When banks err, shareholders pay the price
The Reserve Bank of India, in an order dated May 14, imposed a penalty of ₹5 crore on South Indian Bank for non-compliance with its directions on Income Recognition and Asset Classification norms, Know Your Customer norms and treasury function. The penalty has also been imposed for deficiencies in its compliance function.
The RBI also informs: “This action is based on deficiencies in regulatory compliance, and is not intended to pronounce upon the validity of any transaction or agreement entered into by the bank with its customers.” This is a standard lingo used whenever any such penalty is imposed on banks.
Of late, the central bank has been imposing various monetary penalties on banks frequently.
In April, the RBI fined IDBI Bank ₹3 crore for failing to comply with norms related to reporting of bad loans. And, in March, it fined ICICI Bank ₹58.9 crore for violating norms on sale of government securities from the ‘held to maturity’ category of its bonds portfolio. This is the highest penalty imposed by the RBI on a bank for a single incident.
There are numerous other examples of monetary penalties imposed on various banks in recent times.
Sections 46 and 47A of Banking Regulation Act empower the RBI with various penal provisions. Apart from monetary penalty there can be punishment by way of imprisonment for a term that may extend to three years.
Though there has been an increase in the number of banks penalised, we have not come across any case of imprisonment so far. Penalties have been imposed on both public sector and private banks.
There cannot be any complaint on the enforcement of rules by the central bank. The RBI follows necessary procedure like calling for explanation, studying the explanations, and so on, before deciding on the case. Enough opportunity is provided to the defaulting banks to defend themselves.
But why is a sudden increase in the number of banks being penalised? Is it because more banks disregard RBI guidelines nowadays? Or whether the RBI wants to take the violations more seriously, as in developed countries, so that the banks fall in line? We also do not know whether the imposition of penalty has improved the compliance function of banks, as no such reporting is available.
When monetary penalty is imposed, banks pay it out of their profits. This means that the shareholder of the bank is penalised. Why should shareholders pay for the mistakes (intentional or otherwise) committed by the functionaries of the bank? Every bank has got a robust system of inspection and audit. Even after that if violations happen, they should be with the blessings of the top-level functionaries. The penalty should, therefore, be imposed on the top management and the board members and not on the shareholders.
Who will go to jail if the RBI decides to impose imprisonment as punishment tomorrow? It cannot be shareholders. Then, why there is monetary penalty on shareholders? In the case of public sector banks it will be ironical as one arm of government will incur the penalty and another arm will collect the same.
One expects the RBI to announce its policy on imposing penalty on banks and functionaries and to ensure that the penalty is imposed on the wrongdoers and not on innocent shareholders. Wherever intentional violation is noticed, persons responsible should be relieved of their roles.
The writer is a retired banker