RBI Governor Urjit Patel on Tuesday told a parliamentary panel that it would be impossible to cover each of 1,16,000 commercial bank branches under its supervisory process and flagged that it needs more powers to regulate PSBs.

As Patel assured the MPs in the Parliamentary Standing Committee on Finance headed by M Veerappa Moily that steps are being taken to strengthen the system, a member asked him what RBI as a regulator was doing when the Rs 13,000 crore PNB scam took place and how its regulatory and monitoring mechanisms failed to yield any result

In a written response, the RBI said, “With the number of commercial bank branches being more than 1,16000 in the country, it would be impossible to cover each and every branch of banks under the RBI supervisory process. The RBI has no option but to rely on the internal control system of banks. RBI supervisors can only do the test checks...”

The comments came in response to a question by a member, who asked “in the case of the recent PNB scam, letters of understanding (LoUs) were issued without collateral for years, which went unnoticed. Does it not point to the failure of the supervisory function of the RBI by way of inspection etc? Has any enquiry/disciplinary action initiated by the RBI in this regard to fix responsibility in the matter”?

The meeting by the parliamentary panel took place a day after Central Bureau of Investigation on Monday asked Interpol to issue red corner notices against Nirav Modi and his uncle Mehul Choksi.

Sources said Patel told the panel that the RBI has “inadequate” control over Public Sector Banks (PSBs) and asked for more powers.

As regards LoUs issued for years without collateral by the PNB branch which went unnoticed, the RBI flagged that it is pertinent to recognise that “primary responsibility of understanding the risks undertaken by bank” and that the enterprise-wide risks of a bank are expected to manage under the “three lines of defence” in which RBI’s role comes at the last stage.

In a nearly 60-page written response, the RBI governor said that currently RBI inspects commercial banks under Risk Based Supervision (RBS) framework, which seeks to focus attention and supervisory resources on banks that face greater risks and within banks, those areas which are of greater risk to the bank.

Thus RBI envisages continuous monitoring of banks through offsite reporting mechanism coupled with need-based on-site inspection, the RBI said.

“Since RBI's supervisory role does not constitute an audit of banks” and does not seek to report it, the RBI has issued to banks detailed instructions for putting in place and strengthening their internal control.

Patel was faced with tough questions from the MPs on bad loans, cash crunch in ATMs despite more money having returned to banks post-demonetisation.

Members also raised concerns on rising NPAs in the banking sector that stood at Rs 8.31 lakh crore at end-December 2017.