Co-operative Bank was caught committing 2 mistakes: Gave lengthy explanation on notice, but RBI rejected the arguments and imposed penalty

The Reserve Bank of India (RBI) is continuously taking strict steps regarding transparency, financial discipline and protection of customer interests in the Indian banking sector. Especially the Central Bank is keeping a close watch on the functioning of urban and district co-operative banks. In this series, RBI has imposed monetary penalty on Maharashtra-based Jai Bhawani Sahakari Bank Ltd (Pune) for violating the rules and not following the mandatory guidelines.

Two serious regulatory failings were detected by the RBI during its statutory inspection of the bank’s financial records and functioning. After this, when a show cause notice was issued to the bank, the bank management gave several arguments in its defense, but the Reserve Bank, finding these replies unsatisfactory, took direct penalty action.

According to the Reserve Bank of India’s investigation report, both the deficiencies found in the cooperative bank were directly related to banking security and transparency:

• 1. Not sending data to Credit Information Companies (CICs):

  
  

  There are clear instructions from RBI that all banks have to compulsorily share complete data of loans and repayments of their borrowers with all credit information companies (like CIBIL, Experian, Equifax, CRIF High Mark). The investigation revealed that the bank completely failed to report the credit information of its borrowers to all the CICs on time.

• 2. Negligence in KYC rules and risk categorization of accounts:

  
  

  Under KYC (Know Your Customer) guidelines, it is mandatory for banks to periodically review the risk category (Low, Medium, High Risk Categorization) of customers’ accounts. Jai Bhavani Sahakari Bank had not reviewed the risk profile of the accounts within the prescribed time frame, which could have increased the risk of money laundering and suspicious transactions.

RBI had served notice to the bank using the powers conferred under Section 47A(1)(c) and 46(4)(i) of the Banking Regulation Act, 1949.

In response to the notice, a written explanation was sent by the bank and oral arguments were also presented during the personal hearing. The bank’s argument was that this procedural delay was due to lack of technical upgradation and staff and was not intentional. However, after reviewing all the documents and facts, RBI came to the conclusion that the allegations of non-compliance with the rules are fully proved and are sufficient grounds for imposing a monetary penalty. After this, an order was issued to impose penalty on the bank.

Whenever the Central Bank imposes penalty on co-operative banks, it is natural for common account holders to be worried about their deposits. However, like every time, the Reserve Bank has clarified the situation this time too:

• Lack of regulatory compliance: This penalty has been imposed only on the basis of deficiencies in regulatory compliance by the bank.

• Transactions are completely valid: This action of RBI is not intended to invalidate any valid transactions or agreements entered into by the bank with its customers.

• Customers’ deposits are safe: The normal functioning of the bank will continue as before and this penalty will not have any adverse effect on the deposits, FDs or normal transactions of the account holders.

This is a direct warning from RBI to cooperative banks that any negligence in the rules related to financial data and risk management of account holders will not be tolerated.