The Reserve Bank of India (RBI) has been making noises for too long that it would check the growth of bad loans. Union finance minister Arun Jaitley recently met the chiefs of the State-run banks and gave them a subtle warning to take decisions professionally. But the rot in the system will prevail unless the supervisor, the RBI, is serious.
No event has caused a sudden surge of bad loans — indeed all banks are subject to annual inspections by the central bank and statutory audit by a team of auditors approved by it. Yet these irregularities were either missed because banks hid these bad loans by restructuring them or revising their terms, or perhaps the auditors and the RBI failed to unearth them or glossed over this major lapse. Not sure what’s worse, but the bottom line is that no one is being held accountable and there is no ownership.
Recently, the RBI conducted an independent scrutiny of the loans and current accounts of a fairly major corporate entity, and imposed a penalty of Rs 1.50 crore on 12 banks — five public and seven private sector — for violations of guidelines. The findings were serious — the loans were not backed by adequate securities. It is presumed that these banks would have procured, as required, auditors’ certificates from the company for advances being fully secured.
Claims that the lending banks were not aware of the exposure of other banks to the company seem absurd in the present-day world. The RBI’s committee of executive directors deemed it fit to let off the seasoned banks with a penalty of Rs 1.50 crore, but no official from any bank was found responsible. Surely, no bank can plead ignorance of the RBI’s rules and guidelines. Moreover, all these banks are subject to annual audit and supervisory inspection. So it is pathetic that the RBI had to conduct a special scrutiny to find the mess in the supervisory system. The RBI must realise that the Rs 1.5 crore penalty is akin to having a fine of Rs 100 for jumping a red light — it does nothing to deter a crime.
As a matter of fact, the RBI, in the past 20 years, has been indicted by both the Joint Parliamentary Committees set up in 1991 and 2001 to inquire into the irregularities in the financial system, for its lax supervisory system. It needs to begin to act as the supervisor and ensure strict compliance of its guidelines.
KL Khetarpaul is former executive director of the Reserve Bank of India
The views expressed by the author are personal