RBI’s Penalty Regime and the Compliance Machinery in Banks-I
In recent years, the Reserve Bank of India (RBI) has been in the news for slapping monetary penalties on regulated financial entities (REs) like banks, non-bank finance companies (NBFCs) and cooperative banks for various violations and non-compliance with guidelines issued by the regulator.
In the past two years, which ended June 2023, the number of REs subjected to fines rose from 90 to 122, according to RBI’s financial stability reports (FSRs). The total penalty levied was Rs35.63 crore in December 2021; it declined to Rs9.98 crore in the first half of 2022 and climbed again to Rs26.34 crore in the latest half year.
Such non-compliance by REs raises questions about the efficacy of the compliance machinery in commercial banks.
RBI’s Power To Impose Fines
Section 46 of the Banking Regulation Act 1949 (BRA) lists circumstances in which RBI is empowered to impose monetary penalties on the banks as under:
1. If the bank makes a statement which is materially false or willfully omits to make a material statement
2. If the bank fails to produce certain documents/ books or to answer questions relating to its business during an inspection or scrutiny by RBI
3. If the bank receives any deposit in violation of an order from RBI under BRA Section 35(4)(a)
4. If the bank contravenes any other provision of BRA or has not complied with any rule or order made under the said Act.
Section 35 of BRA deals with bank inspections and guidelines regarding the acceptance of deposits. Section 35A empowers RBI to issue directions to banks for compliance and section 35AB, to issue directions for stressed assets.
The penalty for willful suppression of facts or failure to supply material facts is imprisonment of up to three years and monetary fines of up to Rs3 crore for violation of any direction or guideline issued by RBI. Continued default would lead to additional fines for every such instance.
A List of the Delinquents among Banks
For the purpose of this article, the delinquents in the commercial banking sector, which figured during the period from January 2022 to November 2023, have been taken into account. A list of such banks with the penalty levied on them is given in the following table. A few were penalised more than once. Among the public sector banks (PSBs), Bank of Baroda was slapped with the highest fine of Rs4.34 crore (November 2023) and among the private banks, ICICI Bank was fined Rs12.19 crore (October 2023) followed by Paytm Payments Bank with Rs5.39 crore.
Table: List of some commercial banks penalised in 2022 and 2023 (till November)
Since most commercial banks are earning huge revenues, these penalties would only be a fleabite. There are, however, larger implications which deserve attention.
Common Features Observed
A study of the circumstances leading to penalties reveals certain common features. a) Failure to exercise due diligence; b) Lapses in reporting; c) Failure to ensure integrity of data; d) Customer unfriendly behavior; e) Ignoring conflict of interests in loan sanctions.
The one common denominator in all situations attracting penalties is the non-compliance by REs with the regulator’s directives under the BRA and anti-money laundering guidelines. 
A few illustrations will be useful.
Banks are required to conduct due diligence about the background of a prospective customer. In the case of a loan account, the due diligence becomes more rigorous as the bank is required to assess the new client’s creditworthiness. Non-compliance with these protocols enhances the vulnerability of the bank to fraud and loan losses.
In a regulated system, reporting on worrisome developments is of critical significance. For instance, when a loan account turns out to be fraudulent—as when there is a diversion of loan proceeds, misrepresentation about security charged to the bank, or a loan is availed by doctored data—it has to be classified as fraudulent as early as the bank comes to know of it or, if it is a joint loan, when the lead lender comes to know of the fraud. If there is a delay in classifying, follow-up efforts will be delayed and it can affect not only the bank concerned but it can have a cascading effect on the sector.
The integrity of data supplied to the regulator is equally critical for effective monitoring of the operations in the financial sector. Timely reporting and ensuring the correctness of the report help the initiation of prompt corrective actions on the part of the regulator.
There have also been instances of overcharging the customers under diverse pretexts like levying flat charges for SMS as against actuals, imposing penalties for premature loan closure when there is no provision in the loan agreement, collecting interest even before the loan is actually disbursed to the borrower, contacting the customers between 7pm and 7am and unacceptable conduct of loan recovery agents. Such acts are in violation of RBI’s specific instructions.
Important decisions by the banks should not be influenced by the decision-makers’ personal connections with the beneficiaries of such decisions. For instance, if the bank’s directors are also directors in another company, any decision beneficial to such a company could attract an allegation of conflict of interest. 
How Does the Process Get Triggered?
As the regulator, RBI conducts inspections for supervisory evaluation (ISE) of the financial entities to evaluate their supervisory functioning during a particular year. The evaluation is in relation to compliance with the guidelines and directions issued by RBI. If there are failures in compliance, it will call for a detailed response from the bank concerned. 
After examining the response so received, RBI may take a decision to impose a monetary penalty and also give further directions to be complied with, within a time frame. The amount of penalty will depend on the gravity and the duration of the non-compliance by the bank concerned. 
Most of the cases of fines arise out of non-compliance with the regulator’s directives and guidelines. That takes us to the efficacy of the compliance system in the banks.
(TR Bhat is former general secretary of All India Bank Officers' Confederation (AIBOC) and former officer of Corporation Bank)
6 months ago
In the process RBI, the regulator confirmed it's role now restricted in imposing (or charging) penalties/fines against all ills of public sector banks and seems not worried at all in continuation of the so called 'system' as developed and nourished in financial sectors for years at the behest of the stakeholder, the Government .
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