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Raghuram Rajan: No one wants to go after rich and well-connected wrongdoer

Rajan also raised the issue whether the RBI is taking a lenient view against malpractices in the banking sector and said there’s “a sense that we do not enforce compliance”.

By: ENS Economic Bureau | Mumbai |
Updated: January 18, 2016 4:56:12 pm

Is India a weak state which punishes only the small and weak? RBI Governor Raghuram Rajan who made some plain speaking to his colleagues in the central bank has said “the rich and well-connected wrong-doer” is virtually going scot-free.

In a stinging attack on the issue of culture of compliance, Rajan said, “it has often been said that India is a weak state. Not only are we accused of not having the administrative capacity of ferreting out wrong doing, we do not punish the wrong-doer — unless he is small and weak.”

According to the RBI Governor, this belief feeds on itself. “No one wants to go after the rich and well-connected wrong-doer, which means they get away with even more. If we are to have strong sustainable growth, this culture of impunity should stop,” he said in a recent message to the RBI employees.

Rajan’s observations assume significance as banks are yet to go after big loan defaulters while giving small borrowers a raw deal. “Importantly, this does not mean being against riches or business, as some would like to portray, but being against wrong-doing,” he said.

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Rajan also raised the issue whether the RBI is taking a lenient view against malpractices in the banking sector and said there’s “a sense that we do not enforce compliance”.

“My sense is that we need a continuing conversation about tightening both detection as well as penalties for non-compliance throughout the hierarchy. We cannot be seen as a paper tiger,” Rajan said in a message to RBI employees. His comments have come at a time when the RBI and the banking sector are struggling to tackle rising non-performing assets (NPAs) and willful defaults.

In a scathing self-criticism, Rajan said, “are we allowing regulated entities to get away year after year with poor practices even though these are noted during inspections/scrutinies? Should we become more intolerant of sloppy practices at regulated entities, so that these do not result in massive scams years later? Should we haul up accountants who do not flag issues they should detect?”

“While we should be wary of regulatory overreach, we must also recognise that if we do not expand our responsibilities, others will fill them. That is not always a bad thing, but if new regulators lead to a balkanization of regulation and many regulatory gaps, the system will be worse off,” he said. “Let us be prepared to step up where necessary instead of assuming others will take responsibility.”

Rajan said, “if we demand more of the regulated, we should not be found wanting ourselves. As with all organisations, we are reliant on a few stalwarts who carry the organisation on their broad shoulders. These are the best performers.”

There is a second tier that exceeds the needs of the job through their effort or their capabilities, but they fall a little short of being truly excellent. A third tier consists of time-servers, for whom the job is a source of livelihood but who have lost the desire to excel. They put in a reasonable day’s work, but not an ounce more than what is demanded of them. “And then there are those who are overwhelmed by the work or who have lost any desire to perform. I have encountered all these types at the bank,” he said.

“Our regulations are not always very clear, our staff sometimes is neither well informed of our own regulations nor willing to help the customer, our responses are occasionally extraordinarily slow and bureaucratic (in the sense of hiding behind opaque rules or avoiding a decision rather than taking a sensible course of action),” Rajan said. The imagery that comes to mind for critics is of a traditional unimaginative organisation rather than a dynamic intelligent one, the letter said.

Rajan said the RBI’s budget will be approved by its Central Board. “Our dividend policy is currently being debated with the Government, but we intend to make it rule-based using cutting edge principles, so that the stability of the bank is protected, even while the Government gets all possible dividends from ownership,” he said.

The RBI also intends to improve the board’s oversight of wage and perquisite negotiations. “Transparency and good governance are ways to protect ourselves from roving enquiries — everyone should recognize that an effective regulator has enemies, and like Caesar’s wife, should be above all suspicion,” Rajan said.

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