Time is ripe now for the regulator to protect the bank depositors, customers, the public and the state from the archaic rules and regulations that have outlived their utility
There was wide publicity recently in the media about the penalty levied by Reserve Bank of India (RBI) on 25 commercial banks totally amounting to Rs60 crore for violation of banking regulations in the aftermath of Cobrapost sting operation exposing the alleged role of banks in money laundering and tax evasion in our country.
Names of banks and the extent of penalty levied:
The names of banks and the amount of penalty so far levied are as under:
|Name of the Bank. Penalty Amount (Rs in crore)|
Axis Bank Ltd. 5.001
Andhra Bank 2.50
|Bank of Baroda 3.00|
|Bank of India 3.00|
|Canara Bank 3.001|
|Central Bank of India 3.00|
|Deutsche Bank A.G. 1.00|
|Development Credit Bank Ltd. 1.00|
Dhanlaxmi Bank Ltd. 2.00
HDFC Bank Ltd. 4.50
ICICI Bank Ltd. 1.001
|Indian Overseas Bank. 3.002|
|ING Vysya Bank Ltd. 1.50|
|Jammu & Kashmir Bank Ltd. 2.501|
|Kotak Mahindra Bank Ltd. 1.501|
|Oriental Bank of Commerce 2.00|
|Punjab & Sind Bank. 2.50|
|Punjab National Bank. 2.50|
|State Bank of India 3.00|
|The Federal Bank Ltd. 3.00|
|The Lakshmi Vilas Bank Ltd. 2.50|
|The Ratnakar Bank Ltd. 0.50|
|United Bank of India. 2.50|
|Vijaya Bank. 2.00|
|Yes Bank Ltd. 2.00|
What were the violations and how they were dealt with?
The RBI in its press release dated 15 July 2013 has said that their scrutiny of books of accounts of these banks revealed violation of certain guidelines and instructions issued by RBI. These mainly relate to non-adherence to certain aspects of know your customer (KYC) norms, anti-money laundering guidelines, omission in filing of cash transaction reports, sale of gold coins for cash beyond Rs50,000 and a couple of other violations relating to remittance under liberalized remittance scheme, repatriation of funds from NRO account and non-adherence to instructions on import of gold on consignment basis etc.
RBI has clarified that the investigation did not reveal any prima facie evidence of money laundering, which, according to RBI, can be conclusively proved only by an end to end investigation of the transactions by tax and enforcement agencies. However, RBI has not clarified as to whether such investigation by the tax and enforcement agencies was being carried out and if so, when it is expected to be completed for the sake of putting a lid on this much publicized role of banks in money laundering and tax evasion in our country.
No doubt the banks would have quietly paid the penalty and got rid of the Damocles’ sword hanging on their head, but are these penalties deterrent enough to ensure that the rules and regulations will be followed scrupulously both in letter and sprit at least in future?
What did the UK banking regulator do when the biggest banking scam surfaced there?
The biggest banking scam that surfaced in UK recently was with regard to manipulation of London Inter Bank Offered Rate (LIBOR), which caused a crisis of confidence in the banking system in the western world.
In June 2012, Barclays Bank Plc, one of the largest banks in the UK agreed to pay a penalty of $453 million (about Rs2,700 crore) to US and UK authorities to settle allegations of rigging while fixing LIBOR, the benchmark interest rate, that caused political storm in the UK. This scandal, which cost Barclay’s CEO his job, resulted in sweeping changes in the way in which LIBOR is set, as LIBOR benchmark rates are used for trillion of dollars worth of loans around the world.
Union Bank of Switzerland (UBS) agreed to pay a total of $1.5 billion (Rs9,000 crore) in fines to various authorities in the US, UK and Switzerland to settle charges of manipulating LIBOR, over the period between 2005 and 2010. UBS had said that it would pay $1.2 billion to the US Department of Justice, 160 million pounds to the Financial Services Authority of the UK and 59 million Swiss francs to the Swiss Financial Market Supervisory Authority. This is the second bank; after Barclays, to be charged with rigging LIBOR.
British Government’s initiative - ‘Changing Banking for Good’
Apart from the penalties thus levied on the banks by the regulators, the British Government established in July 2012 a Parliamentary Commission on Banking Standards to conduct an inquiry into professional standards and culture in the UK banking sector and to make recommendations for legislative and other action. The Parliamentary Commission came out with a detailed report titled “Changing Banking for Good” in June 2013 recommending sweeping changes in the way in which banks function with a view to ensure high standards to strengthen Britain as a global financial centre.
The report contains numerous recommendations that cover several issues, with main areas like: making senior bankers personally responsible, reforming bank governance, creating better functioning and more diverse markets, reinforcing the powers of regulators and making sure they do their job.
Commenting on the publication of the Final Report, the Chairman of the Parliamentary Commission Andrew Tyrie, MP, had said as under:
“Recent scandals, not least the fixing of the LIBOR rate that prompted Parliament to establish this Commission, have exposed shocking and widespread malpractice. Taxpayers and customers have lost out. The economy has suffered. The reputation of financial sector has been gravely damaged. Trust in banking has fallen to a new low.
“A lack of personal responsibility has been commonplace throughout the industry. Senior figures have continued to shelter behind an accountability firewall. Risks and rewards in banking have been out of kilter. Given the misalignment of incentives, it should be no surprise that deep lapses in banking standards have been commonplace.”
“The health and reputation of the banking industry itself is at stake. Many junior staff who may have done nothing wrong have been impugned by the actions of their seniors. This has to end. Where the standards of individuals, especially those in senior roles, have fallen short, clear lines of accountability and enforceable sanctions are needed. They have both been lacking.”
“It is not just bankers that need to change. The actions of regulators and Governments have contributed to the decline in standards. Governments need to get on with the job of implementing these reforms. Regulators and supervisors need rigorously to enforce them. We need better regulation: this may mean less, not more. And we need a better functioning and more competitive banking industry. The Final Report contains a package of recommendations that, together, change banking for good. We must get on and do what is right for the UK.”
The key recommendations of the Commission are based on the following five themes to restore trust in banking:
a. making individual responsibility in banking a reality, especially at the most senior levels;
b. reforming governance within banks to reinforce each bank’s responsibility for its own safety and soundness and for the maintenance of standards;
c. creating better functioning and more diverse banking markets in order to empower consumers and provide greater discipline on banks to raise standards;
d. reinforcing the responsibilities of regulators in the exercise of judgement in deploying their current and proposed new powers; and
e. specifying the responsibilities of the Government and of future Governments and Parliaments.
The Commission’s recommendations are tailored to the needs of British banking industry, as the ramifications of the banking scam relating to rigging of LIBOR have no parallel anywhere else in the world. But the observations of the Chairman of the Parliamentary Commission echoes the level of malpractice existing in the banking industry that require far reaching changes in the interest of restoring public confidence and faith in the banking institutions all over the world.
Can we ‘Change Banking for Good’ in India too?
In so far as Indian banking is concerned, as the RBI investigations have revealed, there exists considerable laxity in complying with the regulatory guidelines, rampant flouting of rules coupled with unhealthy practices of mis-selling with a view to benefit from the misplaced incentives that are increasingly built into the system. And these malpractices apart from exposing the banks to unprotected risks, affect the reputation of the banks and their credibility with the banking public.
It is appropriate to repeat here what Sucheta Dalal, Founder-Trustee, Moneylife Foundation said in her monthly letter dated 7 August 2013 addressed to the large body of members of the Moneylife Foundation with regard to plight of bank customers in our country. She rues as under:
“Let me share with you something that was categorically told to us by the Reserve Bank of India (RBI), Deputy Governor this week. He said that the RBI simply does not have the regulatory framework for customer protection. It only implements the Banking Ombudsman Scheme, which is limited to simple banking products. It does not address all customer-related issues or mis-selling of third party products or a host of other problems that hurt your interest, or mine, as a bank customer. So, while he may personally sympathise with consumer issues, there is little that he can do until the policy issue or regulatory framework is addressed.”
The banking regulator in our country has done a good job of protecting the country’s banks from the international turmoil of 2008 that affected the major banks and economies of the developed countries. Time is ripe now for the regulator to protect the banks’ depositors, customers, the public and the State from the archaic rules and regulations that have outlived their utility. The changing socio economic environment and growing customer expectations demand a comprehensive change in regulatory framework and call for urgent action to overhaul the entire banking operations to make banks accountable for their actions, responsible for their decisions, responsive to customers’ aspirations and answerable to the regulators for all their misdeeds.
The Central Government of our country is holding majority stake in all public sector banks, which control more than 70% of the banking business in the country. It has the moral as well as the legal responsibility to take steps on the lines of the British Government to create a conducive environment for development of banking on healthy lines and ensure safe, secure, pure and simple affordable banking to the large majority of our population whose financial literacy is unfortunately low in a country, where 40% of the population is still outside the ambit of banking. Changing banking for good and for the good of our people, should, therefore, be the priority for our government as well.
(The author is a banking analyst and he writes for Moneylife regularly on banking and finance.)