RBI penalises 14 banks for non-compliance/contravention of banking norms

Ashish M. Shaji

13 Jul, 2021

The Reserve Bank of India imposed monetary penalties on various banks such as SBI, Bandhan Bank, Bank of Baroda etc., for non-compliance/contravention of banking norms. These 14 banks include public sector banks, private sector banks, co-operative banks, foreign bank and also a small finance bank. In this article, we shall take a look at this development.

Which banks have been penalized by Reserve Bank for Non-Compliance or Contravention of Banking Norms?

Reserve Bank of India (RBI) penalised 14 different banks for contravention of provisions related to lending to non-bank finance companies (NBFCs) and maintaining data on significant exposures.

In a press release released by the RBI, it stated that the penalty was imposed after a “scrutiny in the accounts of companies of a group” by the RBI. While the name of the group is not disclosed yet, however, RBI has named 14 banks on which the penalty has been imposed.

These banks include the following:

• Bandhan Bank;
• Bank of Baroda;
• Bank of Maharashtra;
• Central Bank of India;
• Credit Suisse;
• Indian Bank;
• Indusind Bank;
• Karnataka Bank;
• Karur Vysya bank;
• Punjab and Sind Bank;
• South Indian Bank;
• State Bank of India;
• Jammu & Kashmir Bank and
• Utkarsh Small Finance Bank.

Non-compliance of lending norms and contravention of banking norms

The Reserve Bank imposed monetary penalty on the banks mentioned above for non-compliance with certain provisions of directions issued by the RBI. The directions include the following:

• Lending to Non-Banking Financial Companies (NBFCs);
• Bank Finance to Non-Banking Financial Companies (NBFCs);
• Loans and Advances – Statutory & Other Restrictions;
• Creation of the Central Repository of Large Common Exposures – Across Banks read with contents of Circular on “Reporting to Central Repository of the Information on Large Credits”;
• Operating Guidelines for Small Finance Banks & for contravening the provisions of Section 19(2) and Section 20 (1) of Banking Regulation Act, 1949.

According to section 19(2) of Banking Regulation Act 1949, banks are barred from holding shares in any company, whether as pledge, mortgagee or absolute owner, which amount to more than 30% of the paid-up share capital of that company or 30 per cent of its own paid up share capital & reserves, whichever is less.

According to Section 20(1) of Banking Regulation Act 1949^[1], banks are prohibited from granting loans/advances on security of its own shares or committing for grant of any such loans or advances to or on behalf of the following:

• Any of its directors;
• Any firm in which any of its directors is interested as a partner, manager, employee or guarantor;
• Any company which is not a subsidiary of the bank or a company registered under Section 25 of Companies Act or a government company of which any of the directors of the bank is director, manager, managing agent, employee or guarantor or where he holds substantial interest;
• An individual in respect of whom any of its directors is a partner/guarantor.

The Reserve Bank stated that a scrutiny in the accounts of companies of a group was carried out, and it was seen that the banks had failed to comply with the provisions of the directions mentioned above. Therefore notices were issued to these banks asking them to state the reasons as to why a penalty should not be imposed for non-compliance with the directions/provisions.

Amount of penalty imposed by the Central Bank

RBI has imposed penalty ranging from 50 lakh rupees to 2 crore rupees on the aforementioned banks for failing to comply with regulatory provisions and contravention of banking norms as provided above.

Conclusion

The central bank stated that the replies obtained from the banks, oral submissions made in the personal hearings, wherever sought by banks, and examination of the additional submissions, where made, were duly considered, and to an extent, the charges of non-compliance with the RBI directions/contravention of banking norms (Banking Regulation Act, 1949) were sustained. RBI concluded that it warranted the imposition of monetary penalty on the aforementioned banks.

Read our article:RBI issues Guidelines to manage Risk in Outsourcing of Financial Services by Co-operative Banks