Will RBI disclose “Sanction Mechanism” to enforce sanctity of Banking license conditions?

The opening up of a licensing window for Private Banks in India which has attracted 26 applications has also raised a debate on whether the new licenses are beneficial to the economy. RBI intends to impose “Financial Inclusion” and “Priority Sector Obligations” in addition to “Minimum Capital”, “Majority Public Holding” and “Avoidance of Conflict of Business” as norms to ensure that the new licenses will actually benefit the society.

The undersigned  has been fighting for a “Safe E Banking” environment in India and has been pointing out that RBI has not succeeded in imposing its own regulatory prescriptions for safe banking with the current Bankers. Many of the Bankers simply ignore RBI guidelines and RBI is forced to remain silent. Non notification of Damodaran Committee recommendation on customer service and the recent postponement of security mitigation guidelines for cards and e banking scheduled for June 30, 2013 are glaring examples of how RBI’s good intentions are remaining only on paper.

Naavi has pointed out several instances where some Banks have failed to follow RBI guidelines and flouted licensing norms causing loss to the public. At least in two instances, Naavi has demanded that licenses of two branches of two Banks should be suspended as a matter of punishment. Naavi has also demanded that the penalty for KYC failures should be increased and the funds generated should be used for providing “E Banking Fraud Guarantee Scheme”. RBI has not been able to take any action on these demands.

Additionally several sting operations have recently exposed the malpractices in prominent Banks indulging in money laundering.

Most Banks including public sector Banks have gone on record with illegal and anti consumer terms in the Internet Banking guidelines and RBI has not even taken notice of the same.

Many of these violations are sufficient to cancel the license of the entire Bank if not the erring branch. But considering that Naavi’s demand for cancellation of licenses of one branch of PNB and one branch of ICICI Bank for flouting RBI guidelines has not evoked proper response from RBI, it is unlikely that RBI will ever consider “Non Compliance of Regulations” as sufficient cause for cancellation of license. RBI may consider strict action only when there is a “Managerial Fraud” and “Imminent failure possiblity” in the Bank.

RBI has therefore shown its inability to take any strict penal action against erring Banks who continue to flout regulatory norms and are ready to pay the financial penalty if caught. Absence of any other stricter penalty has diluted the perceived power of RBI.

Had RBI initiated criminal action against some of the Chairpersons of the erring Banks who are proved to be involved in money laundering and other illegal activities, the regulatory compliance situation would have been better. Even if the licenses of the erring branches had been cancelled, it would have had a significant impact in preventing future violations of similar kind. But RBI did not have the guts to impose such strict penalty on the erring Banks.

As things stand today, RBI is therefore becoming less and less effective in regulating the industry. Some of the individual Banks and the IBA are gaining too much indulgence to dictate the regulatory aspects of the industry.

The “Strict Norms” for licensing which are now being discussed need to be seen in this perspective.

For example, even now, RBI has not been able to achieve its Financial Inclusion and Priority Sector lending objectives and there is an admitted large scale rigging of figures by Banks to report non existing compliance. Failure of RBI in “Selective Credit Control” and “Over Liberalization without adequate monitoring and control” is part of the reason why inflation is going unchecked in the country. “Commercial objectives superseding social welfare” has slowly converted “Banks” into “Money shops” with no social obligations.

In this background, the so called “Strict Norms for Licensing” appear amusing. These norms could finally  end up only as an eye wash to let influential corporates get the coveted Bank licenses.

I am sure that some corporates may more than satisfy the minimum captial criteria prescribed by RBI for the New banks to profess that they have “Deep Pockets” to ensure success of the venture. The “holding structure” also would be met with suitable restructuring. They may also provide all assurances on “Financial Inclusion” and “Priority Sector Lending”.

But it is more or less certain that many of the new Banks will finally end up with only “Elite Banking”. They have no capability nor will have the willingness to take up “Financial Inclusion” obligations or “Priority Sector lending”. They will also openly flout “Safe E Banking Principles”. Even though the players will provide assurances and guarantees for obtaining the licenses, they will conveniently ignore in times to come.

From the past one can infer that RBI  does not have the capability to cancel the license even if the Banks turn out to be “In House ATMs” for large corporate houses.

This raises the question that if RBI is not capable of taking strict deterrent action against flouting of Banking norms as has been exhibited in the past, then what is the sanctity of the “Strict Licensing Norms”?

In this background, it appears that just as the applicants need to prove their credentials, it is time for RBI to prove its own credentials as a regulatory agency capable of enforcing its own regulations. For this purpose, RBI should disclose a “Sanctions Mechanism” by which it intends to enforce license obligations in the years to come and the possibility of suspension or cancellation of licenses in cases of repeated failures to meet regulatory guidelines. Such a mechanism should clearly identify “Non Compliance Incident identification and reporting structure”, “Gradation of non compliance incidents”,”Mandatory penalties for different grades of non compliance”, “Inclusion of criminal penalty against erring officials” and also “Cancellation of License”.

May be it can be considered as  an opportunity for RBI to develop an effective regulatory mechanism for the new Banks with which it can also set right the regulatory short falls that have crept into the system at present.

I therefore urge RBI to take some of the steps that have been indicated in this and earlier articles such as

a) Undertaking a Socio-Economic Cost benefit analysis of the business plans submitted by the applicants and placing the reports in public domain along with the proposed business plans

b) Making Cyber Crime insurance mandatory

c) Imposing strict sanctions for non compliance including mandatory loss of license and disclosing the sanction policy as a public document.


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About Vijayashankar Na

Naavi is a veteran Cyber Law specialist in India and is presently working from Bangalore as an Information Assurance Consultant. Pioneered concepts such as ITA 2008 compliance, Naavi is also the founder of Cyber Law College, a virtual Cyber Law Education institution. He now has been focusing on the projects such as Secure Digital India and Cyber Insurance
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