The RBI found irregularities like violation of KYC norms and cash transactions being sliced into smaller amounts, gold sold without following norms and using cooperative banks as conduit for issuing cheques
Not absolutely ruling out money laundering, the Reserve Bank of India (RBI) plans to take early action against banks whose officials were recently caught on tape in a sting operation willing to indulge in serious violation of banking norms.
Leaving it to Parliament the issue of amending laws to provide heavier penalty on banks indulging in such acts, RBI governor D Subbarao also dismissed perceptions that the central bank was going soft on errant banks.
“What action? I cannot tell you because action on this has to be taken at lower level at the RBI. So it is premature to conclude that the RBI is going soft or harsh on this. We got to follow a process. Just because media is investigating today, we can’t say the RBI has to penalise tomorrow otherwise it is soft,” he told the media.
The governor said that under rule of law, there is a process to be followed and it was being followed.
“After the process comes to a close, which I hope is sooner rather than later. If you believe the penalty has been too soft or too harsh, you have a privilege to make a statement,” he said.
Referring to the special investigation that was done into Cobrapost’s expose on some major private banks, Subbarao said the bank managements were issued show-cause notices and action will be taken accordingly.
He said the RBI alone cannot check money laundering and banks too cannot ascertain the source of money while taking deposits.
“Is this money laundering, we do not know... we are not saying there is no money laundering. I am saying whether this money laundering has to be investigated by a much bigger process involving much bigger agencies,” Subbarao said.
When asked about the penalty which could be imposed on erring banks, he said the RBI can levy a maximum of Rs1 crore.
“Barclays was penalised $450 million and HSBC was some amount like that. So we are talking about peanuts here,” Subbarao said, adding, it was up to law makers whether to increase the penalty or not.
He was replying to a question whether penalty on banks needed to be increased.
RBI had launched the investigation into the working of banks following the expose which showed some bankers giving suggestions to customers on ways to bypass regulatory norms.
Subbarao said following the expose, RBI carried out a special investigation of the three private banks and 40-45 branches and also their head offices were looked into.
He said a thematic study of 30 banks was also done to see if the problem was in whole system or in certain banks only.
Subbarao said the RBI found irregularities like violation of KYC norms and cash transactions being sliced into smaller amounts, gold sold without following norms and using cooperative banks as conduit for issuing cheques.
The expose had named several banks in both public and private sector banks and also insurance companies whose officials were shown purportedly willing to violate several banking norms and were prepared to do money laundering.
SBI and Central Bank of India returned a DD saying that it is a "cancelled instrument". What these banks forgot is that the DD cannot be cancelled without the original instrument, which was in their possession at the time of clearing
Strange as it may sound, but two state-run lenders, State Bank of India (SBI) and Central Bank of India (CBI) had created a new record of bouncing a demand draft (DD). In this particular case, both these banks returned the DD drawn by CBI saying, “Instrument is cancelled”.
As we all know, a DD is much safer and certain method of payment compared with cheques. In case of cheques, an individual is the drawer and hence the cheque can be dishonoured by the drawee bank due to various reasons, like insufficient funds. However, in case of DD, the drawer is a bank and hence the payment is certain and the instrument cannot be dishonoured.
Central Bank of India's branch at Colaba Causeway in Mumbai, on 23 April 2013 issued a DD (no93323) for Rs21,878 on the name of Aditya Rahul Talavliker. The DD was presented in SBI's Erandwana branch at Pune by Aditya Talavliker. However, to his surprise, Central Bank (being the local clearing branch) returned the DD saying that the “instrument is cancelled, contact branch”.
Interestingly, a DD can be cancelled, provided the original instrument is presented to the drawee bank. In this case, while the DD was with the banks in Pune, how can the drawee bank branch (at Colaba, Mumbai) cancel the instrument?
There are two possibilities. One the bank employee failed to distinguish between a cheque and a DD. And two, he may not have consulted with his/her seniors before labelling the DD as a “cancelled instrument”.
Moneylife has sent a mail to the SBI chairman and would post his response as and when it comes.
Clearance of a DD
Normally demand drafts are used to pay on demand certain amount to a specified beneficiary from one branch to another branch of same bank. However, since DDs are a kind of cheque, the basic principles of cheque clearing also apply to drafts. This means, if the payee does not have account with the same branch, he/she can deposit the DD in his bank. The bank in turn would send the DD for outward clearing (similar to cheque clearing) to the local clearing house.
Cancellation of DD
A DD can be cancelled at the same branch from where it was issued. The applicant needs to give a letter along with the original DD for cancellation. The bank, in turn would cancel the DD after deducting certain charges and credit the amount in the account of the applicant (if he have one with the same branch) or give him a pay order. Only the person, who has filled the application form for the original DD, can cancel it.
Credit growth for the banking sector as on 17 May 2013 stands at 14.7% y-o-y and deposit growth stands at 13.5% y-o-y. LDR for the banking sector remains high at 77.5% (74.3% as of May 2012).