Penal amount hike on the cards as RBI likely to revamp framework

Scale-based approach to enforcement, key mgmt personnel on the radar

The Reserve Bank of India (RBI) may undertake a comprehensive review of its framework for penalties, according to a top regulatory source.

These may include raising the penal amount; the feasibility of linking it to the size of regulated entities (REs), especially for systemically important entities, and repeat offences; and clawback of the payouts to chief executive officers and key management personnel (KMP). 

In the case of state-run banks, remarks made by the RBI’s senior supervisory manager on KMP could decide how they progress in their careers. It is speculated that “additional capital charge on REs cannot be ruled out”.

The review is part of the central bank’s move to improve the standards of corporate governance in REs and increase the premium placed on it. 

It is a follow-through on RBI Governor Shaktikanta Das’ meeting with the boards of state-run and private banks on May 22 and 29 on “issues related to governance, ethics, the role of the boards, and supervisory expectations”.

A key agenda set by Mint Road as part of its enforcement initiatives for FY24 was to examine the feasibility of a scale-based approach to the issue. In FY23, there were 211 instances of penalties with the sum at Rs 40.39 crore.  In the preceding two financial years, these figures were at 189 and Rs 65.32 crore, and 61 and Rs 31.36 crore. There is also a technical aspect at play here — penalties are imposed with a lag; in the sense, it is for a past supervisory cycle.

The major reasons for imposing penalties on REs were contravening Section 26A of the Banking Regulation Act (1949); cyber security, non-compliance with exposure and IRAC (income recognition and asset classification) norms; know-your-customer directions (2016); fraud classification and its reporting; submitting information to the Central Repository of Information on Large Credits, and to credit information companies; customer protection (limiting the liability of customers in the cases of unauthorised electronic transactions); director-related loans; monitoring the end-use of funds; and violating Housing Finance Companies Directions (2010).

On frauds, the RBI’s Annual Report for FY21 noted the average time lag between the date of occurrence of a fraud and its detection was 23 months; for large frauds (Rs 100 crore and above), it was 57 months.

A two-decadal analysis in the Financial Stability Report of June 2019 observed that between FY01 and FY18, fraud constituted 90.6 per cent of what was reported in FY19, by value. In September 2019, then deputy governor M K Jain had said: “It will not be an exaggeration to say that some of the big losses suffered by banks on account of frauds could have been avoided if a good compliance culture was ingrained in the respective banks.”

Compared to penalties imposed globally, which run into hundreds of millions of dollars, the amounts imposed by RBI are small. The highest penalty by the RBI to date is Rs 58.9 crore, in March 2018, on ICICI Bank for its failure to adhere to directives regarding the sale of securities from its held-to-maturity portfolio.