RBI Boosts Regulatory Actions On Bank Lapses

Data show that the Reserve Bank of India has been stepping up actions taken against banks for regulatory lapses, as measured over the last two years. Bloombergquint.com notes the accelerated activity comes as the bank set up a division that has been tasked with examining, and taking action against, such lapses. The internal Enforcement Department traces its genesis back to April 2017, and focuses on banks and non-bank finance firms.

The penalties levied by the RBI stood at 13 in 2016, rose to 38 in the next year, and then in 2018 tallied 73. In 2019, and as measured solely to Feb. 15, the number was 27. In terms of amounts of monies collected, the 2016 amount was 1.2 Rs Crore, while in the full year it was 110.3 Rs Crore. In the latest full year the Enforcement Department brought penalties against 16 commercial banks, 53 cooperative banks, two non-bank financial companies and two payment banks.

Among the violations most frequently cited were those were tied to know your customer mandates, at 20 violations, “end use of funds” at 11, information shared with other banks (also at 11) and “anti money laundering activities” at 10 violations.

“This is a new type of supervision and enforcement,” R. Gandhi, a former RBI deputy governor, said in an interview with the news outlet. “For a long time typically, the central bank used to take an overall view of the bank’s violations and not on each violation. But today the number of transactions that each bank and each of its branches process is significantly higher. Given that financial regulations, including securities market, have become tougher over time the RBI now applies penalties for each violation.”

Drilling into the data a bit, Gandhi said that urban cooperative banks had seen heavier penalty activity than other types of institutions (with 17 violations) and it should be noted that there are more of these UCBs than other types of banks.

The RBI does not publish the specifics of the violations. Other regulatory agencies such the Securities and Exchange Board of India do publish those details.

Another deputy governor of the RBI, SS Mundra, said that such disclosures may be necessary, telling the news outlet that such enforcement activities should have an impact on performance reviews of key bank executives. “The important point of enforcement is that the threat of a penalty can have reputation risk for the organization, but it is a one-time weapon,” said Mundra. “If you have to keep imposing penalties on the same organization, then it can lose its meaning as the receiver of the penalty and the audience will take it lightly as it becomes routine.”