Regulatory scrutiny of banks is increasing, and so is the severity of penalties—from an occasional rap on the knuckles earlier to substantial fines and outright bans.
When the Reserve Bank of India (RBI) barred Mastercard from issuing new cards over its failure to comply with data-localization norms this month, it was the latest in a series of such actions where RBI has cracked down hard on a regulated entity. Over the past two years, RBI has raised the quantum of fines and severity of punitive action on banks and their business partners.
In the six months to June, RBI imposed a penalty of over ₹43 crore on 23 commercial banks, compared with ₹20 crore on eight banks in 2020 and ₹143 crore on 49 banks in 2019, according to data compiled by Mint. RBI had penalized 36 banks in the wake of the Nirav Modi scam in 2019, but the penal amount for each bank was small.
In 2021, penalties were imposed for a range of violations, from account-related provisioning shortfall to fraud classification. The fines ranged from ₹50 lakh on State Bank of India to ₹4 crore on Bank of India. In the case of HDFC Bank, RBI slapped a fine of ₹10 crore and stopped it from issuing credit cards. In contrast, it imposed a penalty of ₹2 crore on Punjab National Bank for non-compliance of SWIFT operations norms in the ₹14,000 crore Nirav Modi scam in 2019. SWIFT stands for Society for Worldwide Interbank Financial Telecommunication
By all accounts, RBI is losing patience with banks and other regulated entities that don’t comply with regulations. On 1 July, Mint reported that RBI has tightened the screws on cooperative banks. Bankers said RBI has become stringent on all violations. It has been particularly unforgiving for lapses related to reporting data via the Central Repository of Information on Large Credits, which allows it to monitor asset quality in real-time.
According to a senior banker at a private sector bank, RBI has become very strict. “Previously, RBI would give a gentle warning before imposing a penalty. The penalty was also in the range of a few lakhs of rupees to ₹2 crore at the most. But now RBI is taking a firm stand even if these institutions are of systemic importance,” he said, requesting anonymity.
RBI has intensified its scrutiny of banks, moving towards risk-based supervision from the earlier transaction-centric approach. RBI has now allocated supervisory resources and attention in accordance with the risk profile of each institution. This process essentially involves continuous monitoring and evaluation of supervised institutions’ business strategies, exposures and risk profiles. It focuses on evaluating risks, identifying developing problems and facilitating prompt intervention. Under the earlier approach, RBI examined the capital adequacy, asset quality, management aspects, earnings, liquidity and systems and control of banks.
The setting up of the enforcement department in 2017 also added greater focus to implementation of rules. The department was set up to separate enforcement action from the supervisory process.
The enforcement department identifies violations after going through reports on risk assessment, scrutiny and references forwarded by the supervisory and regulatory departments. Later, a panel adjudicates the violations and determines the penalty based on proportionality and intent after allowing a personal hearing.
“What is different now is that RBI has more real-time data, and there is a single supervisory manager for each institution. This manager monitors data and the concerned bank over the year. Earlier, inspection officers would change every year. This new approach has ensured there is continuous monitoring of banks,” said the banker cited above.
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