Financial Daily from THE HINDU group of publications
Friday, Dec 20, 2002
Markets - Economic Offences
Money & Banking - RBI & Other Central Banks
RBI blamed for `slackness'
NEW DELHI, Dec. 19
THE Joint Parliamentary Committee (JPC) probing into the securities scam has expressed concern over the Reserve Bank of India's (RBI) "weak and ineffective" supervisory role, which, it feels, was instrumental in diverting bank monies into the stock market.
"A good regulator would have anticipated the possibility of diversion of funds and taken pre-emptive action. It is not good regulation to wait for a loophole to be exploited before closing it," the JPC report said.
The report noted that RBI issued guidelines in November 2000, limiting individual banks' exposure to the capital market by way of investment in shares, convertible debentures and units of mutual funds (other than debt funds) to 5 per cent of the bank's domestic advances at the end of the previous fiscal.
"The RBI should have been proactive in prescribing exposure limits to brokers, particularly after having done so in terms of exposure to investments in shares and IPO financing," the committee pointed out.
Further, it noted that even when guidelines existed and individual banks did not follow the same, RBI tended to "condone such transgression".
There was even a feeling in the RBI that firm and timely action against the management of banks may lead to a run on the banks. "However, the committee is of the view that firm and timely action might forestall the possible surfacing of major failures and, in some cases, run on the banks."
In this context, the report pointed out how the Madhavpura Mercantile Co-operative Bank (MMCB) and City Co-operative Bank had not constituted Audit Committees despite the RBI issuing a circular to this effect on July 25, 1994. In the case of MMCB, there were violations of credit exposure to single as well as group borrowers, including the group belonging to the chairman, in violation of RBI directives on group exposure. Yet, corrective actions were not effectively pursued by RBI.
Similarly, with regard to City Co-operative Bank, the central bank came to know of the misuse of powers and flagrant violation of its regulations/directives only "after a public outcry and news in the press". And surprisingly, RBI issued licences to the bank as late as February 2001 for opening four new branches, giving an impression that it was functioning well. This was even after the RBI, in its annual inspection report of 1999, indicated some glaring irregularities.
"This leaves the impression that both the Registrar of Co-operative Societies as well as the RBI showed laxity in discharging their duties even prior to March 2001, when the run on the bank surfaced," the report stated.
The JPC concurred with the views of the Jagdish Capoor and Madhav Rao Committees to do away with the existing dual control over co-operative banks. "This results in overlapping jurisdictions and also at times in cross directives. Besides, it has been noticed that State Registrars do not always act expeditiously on directions received from RBI, with the result that the managements of these banks are enabled to take advantage of the existing loopholes to commit irregularities," it added.
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