RBI fines 22 banks for KYC violation: What it means

The penal action taken by the Reserve Bank of India (RBI) against 22 banks on Monday (July 15) confirms that there is indeed rot in the Indian banking industry, and it is not restricted to the few aggressive private sector banks which were penalised earlier.

In June last year, the RBI had penalised three banks - ICICI Bank, HDFC Bank and Axis Bank - for not adhering to the laid down customer identification process,  violating know your client (KYC) norms,  and failing to report cash transactions of over Rs 50,000. That was following a sting operation carried out by online portal Cobrapost, which caught bank staffers on camera suggesting to customers innovative ways to bring unaccounted money into the banking system.

In today's action, the RBI has penalised 22 banks which includes public sector, private sector and foreign banks. While Ratnakar Bank (private sector) will have to pay a penalty of Rs 50 lakh, Bank of Baroda, Bank of India, Canara Bank, Central Bank of India, Indian Overseas Bank, State Bank of India, and Federal Bank, among others, were fined for Rs 3 crore each.

Deutsche Bank was fined for Rs 1 crore. It is the only foreign bank fined by the regulator. A number of other banks - Barclays, BNP Paribas, Citibank, Royal Bank of Scotland, Standard Chartered Bank, Bank of Tokyo - will be issued 'suitably cautioning letters' by the RBI, but will not have to pay any penalty. .

The remaining 13 Indian banks which have been fined between Rs 1 crore to Rs 2.5 crore include Andhra Bank, DCB, Dhanlaxmi Bank, ING Vysya Bank, J&K Bank, and Kotak Mahindra Bank.

The RBI release also mentions that similar scrutiny was also carried out in seven other banks during April and May this year. "The process of follow-up action in respect of those banks is at different stages of completion," said the RBI.

This confirms market suspicions about bankers. They often have a casual attitude towards KYC norms which not only help tax evaders, but also encourage them to deposit and invest money in the banking system. While the RBI has claimed there was no money laundering , the laxity in adhering to banking regulations is a clear indication that all is far from well in the banking system.

This mass scale case of violations is hitting the street at a time when the banking regulator is readying to issue new bank licences to large conglomerates. There is a need for proactive action than reactive.