gods and demons of Hindu mythology. Patel said the RBI was willing to face the brickbats as this was its duty, but vowed things would improve.
“We will persist with our endeavours and get better with each trial and tribulation along the way,” he said. (Reporting by Devidutta Tripathy, Abhirup Roy, Sankalp Phartiyal and Zeba Siddiqui Editing by Euan Rocha and Alex Richardson)