RBI penalties surge 88% in last 3 years, KYC and AML top violations list

The Reserve Bank of India has collected Rs 78.6 crore from these penalties over three years, including 261 penalties in 2023 alone

The Reserve Bank of India (RBI) has increased the number of penalties imposed on financial institutions by 88 per cent over the past three years (from 2021 to January this year), with Know Your Customer (KYC) and Anti-Money Laundering (AML) violations being the most common, according to a report by The Economic Times.

The central bank has collected Rs 78.6 crore from these penalties over three years, including 261 penalties in 2023 alone, as reported by Signzy, a fintech firm specialising in regulatory compliance for institutions. KYC and AML regulations require companies to effectively allocate resources to detect potential money laundering activities within their operations.

Urban and rural co-operative banks have the highest number of KYC and AML violations, with urban co-operative banks paying Rs 13.5 crore and rural co-operative banks paying Rs 20.13 crore from 2021 to January this year.

The Economic Times cited Ankit Ratan, co-founder and CEO of Signzy, as saying, “Small organisations like co-operative banks and fintechs often lack adequate risk and compliance teams. This is not solely an issue of expertise but also involves systemic problems and limited bandwidth.”

The rise in penalties can also be attributed to the RBI’s stricter and more comprehensive auditing, particularly targeting fintechs and non-banking financial companies (NBFCs), the business-daily said.

Fintechs, being technology-driven, differ from traditional banks as their primary focus is on solving problems through technology. Consequently, they often lack large risk and compliance teams and the extensive institutional knowledge typical of banks.

RBI fines ICICI, Yes Bank

Earlier last week, the RBI imposed a penalty of Rs 1 crore on ICICI Bank for non-compliance with norms relating to loans, and a Rs 91 lakh fine on another private sector lender, Yes Bank, for violating norms relating to customer service and unauthorised operation of internal/ office accounts.

The RBI’s supervisory inspection found violations by both banks relating to their financial position as of March 31, 2022.

RBI found that ICICI Bank had sanctioned term loans to certain entities in lieu of or to substitute budgetary resources envisaged for certain projects, and without undertaking due diligence on the viability and bankability of the projects to ensure that revenue streams from the projects were sufficient to take care of the debt servicing obligations, among others.

On Yes Bank, the banking regulator found the lender levied charges for non-maintenance of minimum balance in certain savings accounts having insufficient/ zero balance and opened and operated certain internal accounts in the name of its customers for unauthorised purposes like parking funds and routing customer transactions.