The Reserve Bank of India (RBI) has adopted a strict supervisory stance towards the banking sector over the past week, penalizing three leading banks and a payments bank to the tune of over ₹5 crore for non-adherence to regulatory guidelines.
The central bank issued punitive orders against public sector lenders State Bank of India (SBI), Canara Bank and City Union Bank on February 26, 2023 for flouting key banking norms.
In a concerning development, global rating agency S&P Global Ratings also warned that recent RBI directives could compress the capital adequacy positions of Indian banks by up to 60 basis points next fiscal year.
SBI Slapped with ₹2 Crore Fine by RBI
The RBI imposed a monetary penalty of ₹2 crore on SBI, the nation’s largest lender, for contraventions of regulatory guidelines pertaining to the Banking Regulation Act, 1949.
Specifically, SBI failed to comply with certain provisions related to managing depositor education awareness funds and adhering to shareholding limits in borrower entities under RBI rules.
As per estimates, the bank held equity stake exceeding 30% in a particular company.
Canara Bank Penalized for Inadequate Compliance
The RBI also extracted a fine of ₹32.30 lakh from leading public sector bank Canara Bank for non-compliance with directions on submission of credit data to credit information companies (CICs).
Canara Bank reportedly failed to rectify historical rejected data and resubmit the updated information to CICs within the stipulated timeline of seven days.
Through these actions, the RBI aims to address compliance deficiencies and ensure strict adherence to prescribed reporting timelines by regulated entities.
City Union Bank Faces Monetary Penalty
The RBI has also recently imposed a monetary penalty of ₹66 lakh on private sector lender City Union Bank on February 8, 2024 citing non-compliance with income recognition, asset classification and know your customer (KYC) norms.
As per the RBI’s risk assessment report, City Union Bank was found to have significant divergence in bad loan identification and reporting compared to RBI’s estimates during an on-site inspection.
Further, deficiencies were noted in the periodic review of risk profiles of the bank’s customers.
Through these actions under relevant provisions of the Banking Regulation Act, 1949, the RBI aims to address compliance deficiencies and ensure strict adherence to prescribed reporting timelines and risk management practices.
Why RBI’s Actions are Crucial?
Experts opine such stern measures were imperative to tackle systematic issues around technology risks, data integrity and customer service in India’s banking ecosystem.
The interventions emphasize upholding regulatory discipline to foster trust, transparency and resilience across financial market participants.
With rising competition from fintech disruptors, ensuring robust systems and internal controls emerges as a competitive advantage for incumbent banks to retain their market standing.
As the banking sector watchdog, the RBI seems focused on proactively identifying and addressing cracks to reinforce stability and risk management effectiveness in the sector.
Curbs Imposed on Paytm Payments Bank
In a directive issued on February 24, 2024, the RBI barred digital payments bank Paytm Payments Bank Ltd. from onboarding new customers, citing the need to take supervisory action under relevant laws.
As per the order, Paytm Payments Bank has been prohibited from opening new savings or current accounts for its consumers. Additionally, aggregate fund transfers beyond ₹5000 per month have been restricted across existing individual bank accounts.
However, to minimize disruption and maintain continuity of crucial payment services, Paytm may be permitted to operate as a Third-Party Application Provider (TPAP) for UPI transactions alone if its application gets approved by authorities.
The constraints shall remain effective until December 31, 2024 and were deemed necessary owing to flaws observed by the RBI across Paytm’s IT systems, data reporting protocols, and customer grievance redressal mechanisms.
S&P Warns of Lower Bank Capital Levels
Global ratings major S&P Global Ratings suggests the RBI’s stricter regulations around risk classification and provisioning norms could compress the Tier 1 capital of Indian banks by up to 60 basis points in FY 2025.
Key reasons cited include the RBI’s move to increase risk weights on unsecured personal loans, credit cards and lending to non-bank finance firms earlier this month.
To summarize, the RBI’s tough stance aims to address apparent governance and compliance deficiencies across banks and payments entities. The fines appear intended to penalize lapses and reinforce supervisory discipline.
What Lies Ahead?
Banks now need to review internal controls and digitization strategies to pre-empt similar supervisory actions in the future. Building compliant governance frameworks and keeping pace with RBI’s latest norms should be a key priority.
For consumers, while temporary disruptions are inevitable, the stringent oversight promises enhanced system stability, leading to improved service levels over time.
As the central bank governor recently reiterated, “While innovation is welcome, customer confidence and trust should not be diluted in the quest for hyper innovation.” The RBI’s regulatory actions clearly echo a similar thought process.
Going forward, resilient risk management and high governance standards will likely be the hallmarks of sustainable, customer-centric banking in the emerging Indian market.
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