Ever since the banking systems were developed in the country, RBI has been the head of all the banks. It is often known as a banker to banks, providing valuable services, suggestions and schemes. The Reserve Bank of India is the apex bank of the country under which all the other banks work. The banks are provided with a set of rules and regulations which they, under any circumstances, have to follow. Any bank not following the rules has to face penalties.
Recently, the RBI imposed penalties on 14 different banks on 7 July, which is probably the highest number of penalties imposed in a single day. The Reserve Bank of India imposed penalties on many big banks including the State Bank of India (SBI) and Bank of Baroda, Bandhan Bank etc due to violation of certain rules.
The list of these 14 banks includes many public sector banks, private sector banks, foreign banks, Cooperative banks and one small finance bank.
The central bank can impose penalties for violating the rules and regulations of the other banks. However, sometimes a single warning is given if the violation is small, or unintentional. But the penalty given this time to the 14 banks is huge and is due to violation of many different rules.
These include non-compliance of the provisions of directions issued by RBI relating to the Lending to Non-Banking Financial Institutions, financing to Non-Banking Finance Companies and Statutory and other restrictions on the loans and advances. The RBI has been very efficient in its operations and therefore the negligence of the banks have led to imposing the penalties.
Before this, it has never happened that RBI has imposed penalties on 14 banks in a single day. This is probably the highest number of banks that have received penalties in a single day, due to violation of various rules. You might be wondering what the main violation is.
According to the reports, the violation is mainly linked to the association of banks with the current crisis-ridden Diwan Housing Finance Companies (DHFC) and its group companies.
What happened to DHFL?
Recently, DHFL has gone bankrupt. It has more than Rs90,000 crore in debt to various lenders, including many of the banks which received penalties from the RBI on the 7th of July. Shockingly, the entire share capital of the company is said to be cancelled. NSE said that the shares of DHFL will be entirely cancelled from the list of the stock exchange. BSE also suspended trading of DHFL in its stock exchange in order to avoid complications.
But how the RBI banks are affected by DHFL being bankrupt?
The banks lend a huge sum of money to the big companies and DHFL was one of them. The amount lent to DHFL became impossible to recover after the company claimed that it has gone bankrupt. At last, only 33% of the total amount lent to the company will be recovered by the banks and the rest will be lost.
This has been a major issue for the banks and therefore they have received penalties from the central banks. The violations are mainly related to DHFL, as per the official reports of RBI.
According to the reports of RBI, a critical observation in the accounts of companies was done by the group of officials from the RBI which revealed that the banks, which were listed in the penalties list had failed to comply with one or more regulations issued by the directions of RBI and the provisions of Banking Regulation Act of 1949.
The study has resulted in revealing the failure of banks to comply with the regulations of the central bank and therefore have to face penalties now. Moreover, after the study of accounts was done, many notices were given to the banks giving them the advice to show cause as to why they should not be penalised for the non-compliance with the regulations of the Banking Regulation Act of 1949.
However, after the show cause notice was given and the situation was further examined, the RBI came to the conclusion that the violations done by these banks cannot be ignored or forgiven with a warning and requires a monetary penalty and therefore various monetary penalties were imposed on fourteen banks.
Other than the violations discussed above, some of the remaining violations include violations of the rule on the creation of a central repository of large common exposures, reporting to a central repository of information on large credits, violating guidelines for small finance banks. Other than Bank of Baroda, State Bank of India and Bandhan Bank, other banks are 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, Jammu and Kashmir bank and the small financial bank whose name is Utkarsh Small Finance bank.
The violations done by these banks are huge, and so are the penalties imposed on them. The amount of penalties range starts from Rs50 lakhs and is up to Rs2 crore each, which is huge. The RBI has sole authority of penalising the banks if they violate any rule. Exercising its power, RBI under the provisions of sections 47(A) read with section 46(4) and section 51(1) of the Banking Regulation Act of 1949.
In layman language, penalties act as a mode of negative motivation giving the banks which have violated the regulations to keep the regulations in mind as well as to maintain the trust of people in the banking sector.
However, the individuals who have deposited their precious savings with the banks should not worry at all. The action of penalty is based on the inability in regulatory compliance which has to be paid solely by the bank and therefore does not affect even a single bit of the individual transaction or agreements which are currently prevailing as well as transactions that are to be done in the future between the banks and their customers.
The penalties imposed are with the mere purpose to give a lesson to the banks to function according to the regulations of the central bank and to avoid the creation of distrust among the people.
Edited by Aishwarya Ingle