Raghuram Rajan’s answers on the PNB scam and controversial 20:80 rule do not pass muster

The media’s blue-eyed boy and former RBI Governor Raghuram Rajan today finally broke his silence around the PNB scam and other issues relating to it. Rajan was the RBI Governor for 3 years when the PNB scam was on-going.

In an interview to CNBC TV 18, Rajan was point blank asked who was to blame for the PNB scam. Rajan replied that there was “plenty of blame to go around” and named everybody from the management, the board of the bank to the auditors.

With regards to the RBI’s role, Rajan asked why the instructions of the RBI were not obeyed over time. He also revealed that back then he had expressed concern that although the RBI unearth’s frauds, but it could never bring to book the culprits. He also said that generally when the regulator spots a problem, it sends a message to the banks, and “basically assumes to some extent that the banks have fixed it”. He reiterated that “But surely there is plenty of responsibility to spread around.”

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Sadly, Rajan’s answers expose him and the RBI:

1. Does the RBI had no responsibility to check the functioning of the banks to see if such frauds are being committed? Can it simply pass the buck to the others involved? If so do we even need the RBI?

2. Is it enough to “assume” that the banks have fixed a problem once the RBI identifies it? Does the RBI and its chief not have a duty to see if their instructions have been followed?

3. Rajan is now expressing concern that RBI was basically a toothless body. Did he make any moves to change this status?

He was also the RBI chief when the controversial 20:80 rule was notified by it, as one of the last order of the Finance Minister Chidambaram. It is believed that almost 50% of the entire benefit was cornered by 7 companies and Mehul Choksi’s Gitanjali Gems was again one of them, while 13 private companies in total benefited from this scheme. The India Bullion and Jewellers Association (IBJA) had written a letter to the then Reserve Bank of India Governor, Raghuram Rajan, warning him of the perils of the 20:80 scheme and accusing the Congress government of “deliberately yielding to the cronies” by changing the gold policy days before demitting office.

On the 80:20 scheme, Rajan said that the scheme should be separated from the Nirav Modi scam:

As far as I understand, the Punjab National Bank (PNB) scam started in 2011 and was unearthed in 2018. The gold scheme that is under the scanner at this point was something which lasted between May 2014 and November 2014. It seems to me very hard to argue that whatever happened then and I am happy to talk more about that, but whatever happened there was in any way related to the scam other than it happened in the same industry that there was gold involved. It is important to treat these as two separate issues

He, however, appeared to defend the 20:80 scheme:

Happy to talk about the 20:80 because the actions there as far as I understand were justified.

He further tried to shift blame on this scheme as well by claiming that the Government (the then UPA Government) was the “prime mover” in this scheme. He also justified the scheme by citing forex problems and Current Account Deficit. He also said that the beneficiary companies were selected by the Department of Trade in the Commerce Ministry. He also accepted that like any constraints being put on a system, some people could have made money and some would have lost money, and those who lost would have complained.

When asked about the timing of the 20:80 rule i.e. just a few days before a regime change, Rajan tried to avoid the issue and said he did not know the rationale behind the Government’s move. He also said that it was a period of rapid regulatory change due to a forex crisis. In the end, he does accept that as RBI Governor he does bear responsibility for any instruction from his office.

When asked if he could have said “No” to the Government, he spoke on other issues like suggesting that every policy would have good and bad effects. He again referred to the Government’s definition of selected importers and said that the RBI followed it. He then claimed that if the new NDA Government could have acted immediately if they thought this was an issue of importance. He also said that “procedures were followed” which was important. No direct answer to the question whether he could have said “No”.

Is this the same Raghuram Rajan who frequently commented on matters beyond the RBI’s jurisdiction, especially on the Government’s other actions? Is this the same Rajan who gave the famous quip: “I am Raghuram Rajan, I do what I do”? Rajan could not clearly answer whether he could have said NO to Chidambaram and if he did not say so, why he chose to not do so?

Clearly, the former RBI Governor has more to answer.

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