Govt’s Chief Economic Advisor calls for better RBI regulation

Govt’s Chief Economic Advisor calls for better RBI regulation

Referring to the PNB fraud, Arvind Subramanian , “We know that, for whatever reason, internal control has broken down. But another important question is what about the external controls in the banking sector?"

Govt’s Chief Economic Advisor calls for better RBI regulation
Subramanian went on to talk about the problems facing public sector banks and the role of the RBI at the Madras Management Association. (File)

A DAY after the RBI said it will take “appropriate supervisory action” in the Rs 11,400-crore Punjab National Bank fraud and termed it a failure of internal controls in the bank, Chief Economic Advisor Arvind Subramanian said more effective regulation was also needed from the RBI.

Addressing the annual convention of the Madras Management Association here on Saturday morning, Subramanian said instead of talking about the ‘Growth Story of India’ as he intended to, he would speak about “something that is in everyone’s mind today, it is the one news in the headlines”. Referring to the PNB fraud only as “the latest episode”, the CEA to the government of India added, “We know that, for whatever reason, internal control has broken down. But another important question is what about the external controls in the banking sector? What about the control exercised by the regulator or the supervisor? What was happening there as well?”

Subramanian went on to talk about the problems facing public sector banks and the role of the RBI for more than 30 minutes, saying this topic “is actually critical to accelerating India’s growth, India’s fastest growth”.
“How do we get better regulation of the banking system? How do we prevent these things happening? Of course, there has to be an internal control, auditing has to be better, but there also has to be a better external control, better regulation and supervision,” he said.

Referring to the rising non-performing assets on the balance sheets of banks and the debt accumulation on the balance sheets of corporates, Subramanian said there were four ‘R’s — Recognition, Resolution, Recapitalisation and Reform — to deal with the problem. “Still we failed to recognise the actual problem because there was a fifth R, Regulation. Regulation of the banking system and the role of the regulator in this (crisis),” he said.
Subramanian joked that he had consulted his mother, who was in the audience, before speaking, “since I am going to say a lot of important things”. She had assured he is “astrologically protected” right now, he laughed.


In its first official reaction after the surfacing of the PNB fraud, the RBI said on Friday, “it is a case of operational risk arising on account of delinquent behaviour by one or more employees of the bank and failure of internal controls”. The RBI has already undertaken a supervisory assessment of control systems in the PNB and will take appropriate supervisory action, it said.

In his speech, Subramanian said, “About a year ago, the government passed the Bankruptcy Code and six months ago the RBI put a number of companies into resolution. A couple of months ago, the government fired a bazooka and announced recapitalisation of banks. The regulator Reserve Bank of India has passed a series of regulations to accelerate the resolution process. Of course, over the weekend, we have all these scandals which have affected the Indian banking system. Bank of Baroda closed down operations in South Africa, State Bank of India had to recapitalise a lot more than they have said, and there is the Punjab National Bank episode now.”

Evoking laughter from the audience, he said, “Now, let me be clear. I don’t belong to the Enforcement Directorate or CBI or RBI, so I know nothing about the details of these (cases), other than reading the newspaper… But I don’t want to step back on a public policy question — what should be learned from these happenings?”

Asked about the recovery of money lost to the scams, Subramanian said, “The normal legal process should work. If some crime happens, punishing the offender is part of maintaining the integrity of the system.”

Talking about non-performing assets and the RBI’s progress in identifying NPAs in the past four years, he said, “At any point in time, the number of bad assets in the system are always 20 to 30 per cent more than what people tell you.” Clarifying that he was talking about the world scenario and not India specifically, he added, “There is always a tendency to not reveal (bad assets)… Anyway, we made a lot of progress in identification.”

Subramanian also praised the progress and steps taken by the government in recapitalisation of banks, while adding that the reform of the system continues to be a challenge. “When the government is putting in a lot of money to recapitalise the banks, how do we make sure that this will not repeat itself,” he pointed out.

“In this latest episode, a lot of taxpayers’ money is going to solve the twin balance sheet challenge. The question is are we getting enough value for this taxpayer’s money? Will this taxpayer money be better protected under the current governance and ownership structure? Or will it require a different policy structure? When I talk about more private sector participation in the public sector, some people suggest to reform the governance model in public sector banks,” he said, asking what assurance they have that such a reform would be better than the experience of the last 40 years. Quoting Albert Einstein, he added, “Insanity is doing the same thing over and over again, but expecting different results.”

At the same time, Subramanian added that more private sector participation is no guarantee for a stable financial system. “More effective regulation is needed from the banking regulator to address what has happened now, and also to complement more private sector participation.”

Subramanian also said that he had learned over the past four years that “decision-making in the Indian government is actually almost paralysed by the fear of four ‘C’s — Courts, CBI, CVC and CAG, all overhanging.” It is not only about punishing the culprits, but taking measures to prevent these crimes, he said.

Answering a question on encountering politicians regarding scams, he said, “I have a cardinal rule. That is to play the role of the Chief Economic Advisor, not a moral officer.”

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