Major financial sector scams (PNB, IL&FS, PMC bank) came to light in the recent period.
Apart from poor governance and fraudulent practices, a common thread in all these has been supervisory failure.
What is the challenge to financial regulation?
The country’s leading financial sector regulator, the RBI, is seen to be responding only after the event of a fraud.
Like in IL&FS, in the PMC case too, there appears to be shortfalls on the part of the management and the board of the bank.
This was evident as the bank’s loan exposure to a single firm, HDIL, alone constituted 73% of its assets.
Moreover, several dummy accounts were created to conceal this.
But these escaped the regulator’s monitoring as the issue of dual control by the RBI and state governments remains a concern.
It has been cited as a hurdle by the RBI for its inability to effectively supervise cooperative banks.
This poses limitations in superseding the board of directors or removing directors of these banks, unlike in commercial banks.
What are the larger concerns?
India remains an economy where the large banks continue to focus on bigger cities and towns.
Given this, the role of co-operative banks in ensuring credit delivery to the unorganised sector and last mile access remains a point of concern.
This is especially true in terms of poor credit delivery to the small businesses.
A recent RBI report shows that fund flows to the commercial sector had declined by close to 88% in the first 6 months of the 2019-20 fiscal.
This would have surely hurt small businessmen, traders and the farm sector.
What is the way forward?
A remarkable feature since 1991 liberalisation has been the resilience of India’s financial sector.
This may also have to do with the dominance of government-owned institutions or lenders and a strong central bank.
If this record is to be continued, the RBI will have to play a better supervisory role.
The RBI has already started building an internal cadre for supervision of banks and other entities aimed at enhancing its oversight capabilities.
This will have to be complemented by legislative changes which could lead to greater regulatory control and powers for the RBI over cooperative banks.
Besides the banks and lenders with national or regional presence, India needs efficient other players - cooperative banks, small finance and payment banks.
