Penalties Imposed by RBI on Banks

Penalties Imposed by RBI on Banks

Subject :Economy

Section: Monetary Policy

• ICICI Bank: Fined ₹12.19 crore for various violations, including sanctioning loans to companies where two directors were board members, marketing non-financial products, and failing to report frauds to the RBI within the prescribed timeline.
• Kotak Mahindra Bank: Penalized ₹3.95 crore for failing to conduct the annual review and due diligence of service providers, breaching customer contact time restrictions, and incorrectly levying interest and foreclosure charges.

Reasons for Penalty: 

• ICICI Bank: Violations of certain sections of the Banking Regulation Act, 1949, and non-compliance with RBI’s directions on loans, advances, financial services, and fraud classification and reporting by commercial banks.
• Kotak Mahindra Bank: Non-compliance with RBI’s directions on managing risks, code of conduct in outsourcing financial services, recovery agents engaged by banks, customer service, and loans and advances statutory restrictions.

Background:

• ICICI Bank previously faced penalties in March 2018 for non-compliance with directions on the direct sale of securities from its HTM portfolio and specified disclosures.
• Both banks were cautioned that the RBI’s action does not determine the validity of any transaction or agreement with their customers.

About Banking Regulation Act, 1949

The Banking Regulation Act, 1949 is a legislation in India that regulates all banking firms in the country. It was enacted as per the recommendations of the Committee on Indian Financial System (CIFR), also known as the Gadgil Committee report. The primary objective of the act is to consolidate and amend the law related to banking in order to secure monetary stability and ensure a healthy banking system in India.

The Banking Regulation Act, 1949 empowers the Reserve Bank of India (RBI) to regulate the functioning of banks in India. It provides detailed guidelines for the licensing of banks, management of banking companies, regulation of the paid-up capital and reserves of banks, and more. The act also outlines the provisions for the nationalization of private banks in India.

Some key features of the Banking Regulation Act, 1949 include:

1. Licensing of Banks: The act lays down the conditions for obtaining a banking license in India.
2. Reserve Bank’s Powers: The act provides the Reserve Bank of India with the authority to inspect, regulate, and supervise the functioning of banks in India.
3. Shareholding Regulations: The act sets the maximum limit for the shareholding of any individual or entity in a banking company.
4. Branch Expansion: It regulates the opening of new bank branches and imposes certain restrictions on their operations.
5. Control Over Management: The act enables the RBI to control the appointment and functioning of the management of banks.
6. Regulation of Operations: It provides guidelines for various aspects of banking operations, such as loans and advances, investments, and reserves.

About Held-to-Maturity (HTM) securities

• Held-to-Maturity (HTM) securities refer to debt securities that a company or financial institution intends to hold until they mature.
• These securities are accounted for at amortized cost, and any unrealized gains or losses are not recognized in the financial statements.
• They are classified as non-trading assets, and any changes in their market value do not affect the income statement.
• HTM securities provide a stable income stream as they offer fixed interest payments until their maturity date.