n’joy! Frauds are forever!
“No Banking Regulator Can Catch or Prevent All Frauds!” -RBI
Bank regulator can not stop frauds!
Recently Urjit R. Patel, Governor, Reserve Bank of India delivered Inaugural Lecture at Centre for Law & Economics, Centre for Banking & Financial Laws Gujarat National Law University, Gandhinagar. He says: “No Banking Regulator Can Catch or Prevent All Frauds!”
Another point is in order before I move to the broader issue of bank stressed assets and their resolution. There has been a tendency in the pronouncements post revelation of the fraud that RBI supervision team should have caught it. While that can always be said ex post with any fraud, it is simply infeasible for a banking regulator to be in every nook and corner of banking activity to rule out frauds by “being there”.
If a regulator could achieve such perfect outcomes, it would effectively imply that the regulator can do anything that banks can do, and by implication, can simply perform the entire banking intermediation activity itself. What is needed is that various mechanisms to deter frauds and other irregularities are in place and have bite so that fraud incidence is low and magnitudes contained. Indeed, frauds have happened at banks in regimes with varied levels of banking regulatory quality and in both public and private banks.
In the specific case at hand, the Reserve Bank had identified, based on cyber risk considerations, the exact source of operational hazard –through which we understand now the fraud had been perpetrated. In particular, the RBI had issued precise instructions via three circulars in 2016 to enable banks to eliminate the hazard.
It turns out ex post the bank had simply not done so. Clearly, the internal processes at the bank failed in allowing the operational hazard to remain in place in spite of clear instructions to close it. As we have stated in RBI’s only press statement on this case to date, this was essentially an operational failure at our second largest public sector bank.
The RBI will undertake actions against the bank that it is empowered to but this set is limited under its BR Act powers over PSBs.
Indeed, in a recent interview to the Press Trust of India, March 11 2018, the IMF Deputy Managing Director Tao Zhang has reinforced this point along with others I alluded to above: “[W]e think the PSB recapitalisation should be part of a broader package of financial reforms to speed up the resolution of NPAs, improve PSB governance, reduce the role of the public sector in the financial system, and enhance bank lending capacity and practices…
The experts recommended legal changes to enable the RBI to extend all the powers currently exercised over private sector banks to public sector ones; in particular, regarding Board member dismissals, mergers, and license revocation… Having said that, banks’ operational risk management, risk culture, internal control frameworks and external audit function should typically play a central role in preventing fraud.”
