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Former RBI governor YV Reddy has slammed the government and the central bank for the Rs 13,000 crore scam at the Punjab National Bank (PNB), saying that there is a loss of confidence in the integrity of the banking system.

He said that the owner of public sector lenders is answerable to taxpayer losses arising out of such financial scams. Speaking at an event in Shivaji University at Kolhapur, YV Reddy explained how bank frauds and high NPAs (non-performing assets (NPAs) impact depositors.

The former RBI governor said that the interests of depositors are adversely affected when borrowers do not pay principal and interest as scheduled or if non-performing assets are large. “The PSBs do not have adequate capital to take care of depositors’ interest, but since the majority ownership is that of the government, the deposits are safe. These are not limited liability companies, but institutions established under the law,” he said.

YV Reddy headed the central bank from 2003 to 2008 and said it is the taxpayers who pay for the losses due to such banking frauds. The massive PNB fraud was detected in mid-February, after which a multi-agency probe was launched. The case sparked major controversy as the main accused Nirav Modi and Mehul Choksi flew the country days before the fraud was detected. PNB posted the biggest ever quarterly loss by any bank in India of Rs 13,416.91 crore in Q4.

“The (PNB) fraud is of such a magnitude that it affects the credibility of the RBI in ensuring the trust of people in banking. To this extent, it has to review its own regulatory and supervisory practices,” VY Reddy said. Last year, the Narendra Modi government’s proposal of Bail-in, in which depositors money could be locked-in for some period of time, to help banks restructure their debts created a lot of furore. The Financial Resolution and Deposit Insurance (FRDI) Bill, which included the Bail-in clause, has not been passed by the Parliament yet.

“We should be able to indicate a bright future for the banking system to keep banking safe for depositors and, in fact, for all concerned,” YV Reddy said.

Last modified on Monday, 11 June 2018

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