The Reserve Bank of India (RBI) Governor, Duvvuri Subbarao, has expressed his dissatisfaction with the current level of penalties imposed on banks that violate the central bank’s regulations. He said that the maximum penalty of Rs 1 crore is “peanuts” compared to the size and profits of the banks.
Why are the penalties low?
According to Subbarao, the penalties on banks in India are low because of the legal constraints. He said that the RBI can only impose fines as per the Banking Regulation Act, 1949, which has not been amended for a long time. He said that it was up to the lawmakers to decide whether this should be increased.
Subbarao also said that the RBI does not have the power to revoke the licences of banks, except in the case of co-operative banks. He said that the RBI can only issue directions to banks to stop certain activities or to merge with other banks. He said that the RBI has to resort to moral suasion and persuasion to ensure compliance from the banks.
How does the RBI deal with erring banks?
Subbarao said that the RBI has been cracking down on erring banks, especially co-operative banks, in 2020. He said that the RBI has issued a total of 106 directives to co-operative banks either restricting their business operations or extending the period of existing directions. He said that the RBI has also cancelled the licences of three co-operative banks this year, namely CKP Co-operative Bank, Mapusa Urban Co-operative Bank, and Karad Janata Sahakari Bank.
Subbarao said that the RBI has also imposed monetary penalties on several banks for violating various norms, such as KYC, anti-money laundering, income recognition, asset classification, and provisioning. He said that the RBI has also taken action against banks for governance lapses, internal control failures, and frauds.
What are the challenges faced by the RBI?
Subbarao said that the RBI faces many challenges in regulating the banking sector, which has become more complex and diversified over the years. He said that the RBI has to balance the objectives of financial stability, growth, and inclusion. He said that the RBI also has to deal with the impact of the COVID-19 pandemic, which has affected the liquidity, solvency, and profitability of the banks.
Subbarao said that the RBI has taken several measures to support the banking sector during the crisis, such as providing liquidity, moratorium, restructuring, and regulatory forbearance. He said that the RBI has also enhanced its supervision and monitoring of the banks to prevent any systemic risks.
What are the expectations from the banks?
Subbarao said that the RBI expects the banks to follow the rules and regulations laid down by the central bank and to act in the best interest of the depositors and the public. He said that the banks should also improve their governance, risk management, and internal controls to prevent any lapses or frauds. He said that the banks should also adopt the best practices and standards of the global banking industry.
Subbarao said that the RBI is committed to ensuring the safety and soundness of the banking sector and to fostering a culture of compliance and accountability among the banks. He said that the RBI will continue to take appropriate action against any bank that violates the norms or indulges in malpractices.
