More powers over state lender

Mumbai. The Reserve Bank of India chief said that it had very limited authority over state-run banks and called for reforms to give the regulator more powers to police such lenders in the wake of a $2 billion fraud.
RBI Governor Urjit Patel defended the central bank’s role in the aftermath of the Punjab National Bank fraud case and hit back indirectly at the Indian government, which has criticized the role of the regulator and auditors for failing to spot the alleged scam. Speech at a law university in theGujarat, Patel said there were numerous limitations in the RBI’s powers over state-run lenders, such as its inability to remove directors, replace management, force a merger or initiate liquidation. While the RBI regulates all banks in India, state-run banks are also regulated by the government, which owns majority-stakes in them. This has in effect, led to a system of dual regulation, said Patel, adding that this fault line is bound to lead to tremors such as the most recent fraud.

The unravelling PNB fraud has stunned the financial sector and pushed the RBI and government to crack down on bank systems and lending practices. State-run lenders, sometimes referred to as public sector banks, own two-thirds of India’s banking assets, but are much less profitable than nimbler private sector rivals. Patel said the government needed to begin, informing itself about what to do with the public sector banking system going forward, hinting that a recent $32 billion bailout for the bad-debt laden banks was not the best use of scarce resources.