How banks can plug compliance loopholes amid RBI's penalty blitz

Nearly two dozen major banks, including public, private, and foreign institutions, have faced the Reserve Bank of India’s (RBI) scrutiny for regulatory breaches this year.

RBI found a range of compliance violations by banks from misclassifying fraud cases, failure to report fraud cases, breaching recovery agent guidelines, neglecting due diligence on project viability, and exceeding intra-group exposure limits. The RBI has imposed penalties on several prominent banks, including ICICI Bank, Kotak Bank, SBI , Standard Chartered Bank and a host of public and private sector institutions.

ICICI Bank, for example, faced one of the most substantial penalties in recent times, amounting to Rs 12.19 crore, for failing to adhere to RBI guidelines on fraud classification and timely reporting of fraudulent activities. In addition, the private bank was found to have granted loans to companies where two of its directors held board positions, raising concerns about conflict of interest.

Kotak Mahindra Bank was asked to fork out a Rs 3.95-crore fine for violation of outsourcing guidelines related to recovery agents.

"In a quest for cornering a larger market share on the back of growth in the economy, there are increasing instances of cutting corners in lending and recovery practices," says Rishi Agrawal, CEO and Co-Founder, Teamlease RegTech.

He listed out instances like coercive recovery practices, poor due diligence on recovery agents and inadequate training of recovery agents, lack of transparency in lending practices and hidden charges, beneficiary organisations are related to the bank and its management and board, lending to individuals/organisations beyond regulatory limits, and poor fraud reporting processes to the regulators.

How to plug these compliance loopholes or gaps?

"Banks need to have internal policies in line with regulatory requirements. Employees who are found to compromise regulatory compliance should be penalised," said Agrawal of TeamLease.  

He also suggested strong IT systems need to be instituted to detect and discover instances of process violation. "The tone from the top needs to be clear on regulatory compliance," he added.

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