What is RBI’s role in PNB?

Someone who read my blog post called me and told me to consider the following:

If a fraud in any company occurs, it is the problem for the management, the Board and the owner, in that order.

In this instance, can the regulator change the owner? No. The Board? – No. The owner appoints them. Can the regulator order the CEO replaced? No! The owner does not need the regulator’s approval for public sector banks to appoint CEOs whereas private sector banks do need the regulator’s approval.

The regulator is responsible for financial stability and consumer protection.

Now, Tamal Bandyopadhyay in his piece for MINT says that RBI insists on reconciliation of Nostro accounts:

Finally, RBI is very particular in keeping a tab on all transactions in banks’ Nostro accounts and it always insists on timely reconciliation of such accounts. How could the rapid rise in transactions in PNB’s Nostro account escape the regulator’s eye?

I understand RBI sent a note to all banks in the first week of February, asking them to reconcile all Nostro accounts.

What if banks tell the RBI they have done so, without doing so? What can the regulator do, in such situations? Have the bank’s internal auditors and statutory auditors failed here?

From Tamal:

Concurrent auditors in bank branches are assigned the job of transaction verification. There could be delay, but I wonder how the concurrent auditors failed in tracing out the full chain. Ditto about the statutory auditors. They are supposed to check customer-wise transaction register, along with sanctions /approvals for authenticating the true state of the books of accounts and establish the amount of bank’s contingent liabilities on the date of book closure. Similarly, the internal auditors are expected to verify client files, outstanding transactions, approvals and transaction registers. Besides, RBI auditors conduct the annual financial review.

But, Tamal also added this:

Besides, RBI auditors conduct the annual financial review.

What is the depth and breadth of this review? So, is the regulator really free of lapses here?


A much scarier thought

On this Punjab National Bank scandal, it does seem simple enough to understand what happened. But, that is worrying. If it was reasonably simple, why did it go undetected? It is not unreasonable to assume that several could be on the take – cutting across banks, auditors, the regulator, governments, etc. We live in a cynical world.

But, that is low probability because it is risky to involve too many stakeholders. Someone could spill the beans, if not out of altruism and morality but out of pique, let us say, because the spoils were not shared ‘fairly’. Yes, there could be moral considerations in immorality!

A scarier thought – scarier than the possibility of multiple layers and cross-sections of involvement – is that simply no one bothered to notice or do their job. The mind-numbing possibility is one of pervasive and deeply ingrained indifference and sloppiness. In other words, no one cared or cares any more!

Hence, it was scary to read that someone actually mentioned this as the possible reason for the scandal remaining undetected:

The accounts given by current and former executives who spoke to Reuters suggest an answer as simple as it is alarming: no one was paying attention. [Link]

This does not augur well for the integrity and unity of the country at all because it could be pervasive – yes, not within the banking system alone. Why should other sectors be different?

[Postscript: If the bank issued LoU to foreign banks (or, foreign branches of Indian banks, I presume that they would credit PNB’s Nostro account held with them before PNB credits the account of the borrower with the money. If I am right, why did the audit of PNB’s Nostro Accounts not spot the ‘unusual’ transactions? Why did anyone not raise a flag? Are these stupid questions? Perhaps.]

From loans to assets

Corporate Credit Growth muted due to:

– Strategy to grow in Better Rated Corporates; restricting growth in stressed sectors

– Movement of exposure from loan book to Investment Book; Commercial Paper plus Corporate Bonds portfolio grew 25.2% YoY adding 317 bps to our market share for the same. [Link]

I found that in SBI’s third quarter analyst presentation. It is an interesting story of bank balance sheet transformation. It is good in one sense because bank credit growth need not be the only indicator of underlying economic activity. Market provision of funds is assuming importance. I had indicated this in my piece on the jobs study by Ghosh & Ghosh.

But, equally interestingly, this does obviously change the asset side of the balance sheets of banks. If there is market exposure rather than credit exposure, who is the appropriate regulator?

I will add two caveats: These are still very early days; on regulation, there is no need to answer the above question in a binary manner. It need not be EITHER/OR.

But, interesting to watch the space, as they say.

Postscript: In the second quarter, SBI had mentioned the Gross NPA + Restructured Assets Ratio. In the third quarter analyst presentation, it merely presented the ‘Gross NPA ratio’. Wonder….

On bailouts and bail-ins

In a post done two weeks ago, I had noted that the proposed Bill (it has gone to the Parliamentary Standing Committee) on Resolving Financial Institutions did not really hold much terror for depositors and that some of the fears that were being expressed were exaggerated – over the top.

But, on closer reading, I realised that, prima facie, concerns were not wrong. The wording was vague and sloppy. Bailing in Indian bank depositors was flawed on many counts. That prompted my MINT column published today.

This morning, as I was searching for my column online (it was uploaded only this morning due to some technical glitches), I came across a piece by Monica Halan in ‘Hindustan Times’. She writes:

It is the bail-in clause that is causing all the panic in the minds of the depositors. Will my deposits be used to reduce the liability of the bank? No, you do not need to worry that your deposits will be lost in a bail-in. Your deposits will be insured, just as they are today and there is an additional protection for depositors because the bail-in can be invoked, and your deposits be lost, only if you have given your consent for this to the bank when you signed the deposit forms.

Well, it is not that simple. The wording of Clause 52 (5) is not that clear. Here you go:

(5) The appropriate regulator may, in consultation with the Corporation, require
specified service providers or classes of specified service providers to maintain liabilities that may be subject to bail-in and the terms and conditions for such liabilities to contain a provision to the effect that such liabilities are subject to bail-in.

It cannot be optional. If so, it will be a non-starter. Why would anyone opt to be bailed in? Further, as one can see, the wording is not omnibus. It does not simply say that depositors would be excluded from being bailed in for all their present deposits and, in future, they will be, subject to some enhanced deposit size being covered by deposit insurance. It is not that well worded and, perhaps, deliberately so.

Shankkar Aiyar wrote that this Bill is a consequence of the G-20 commitment:

WhatsAppically, the bill is the brain-child of this regime. Factually, bail-in owes its genesis to the financial crisis of 2008. In November that year, the G20, of which India is a member, met in Washington and resolved to strengthen global financial architecture, and expanded the Financial Stability Forum to create the Financial Stability Board (FSB). The concept of ‘bail-in’ made its appearance in a consultative paper of the FSB in July 2011. The proposal (echoed in a RBI report of May 2014) was ratified at the Brisbane G20 in November 2014. The bill was introduced in August 2017. [Link]

But, there is a domestic angle to it. It is part of the recommendations of the Financial Sector Legislative Reforms Commission.

The Finance Minister has issued a clarification but the important thing is to ensure that the Bill reflects such clarifications and assurances unambiguously. Neither this government nor the ruling party nor the economy need this uncertainty right now.

Down and Under now?

These two headlines pretty much summarise the story of the Australian housing bubble:

  • Value of nation’s homes equivalent to four times the economy
  • Risk that ‘a minor shock could become far more significant’

But, the full story is well worth a read. The charts are great (ht: Rohit Rajendran). Do not miss noticing how big the housing bubble in New Zealand too is.

The Australian Government announced a Royal Commission to inquire into the conduct of its banks. The Bloomberg story on it lists the following ‘triggers’ for it:

The main opposition Labor party has for months been demanding a royal commission into the finance industry, amid a string of scandals ranging from misleading financial advice, attempted rate-rigging and alleged breaches of anti-money laundering laws. Pressure was growing on Turnbull to hold an inquiry, with some lawmakers in his Liberal-National coalition threatening to force a vote in parliament next week. [Link]

The Opposition leader well captures the ‘capture’ here:

Opposition Leader Bill Shorten said Mr Turnbull had spent 601 days fighting Labor’s call for a royal commission into the banking and financial sector.

“It says everything about Turnbull’s values and priorities that he only agreed to Labor’s royal commission when the banks told him he had to,” he said in a statement.

“He ignored the pleas of families and small businesses, he rejected the words of whistle-blowers. But when the big banks wrote him a letter, he folded the same day.” [Link]

The goose is beginning to get cooked well ‘Down Under’, regardless of the convincing win for Australia in the first Ashes Test at Brisbane.

China opens financial sector and other links

Bloomberg captions its story on China opening its financial services industry to foreign majority ownership with a mention of banks. But, the details do not mention banks yet. Only security companies, insurance firms and asset management companies. [Link]. Ownership cap of 51% for foreigners will be lifted after a few years. But, one has to watch for conditions and other restrictions.

Ian Bremmer in TIME: ‘How China’s Economy Is Poised to Win the Future’.  A conclusion  that backs China – heavily caveated though. But, I am not sure I still agree. [Link]

The Economist says that the private sector has prospered under Xi. Something that has perhaps not happened under the Indian strongman PM in the last three years. [Link]

A very interesting and important piece by John Pomfret in WaPo on the changing thinking in Washington, D.C. on China.

JAVIER C. HERNÁNDEZ and AUDREY CARLSEN write an interesting piece in NYT on the personality cult that is being built around President Xi.

“China’s planning a 1,000km tunnel to divert water away from one of India’s largest rivers”, says a headline in Quartz. It will be hugely problematic for India and Bangladesh. [Link]

Bloomberg has an interesting story on a note that the Chairman of the People’s Bank of China has penned on the website of the bank. The English version is not out yet. But, one can use ‘Google Translate’ to read it in English. The Bloomberg story is here and the Chinese language page is here.

It would be a mistake not to include the tit-for-tat articles by Joseph Nye on America holding aces in the poker game with China and the retort by Wang Wen that China holds the aces now. The claim by Wang Wen that China holds aloft the banner of free trade is rather amusing. These two articles must be read together with the articles by Ian Bremmer and John Pomfret. Apologies if they are behind paywalls.


(1) If one wanted to stay safe  traveling in dangerous, it is good to carry something to trade, when threatened such as, say Rolex watch. Plus, more tips here.

(2) The contrarian in me is tickled by this long-form article in FT on the travails of the Deutsche Bank. [Link]. Most likely behind a paywall.