https://www.moneycontrol.com/news/b...-to-create-jobs-boost-free-trade-2527287.html
Raghuram Rajan breaks silence on 80:20, says scheme was brought in to create jobs, boost free trade
Rajan said the government was diverting public interest by saying the scheme helped those accused in the PNB Fraud case.
CNBC TV18@moneycontrolcom
Former Reserve Bank of India Governor Raghuram Rajan on Tuesday broke his silence on the charges levelled against the 80:20 gold scheme that was rolled out in 2013, calling them a "diversion of public interest rather than a focus on key issues".
Rajan said that the implementation of the 80:20 scheme was in no way connected to the recently unearthed scam at Punjab National Bank, except for the fact that they pertained to the same industry. He maintained that the scheme was brought in to combat the lack of gold supply at the time and bring back jobs in the Indian jewellery sector.
In an exclusive interview with CNBC-TV18's Latha Venkatesh, Rajan said the government in 2014 was looking to relax import restrictions on gold after the rupee had recovered from 2013's taper tantrum.
The central bank then implemented the 80:20 scheme to allow importers of gold to start importing again but with certain conditions in place.
Asked about the timing of the scheme's rollout, Rajan said the government's 80:20 proposal appeared to follow objective criteria and that its motive was clear: to give a fillip to free trading in gold and create jobs in the jewellery sector.
The former RBI governor also spoke about the recently reported Rs 13,640 crore Punjab National Bank fraud and said that the scam should have been uncovered sooner. He also said that had the RBI had any idea of what was going on at the time, it would have done everything in its power to stop it.
Below is the verbatim transcript of the interview.
Q: First for starters, we have to start with the frauds because that is the reason why we are asking this question who’ fault is it? Is it the fault of the owner of the bank, the auditor, the regulator or the management?
A: There is plenty of blame to go around, but it is important to first focus on why the fraud occurred and what systems were inadequate. In any such thing and I am sure the investigation will go into all these details, but why was this Letter of Undertaking (LoU) given. Why was it not recorded in the banking system? Did management take notice of it? Was it put before the board? And of course after that did the auditors pick it up, if they didn’t why didn’t they pick it up because auditors go branch by branch and then were the regulators instructions obeyed over time or were they not and why were they not obeyed? Of course the owner in this case the government which appoints the board members as well as the management what is their culpability in this whole thing. I think every facet has to be examined.
One of the important concerns about frauds that I had when I was at the Reserve Bank of India (RBI) was that we unearth them, but we never actually brought any of the culprits to book. So, one of the things we did was we said we need to bring together all the people involved both in unearthing as well as investigating and see how we can move forward. So, we sent a list of the big frauds to the Prime Minister’s Office to try and get some action on that. So, these are the kinds of things we need to figure out.
Q: When you were governor, many of these LoU’s were signed and used to get letters of credit and actually a letter when you were governor on August 03rd 2016 was sent to all the banks asking them to thoroughly scrutinise the SWIFT system, audit it. Looks like you all were sensitive that a problem can come from this SWIFT connectivity to the core banking system. Can the supervisor be blamed for not pushing hard enough to get their instruction implemented?
A: Before we assign blame, we have to know what happened and why it happened. In many banking systems there are so many ways of getting around the system. We have to understand that when a way is discovered for example with the SWIFT system it was the problem at Bangladesh Bank which unearthed the problems that were there. When the problem is discovered it is important that the regulators send the message to the banks that we have unearthed this problem, now fix it in your systems.
Of course after that the regulator basically assumes to some extent that the banks have fixed it. If they haven’t, we have to understand why the banks didn’t. I mean when they were told about a problem why wasn’t the problem fixed and I understand they were other reminders sent after that by the Reserve Bank and we have to understand why they weren’t obeyed. So, there is a fair amount of learning from this episode that we need to get. But surely there is plenty of responsibility to spread around.
Q: Hot from the oven news is that the Reserve Bank has banned LoUs. News coming in just about 10 minutes back. Way to go you think?
A: I can’t opine on current policy and I am sure they have looked at the issues. One of my concerns in India is that there is sometimes a very ---cavalier treatment of guarantees whether it is bank given guarantees or government given guarantees. We don’t think these are real and it is only when they are called upon by the entity that has relied on them that we understand that it is almost like giving a loan or in fact more than giving a loan because it usually called upon when the loan is in distressed. So, it is actually like providing equity. Unless we account for these properly there are huge contingent liabilities on the government balance sheet as well as on the bank balance sheet and it is important that we acknowledge them.
Raghuram Rajan breaks silence on 80:20, says scheme was brought in to create jobs, boost free trade
Rajan said the government was diverting public interest by saying the scheme helped those accused in the PNB Fraud case.
CNBC TV18@moneycontrolcom
Former Reserve Bank of India Governor Raghuram Rajan on Tuesday broke his silence on the charges levelled against the 80:20 gold scheme that was rolled out in 2013, calling them a "diversion of public interest rather than a focus on key issues".
Rajan said that the implementation of the 80:20 scheme was in no way connected to the recently unearthed scam at Punjab National Bank, except for the fact that they pertained to the same industry. He maintained that the scheme was brought in to combat the lack of gold supply at the time and bring back jobs in the Indian jewellery sector.
In an exclusive interview with CNBC-TV18's Latha Venkatesh, Rajan said the government in 2014 was looking to relax import restrictions on gold after the rupee had recovered from 2013's taper tantrum.
The central bank then implemented the 80:20 scheme to allow importers of gold to start importing again but with certain conditions in place.
Asked about the timing of the scheme's rollout, Rajan said the government's 80:20 proposal appeared to follow objective criteria and that its motive was clear: to give a fillip to free trading in gold and create jobs in the jewellery sector.
The former RBI governor also spoke about the recently reported Rs 13,640 crore Punjab National Bank fraud and said that the scam should have been uncovered sooner. He also said that had the RBI had any idea of what was going on at the time, it would have done everything in its power to stop it.
Below is the verbatim transcript of the interview.
Q: First for starters, we have to start with the frauds because that is the reason why we are asking this question who’ fault is it? Is it the fault of the owner of the bank, the auditor, the regulator or the management?
A: There is plenty of blame to go around, but it is important to first focus on why the fraud occurred and what systems were inadequate. In any such thing and I am sure the investigation will go into all these details, but why was this Letter of Undertaking (LoU) given. Why was it not recorded in the banking system? Did management take notice of it? Was it put before the board? And of course after that did the auditors pick it up, if they didn’t why didn’t they pick it up because auditors go branch by branch and then were the regulators instructions obeyed over time or were they not and why were they not obeyed? Of course the owner in this case the government which appoints the board members as well as the management what is their culpability in this whole thing. I think every facet has to be examined.
One of the important concerns about frauds that I had when I was at the Reserve Bank of India (RBI) was that we unearth them, but we never actually brought any of the culprits to book. So, one of the things we did was we said we need to bring together all the people involved both in unearthing as well as investigating and see how we can move forward. So, we sent a list of the big frauds to the Prime Minister’s Office to try and get some action on that. So, these are the kinds of things we need to figure out.
Q: When you were governor, many of these LoU’s were signed and used to get letters of credit and actually a letter when you were governor on August 03rd 2016 was sent to all the banks asking them to thoroughly scrutinise the SWIFT system, audit it. Looks like you all were sensitive that a problem can come from this SWIFT connectivity to the core banking system. Can the supervisor be blamed for not pushing hard enough to get their instruction implemented?
A: Before we assign blame, we have to know what happened and why it happened. In many banking systems there are so many ways of getting around the system. We have to understand that when a way is discovered for example with the SWIFT system it was the problem at Bangladesh Bank which unearthed the problems that were there. When the problem is discovered it is important that the regulators send the message to the banks that we have unearthed this problem, now fix it in your systems.
Of course after that the regulator basically assumes to some extent that the banks have fixed it. If they haven’t, we have to understand why the banks didn’t. I mean when they were told about a problem why wasn’t the problem fixed and I understand they were other reminders sent after that by the Reserve Bank and we have to understand why they weren’t obeyed. So, there is a fair amount of learning from this episode that we need to get. But surely there is plenty of responsibility to spread around.
Q: Hot from the oven news is that the Reserve Bank has banned LoUs. News coming in just about 10 minutes back. Way to go you think?
A: I can’t opine on current policy and I am sure they have looked at the issues. One of my concerns in India is that there is sometimes a very ---cavalier treatment of guarantees whether it is bank given guarantees or government given guarantees. We don’t think these are real and it is only when they are called upon by the entity that has relied on them that we understand that it is almost like giving a loan or in fact more than giving a loan because it usually called upon when the loan is in distressed. So, it is actually like providing equity. Unless we account for these properly there are huge contingent liabilities on the government balance sheet as well as on the bank balance sheet and it is important that we acknowledge them.