In at least three of the major financial sector scams in the last couple of months in India, featuring Punjab National Bank, IL&FS, some private banks and now the latest, Punjab and Maharashtra Cooperative Bank or PMC, apart from poor governance and fraudulent practices, a common thread has been supervisory failure. The country’s leading financial sector regulator, the RBI, has been shown as flat-footed, responding only after the event. Like in IL&FS, in the PMC case too, there appears to be culpability on the part of the management and the board of the bank considering that the bank’s loan exposure to a single firm, HDIL, alone constituted 73 per cent of its assets and several dummy accounts were created to camouflage this. But often, the issue of dual control by the RBI and state governments has been cited as a hurdle by the regulator for its inability to effectively supervise cooperative banks.
That may be true to an extent, given the limitations in superceding the board of directors or removing directors of these banks, unlike in commercial banks. Yet that alone cannot be a shield for the central bank, considering the role of co-operative banks in ensuring credit delivery to the unorganised sector and last mile access, especially to small businesses, over the last few decades in an economy where the large banks continue to focus on bigger cities and towns. As a recent RBI report shows, fund flows to the commercial sector have declined by close to 88 per cent in the first six months of this current fiscal — to Rs 90,495 crore in mid-September compared to Rs 7.38 lakh crore during the same period a year ago. That would have surely hurt small businessmen, traders and the farm sector. A remarkable feature since liberalisation, has been the resilience of India’s financial sector, which may also have to do with the dominance of government-owned institutions or lenders and a strong central bank. If that track record is not to be sullied, clearly, the RBI will have to raise its game on the supervisory front to remain a step ahead of the entities it regulates.
The central bank has already started building an internal cadre for supervision of banks and other entities aimed at enhancing its oversight capabilities. Hopefully, this will be complemented by legislative changes which could lead to greater regulatory control and powers for the RBI over cooperative banks and an insolvency regime for financial firms as indicated by Finance Minister Nirmala Sitharaman. India needs not just a few large banks and lenders with a national or regional presence but also other players such as cooperative banks, small finance and payment banks. There are voices seeking greater accountability on the part of India’s financial regulators. The risk it holds is the prospect of supervisors swinging to the other extreme while poring over the books of banks and compounding the problem, besides stifling innovation. Carving out a separate authority for supervision may only lead to regulators working in silos. With a weakening economy, the last thing India needs is the unravelling of more such firms stoking fears of financial instability.