Is enforcement of banking regulations ownership neutral?

Mumbai: ‘s $600-million out-of-court settlement with the administrators of NMC Healthcare brings an expensive end to a long-running dispute. For India’s second most-valued state lender, the cost of silence is steep, leaving behind questions about governance, disclosure, and the uneven regulatory enforcement applied to public versus private banks.

The settlement, announced last week without an admission of liability, effectively ends a legal battle that dates back to the 2020 collapse of BR Shetty’s healthcare empire. Following a short-seller report by Muddy Waters that exposed inflated assets and divergence of funds, further investigation revealed undisclosed debt of $4.5 bn.

Abu Dhabi Global Market (ADGM) Court documents reviewed by ET show administrators alleged that the fraud at NMC Healthcare was carried out by its management “with the knowledge and collusion of Bank of Baroda” since 2012, through structured deposits and overdrafts designed to hide debt while failing to comply with know-your-customer and anti-money laundering rules.

The bank faced potential fraud and negligence claims as high as $6 billion, according to evidence from its own solicitor, Baker McKenzie.

The financial hit is significant. The $600 million payout (₹5,700 crore) wipes out more than a quarter of the bank’s FY26 net profit of ₹20,021 crore. Yet, the bank’s communication with its public shareholders was remarkably opaque.

As recently as May, Bank of Baroda’s annual report assured investors that claims “cannot be crystallised” given its “robust defense”. To transition from declaring a robust legal defense to cutting a massive cheque in a matter of weeks suggests investors were kept in the dark about the severity of the legal risk.

The scale of this financial damage makes the absence of internal consequences even more glaring. While the Department of Financial Services (DFS) and the Reserve Bank of India (RBI) undoubtedly signed off on the truce, there are little signs of either the bank’s board or the top management being held accountable for the massive loss-to say nothing of the unrecovered $250 million loan originally extended by BoB to Shetty’s companies.

This asymmetry highlights the differential treatment of compliance failures in banking. When private lenders trip up, the RBI acts decisively. Compliance failures in technology and KYC led to harsh, business-curtailing cease-and-desist orders against and Paytm Payments Bank.

Yet state-controlled entities routinely face far more forgiving scrutiny. Consider ‘s 2022 Diwali debacle, where a series of fraudulent transactions totaling ₹700 crore occurred because bank officials ignored urgent weekend alerts and warnings from the National Payments Corporation of India (NPCI) regarding unusually high-frequency transactions. Although the bank recovered most of the money, it suffered reputational risk. The banking regulator quietly directed banks to ensure that IT officials were on duty round the clock, but no regulatory penalties followed, and it remained business as usual at UCO Bank.

These developments reinforce a warning issued nearly a decade ago by former RBI Governor Urjit Patel: banking regulation in India is not ownership-neutral. The central bank lacks the legislative teeth to penalise management at PSU banks the same way it does at private lenders. Without these reforms, the regulator will continue to face deep challenges in disciplining state-backed entities.