Banking Regulator Cannot Catch, Prevent Banking Frauds: Urjit Patel

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Delivering the inaugural lecture at National Law University, Gandhinagar, Patel said, “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.”

Patel added that the RBI had issued precise instructions via three circulars in 2016 to all banks to eliminate such hazards. But PNB failed to follow instructions. He also said that it is essential for banking regulatory powers to be ownership neutral.

“Banks in most parts of the world, however, have a significant portion of deposit funding that is insured, and since banks serve critical payments and settlements function, they are often too big to fail or too many to fail. Hence, a part of the market discipline is weakened as a trade-off with financial stability and is substituted by a delegation of supervisory and regulatory powers to a banking regulator. Detection and punishment by the regulator then need to be effective to discipline fraud,” he said.

“Investigative and formal enforcement process takes in our country, perhaps for the right reasons, a fair bit of time. Indeed, RBI data on banking frauds suggests that only a handful of cases over the past five years have had closure, and cases of substantive economic significance remain open. As a result, the overall enforcement mechanism – at least until now – is not perceived to be a major deterrent to frauds relative to economic gains from fraud,” he added. He believes that in the case of private sector banks, the real deterrence arises from the market and regulatory discipline.

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