While the RBI directs all banks in India, state-run banks are likewise managed by the administration, which claims dominant part stakes in them.
Patel said the RBI will undertake actions against the bank that it is empowered to but this set is limited under its Banking Regulation Act powers over PSBs. "By so doing, it should weaken in the first-place opportunities for engaging in frauds relating to loan advances". Patel said while delivering a lecture at the Gujarat National Law University in Gandhinagar.
Mr. Patel said that banking regulatory powers in India were not ownership neutral.
The RBI though entrusted with regulation of the entire system has often yield to the wishes of the ministry in case of banks where the latter is the owner. On a question related to the big bad loans and stressed assets which the India banks at present are facing, Vaghul said that the mess in the banking sector was created because to banks have been under the undue control of the government for the past 50 years.
The Reserve Bank has taken steps over the previous year in this direction, with a focus on reference to the IBC of certain large value stressed accounts, covering approximately 40% of banking sector's overall exposure to the stressed assets.
To be sure, on 12 February, RBI came out with revised framework for stressed assets resolution. As explained below, this approach is a positive step towards strengthening the credit culture in the economy, at both borrowers and banks.
"Its magnitude is larger than Rs8.5 lakh crore of stressed assets on bank balancesheets and its significance stems from several practices in promoter-bank credit relationship that need immediate attention", he said.
The RBI has been clamping down on the failure to recognise asset quality as non-performing as per its norms by requiring that banks, whose "divergence" exceeds by 15% of the true non-performing assets as per the norms, disclose the divergence.
He also highlighted that in the case of private sector banks, the real deterrence to act against fraudulent activities arises from their market and regulatory discipline, as the primary concern of the CEO of a private bank is whether s/he will be able to raise capital when the need arises, or even whether s/he will still be running the bank the next day. Patel said the RBI was willing to face the brickbats as this was its duty, but vowed things would improve. 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".
"It turns out ex post the bank had simply not done so". Public sector banks, which after the nationalisation in 1969, account for some 80 per cent of banking resources of the country have since then been confronting two bosses, the RBI and the finance ministry.
"As the guard of people's deposits at banks, I will do my best to break the unholy nexus", he said. "Banking frauds amount to looting of our country's future by some in the business community in cahoots with some lenders".