Dear Readers, The Reserve Bank of India (RBI) recently shocked the banking world by stopping Kotak Mahindra Bank from onboarding customers digitally. If we
look at the recent supervisory actions there is a pattern that I could see where the central bank is shifting its focus from monetary penalties to actions. Let me explain.
RBI's strong actionsFrom HDFC Bank to Bank of Baroda and Paytm Payment Bank to Kotak Mahindra Bank, the RBI has taken the strongest action possible. Why is RBI so harsh on
Regulated Entities (REs) which are systemically important and very large? The major reason is that the RBI now wants to hit where it hurts the most.
Generally when car drivers jump the signal there are warnings, but that doesn't solve the problem at large. Hence, cancelling the driver’s licence could be a strong action that the traffic department can take.
Similarly, in cases where there are irregularities the central bank
imposed monetary penalties. In fact, the regulator also imposed a monetary penalty of Rs 3.95 crore on Kotak Mahindra Bank in October 2023.
The penalty was imposed under the Code of Conduct for outsourcing financial services by banks.
In a similar manner, the RBI had also imposed two penalties on Paytm Payment Bank before stopping them from onboarding new customers.
But perhaps there was no major impact in the case of Paytm Bank. The RBI’s goal of making the REs realise the criticality of compliance was not being achieved by penalties.
Because the maximum penalty that RBI has imposed is not more than Rs 5 crore, which is not a big amount for
any RE which is making profits in hundreds of crores. Compared to the earnings of the banks the quantum of the penalty was peanuts.
Someone I know from the RBI said there was no major reaction from the management, investors, shareholders and Board of directors, and it was business as usual for them as they took such penalties very lightly. Hence, the regulator had to find a tougher way to make them realise their
mistakes.
Hit it where it hurts
The regulator has now hit where it hurts more. Stopping a RE from conducting business in a certain manner will make boards and senior management pay attention. Because paying a penalty was easy, losing a business is not.
On average even if a bank is onboarding a thousand customers a day, it will lose 30,000 customers to other banks in a month, which is a big business loss. On the first day after RBI action, the Kotak Mahindra Bank’s stock fell 12%. The RBI’s action made a huge impact, which imposing
penalties could not have made.
I think this is a new strategy of the RBI, which started by stopping HDFC Bank from onboarding new credit card customers and repeating it with Paytm and Bank of Baroda. The central bank is clearly focusing more on actions than monetary penalties.
The enforcement department of the central bank imposed penalties of Rs 65.32 crore on the 182 REs for noncompliance in 2021-22. Later in 2022-23 it imposed penalties of Rs 40.39 crore on 211 REs. This year the penalties as well as the actions are also likely to be very
harsh.
RBI's supervision
The RBI has set a number of legal processes for the REs. And while auditing if the central bank finds gaps intentionally or unintentionally, it rates them and asks the REs to improve within a stipulated period. They also suggest a framework. But there are REs which did not comply even after
RBI’s warning. In fact, there are REs who committed the same mistake or rather continued to carry forward with the same violation the RBI officers found.
One of my acquaintances from the central bank said there are REs which did not bother to comply citing various technical reasons. We realised how grave the situation is when we identified them as habitual offenders, the official said.
The RBI wants no RE to go slow on compliance as
the risk emerging from the various sources are very high in the current times.
Why is the RBI so serious?
After the collapse of banks in Europe and the US, the Indian central bank has become very cautious. It has already seen the havoc created by the PMC Bank fraud and the challenges while imposing a moratorium on Yes Bank. The RBI does not want any of the situations to repeat and is trying its
best to be proactive and avoid any risk, whether it’s a systematic or any individual bank’s operational risk.
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Amol Dethe,
Editor,
ETBFSI.
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