There have been two broad regulatory frameworks in the world for banking. Whichever the framework adopted by any country, the spate of bad loans continues unabated
The tragedy and debacle of PMC Bank continues with heart-wrenching stories of its customers. In the midst of this comes the news from India’s finance minister that frauds in PSU banks between April- September of 2019 is Rs 95,700 cr! And this is over and above the losses written off by banks, which is vastly greater than this.
Indians born in the late 70s will recall that much the same happened during the mid to late 1990s, which is when the Reserve Bank of India established the Board for Financial Supervision. This was an embrace of the UK model which separated policy (Bank of England) and regulation & supervision (Financial Services Authority, dissolved in 2013) as against the US style which combines the two in the Federal Reserve Bureau.
Going by the record of the performance of the financial sector in these countries, it is debatable whether the model of regulatory framework makes any difference at all to the actual regulation and supervision of banks and other financial services firms. You might recall the then US Fed Chairman announcing confidently in 2008 that the American financial system was never safer only for his words to fall flat and exposed as being completely out of touch with reality. It is a different point and a pity that he is still regarded otherwise. The extensive tampering with Libor (London inter-bank offered rate), the most basic and sacrosanct rate, involved many American banks apart from others, with the US Department of Justice finally succeeding in bringing them to books. In the UK, the FSA granted Northern Rock the right to develop its own internal risk management framework and arrive at the amount of capital it needed to hold. Literally a fortnight later, Northern Rock folded under!
In India, the situation seems no different. The separation of policy making (RBI) from supervision (Board for Financial Supervision) hasn’t made any difference to the continued occurrence of financial frauds. Arguably, the most shocking revelation is the case of PMC and HDIL, with the bank’s exposure to HDIL coming to 73% of its total exposure! How something like this could happen right under the RBI’s nose is beyond any imagination. Whatever happened to exposure norms and their reporting at defined intervals.
There is no indicator to give us any confidence that such occurrences will be a thing of the past. It is certainly naive to think so. What needs to be debated is how the regulation and supervision of banks and other entities in the financial services sector can be improved and it is time to completely disregard the model of supervisory framework and focus instead on instruments and techniques of supervision. We have had multiple entities set up in India for infrastructure and we know where we are! The RBI should throw it open to the public and invite their views. We did find the symbol for the rupee. Perhaps, we will find better and more effective instruments & techniques. There is certainly no harm in trying!
PS – I just read that the Reserve Bank has ‘discovered’ that Yes Bank’s losses were $457 million higher than it disclosed as on March 31. Great discovery! I rest my case
(Linkedin, November 20, 2019)
Takeaways
The spate of bad loans is indifferent to model of regulatory framework
Real, effective supervision by the central bank calls for a deep knowledge of how banks actually operate
