This post analyses the trend of RBI imposing stricter penalties on banks, NBFCs and payment system operators for non-compliance with regulatory requirements. It lists major penalties levied by the RBI in the recent past and examines the impact of these penalties on financial service providers.
“RBI is neither a hawk, nor a dove. But is actually a vigilant owl.” – Raghuram Rajan said this in 2014 while defending an RBI policy. RBI appears to be living up to this reputation recently. The Indian financial services sector has seen unprecedented growth. And with this, RBI's penal actions against regulated entities have become stricter.
Until 2019, RBI imposed smaller penalties for violations. In 2020, RBI notified a detailed framework for imposing monetary penalty. After which there was a noticeable increase in quantum of RBI penalties. In May 2021, it imposed a fine of Rs. 10 crores on HDFC Bank for irregularities in the bank's loan portfolios. And in July 2021, it imposed fines ranging between Rs. 1-2 crores on 14 banks for irregularities and non-compliance. In December 2021, RBI fined Punjab National Bank with Rs. 1.8 crore for overlooking norms under the Banking Regulation Act. Besides banks, RBI has been imposing considerable penalties on non-banks too. In December 2021, it imposed a fine of Rs. 1 crore on two payment system operators for flouting net-worth requirements. And in August 2021, RBI penalized five payment system operators for non-compliance with RBI guidelines like KYC norms. Not just fines, RBI also took some one-of-a-kind punitive actions recently. Like banning HDFC bank's new digital offerings due to tech outages. And barring MasterCard, American Express and Diners Club from onboarding new customers as they failed to comply with data localisation norms. RBI took another unprecedented action in February 2022, when it cancelled the NBFC license of a digital lender which offered loans through its app Cashbean. The lender violated KYC and outsourcing norms and fair practices code for loan recovery, and charged usurious interest rates.
In global financial regulation, fines have been an effective deterrence technique. Fines imposed on the financial sector rose by 27 % in 2020, compared to 2019.
Besides the cost and operational inconvenience, RBI's penal actions also cause reputational concerns for financial entities. They may impact stock prices of established players in the short term. And they could take down smaller and newer players who still have not gained the public's confidence. So, regulated entities in the financial services space need to be more careful. Non-compliance with KYC, anti-money laundering norms and data privacy norms are some key concerns for regulators globally (including the RBI). So, the regulated entities will see increase in their compliance costs. But in the long term, effective compliance will boost customer confidence, weed-out non-compliant and inefficient entities, and create a more stable financial ecosystem.
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