Members of the media and other attendees queue at the entrance to the reception of the Reserve Bank of India (RBI) in Mumbai, India. (Photographer: Prashanth Vishwanathan/Bloomberg)

RBI Enforcement Department Steps Up Action Against Regulatory Lapses 

The Reserve Bank of India’s actions against regulatory violations by banks have risen substantially over the past two years, ever since it set up a dedicated enforcement division to act against such lapses.

In April 2017, the RBI set up an internal Enforcement Department to oversee regulatory compliance and violations by banks, non-bank finance companies and other entities.

In its near two-year existence, the department has issued 128 penalties against financial institutions of all types, resulting in penal collections of around Rs 147.3 crore.

Also read: RBI Imposes Rs 5-Crore Penalty On Four PSU Banks

Spike In Enforcement Action

BloombergQuint compiled a list of penalties disclosed on the RBI website between 2016 and 2019.

  • Between Jan. 1, 2019 and Feb. 15, 2019, 27 penalty orders worth Rs 25 crore were issued by the RBI against 20 commercial banks, 6 cooperative banks and 1 non- banking financial company.
  • In 2018, the enforcement department issued 73 penalty orders totaling Rs 110.34 crore on 16 commercial banks, 53 cooperative banks, 2 NBFCs and 2 payment banks.
  • This is 249 percent higher than penalty collections during 2017, wherein the RBI imposed a total of 38 penalties, collecting Rs 39.6 crore, on 6 commercial banks, 28 cooperative banks and 4 NBFCs.
  • On the other hand, only 13 penal orders totaling Rs 1.21 crore were issued by the RBI against financial institutions in 2016.

Queries sent to the RBI seeking details of the functioning of the enforcement department did not elicit a response.

R Gandhi, former RBI deputy governor told BloombergQuint that the nature of enforcement by the RBI has changed in recent years.

The central bank supervisors have moved from imposing an all-encompassing penalty against a bank or NBFC to imposing penalties on a case-to-case [violation-to-violation] basis. That is, the RBI will issue penalties for every regulatory violation by an entity as and when its supervisors find lapses.

This is a new type of supervision and enforcement. 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.
R Gandhi, Former Deputy Governor, RBI

Also read: RBI Penalises Five Banks For Not Monitoring End Use Of Funds

Nature Of Violations

RBI data shows that financial institutions mainly violated regulations on Know-Your-Customer norms, followed by guidelines of reporting and classifying frauds and end use-of-funds.

Around 11 penalties were imposed on different institutions for falling foul of the guidelines on restructuring accounts, 11 on inter-bank information exchange protocols and 10 for violating anti-money laundering regulations.

A total of 17 penalties were imposed on urban cooperative banks, with regards to violating rules on giving loans to the directors of the bank and their relatives.

Across different kinds of banking institutions, the maximum penalties were seen in the case of Urban Cooperative Banks. UCBs are regulated by the RBI while district cooperative banks and state cooperative banks are under the National Bank for Agriculture and Rural Development’s supervision.

Gandhi said there are more UCBs than commercial banks and hence it appears that a high number of penalty orders have been issued against UCBs. When there is a regulation violation by a UCB, it is usually restricted to a local branch, unlike in the case of commercial banks where a specific regulatory violation would have been repeated multiple times across multiple locations, he added.

Therefore, the incidence of regulatory violations at commercial banks would be higher, on average, compared to cooperative banks.

Also read: RBI Cautions Against Fraudulent Transactions On UPI Platform 

Can Small Monetary Penalties Deter Regulations Lapses?

While the RBI publishes the quantum of penalty being imposed and what regulation an entity has violated, it does not disclose the exact details of the transgression. In contrast, the Securities and Exchange Board of India often, in large cases, puts out complete details of the violation and investigation.

Should the RBI also go down this route eventually?

SS Mundra, former deputy governor of the RBI agrees that more disclosures may be eventually needed. “The time has come for the regulator to be more articulate and provide details on the exact nature of the regulatory violation by organisations and how it happened,” Mundra told BloombergQuint.

Going forward enforcement by the RBI should have a bearing on the performance review of chief executive officer and key functionaries, Mundra said while arguing that the incremental impact of penalties will reduce over time.

The important point of enforcement is that the threat of a penalty can have reputation risk for the organisation, but it is a one-time weapon. If you have to keep imposing penalties on the same organisation, then it can lose its meaning as the receiver of the penalty and the audience will take it lightly as it becomes routine. 
SS Mundra, Former Deputy Governor, RBI

To be sure, no amount of enforcement action can completely eliminate regulatory lapses in an industry like banking where millions of transactions take place daily.

With the growing use of complex technologies by customers and institutions, “policing and enforcement” in today’s day and age is difficult for the regulator because of the sheer number of transactions and people involved in the financial system, Gandhi said.

With millions of transactions taking place across banks, NBFCs and others like opening accounts, you will always be able to find a transgression, no matter how much the bank management tries to control it through processes. Enforcement cannot eliminate transgressions by companies through punishments like this.
R Gandhi, Former Deputy Governor, RBI

Also read: Patchwork Approach To ‘Early Warning Signals’ May Do Little To Prevent Bank Frauds