Mumbai, Jun 11 (NIE): Former Reserve Bank of India (RBI) Governor Y V Reddy has come down on the government and the RBI for the Rs 13,000 crore fraud at Punjab National Bank (PNB) and high non-performing assets (NPAs) in the banking system, saying the taxpayers should seek explanation from the government and the RBI should review its own regulatory and supervisory practices.

Reddy, who was the RBI governor from 2003 to 2008, said, “taxpayers who have entrusted their money to the Government owned banks should be asking the government to explain why as the custodian of their money it failed to prevent the fraud.”

He said “a big fraud has come to light in the recent months involving thousands of crores in regard to one particular bank”. “The owner (the government) should be worried about what the Directors it nominated on the board, were doing. The owner should be worried about the Managers it appointed. The owner should be worried about the system of monitoring and control of its own investment,” Reddy said in a speech delivered at Shivaji University, Kolhapur.

According to Reddy, though its (RBI) main responsibility is financial system stability and the depositors’ protection – it cannot escape responsibility for maintaining the trust of the public in the banking system. “The 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,” Reddy said.

PNB detected a Rs 13,000- crore fraud allegedly involving diamantaire Nirav Modi and his uncle Mehul Choksi, a billionaire jeweller, at one of its branches in Mumbai in February this year.

On the accumulation of non-performing assets, Reddy said, “we are now facing accumulated problems, not something that came up suddenly. The problem looks big because it is accumulated and not revealed for several years after the global financial crisis.”

He said banks had also been encouraged to lend to infrastructure, which was not the core competence of the banks, apart from creating asset and liability mismatch. Disclosures of real position were delayed. “So, the accumulated problems came to the open in 2013-14 and in subsequent years,” he said.

“We wanted to introduce good governance practice in public sector banks also, but the power to do so rested with the government. While the same regulation viz having adequate capital, liquidity, exposure norms etc applied equally to public and private sector banks, the regulation relating to management and governance was entirely with the government,” he said.

“Our attempts to try and persuade the Government to use similar criteria for selection of Board directors did not succeed,” he said. “Interests of depositors are adversely affected when borrowers do not pay principal and interest as scheduled or if non-performing assets are large.”

“Actions taken by Government and official statements should ideally reinforce confidence in the RBI at this juncture. The Reserve Bank of India should be seen to command respect and backing of the government to continue to effect mergers to protect depositors’ interest,” he said.

Reddy listed six sources of discomfort for the doubts about trust in banks which had arisen in the recent months. They are: mounting NPAs not due to lending to agriculture or social banking but defaults by the very rich and very powerful; inadequate capital to make up for NPAs in discharging liabilities of banks; a proposal to change law relating to resolving issues of problem banks by making depositors share the burden of insolvency; the large criminal frauds committed in select banks; the investigations launched and raids conducted on some board members and CEO; and the impression that RBI has been taking severe actions simultaneously in a determined manner to address accumulated problems possibly causing some disruption in some quarters.