Blog: In 30 months, RBI fines Rs 73 cr in 48 cases, but no details on bank violations – The Indian Express

ON AUGUST 5 this year, the Reserve Bank of India (RBI) imposed a monetary penalty of Rs 32 lakh on a public sector bank for non-compliance with certain provisions of Reserve Bank of India (Fraud classification and reporting by commercial banks and select FIs) Directions 2016. However, it did not provide details of the non-compliance or violations by the bank.

Since January 2020, the banking regulator has imposed monetary penalties worth Rs 73.06 crore in 48 cases involving banks, including public, private and foreign banks, for violation of provisions or contravention of certain directions through orders that are brief and without details. These sparsely worded orders from RBI have drawn criticism from various quarters, with some observers even calling for the setting up of an appellate court like the Securities Appellate Tribunal (SAT) to challenge the central bank’s decisions. The Financial Sector Legislative Reforms Commission (FSLRC), headed by Justice BN Srikrishna, had earlier recommended a financial sector appellate tribunal for all the regulators including the RBI.

In almost all these orders, the RBI said the action was taken against the bank for ‘non-compliance with certain provisions of directions issued by the RBI’. The orders are released on its website in two to three paragraphs with minimum details giving hardly any clue to investors and bank customers about the violations.

Compared to this, the penalty orders passed by the two other regulators – the Securities and Exchange Board of India (Sebi) and Insurance Regulatory and Development Authority (IRDAI) – for any non-compliance are more elaborate with details about the violation and the modus operandi.

The RBI did not respond to a mail from this paper on the issue. In a post-policy media interaction in September, the Reserve Bank governor Shaktikanta Das had said, “We communicate our detailed order to the regulated entity. However, we mention the important highlight of that order in the press release, which is available to everyone in the public domain. But the reasoned orders are communicated with regulated entities which contain the reply they have given, our detailed analysis of that reply, points of agreements and points of disagreements.” He was responding to a query on why the RBI’s orders against any regulated entity for non-compliance are not detailed ones.


Need for transparency

Customers and investors of banks have only sparse access to information on non-compliance of RBI directions by banks. Unlike in the case of other financial regulators, RBI provides details only to the entity being penalised for violation. There is a need to keep stakeholders informed, and an appellate authority may serve the purpose, say governance and policy experts.

“The RBI is an old regulatory institution. It has developed certain kinds of practices over its existence in the last 80-85 years. Not only in the orders they pass they don’t give reasons and detailed explanations, they also don’t hear the party,” former finance and economic affairs secretary Subhash Chandra Garg said.
On the other hand, Sebi, which was established much later than the RBI, passes ‘speaking orders’ that are long, explanatory and give details on all aspects of the issue.

Garg, who also served on the board of RBI, said in most cases, Sebi hears the concerned party or at least gives them some opportunity to provide explanations, before taking action. If not satisfied, the party can also challenge the Sebi’s decision in SAT. “The appellate authority hears the concerned party and if there are no reasons or bases for passing that order, the order would get simply thrown out,” Garg said.

He believes a similar appellate kind of arrangement is required to challenge the RBI orders, going forward. Like Sebi and IRDAI, whose orders can be challenged in the SAT, the Debt Recovery Tribunals, Income Tax Department and National Company Law Tribunal (NCLT) all have appellate tribunals. Currently, the RBI is the only regulatory institution which doesn’t have an appellate body.

Corporate governance research and advisory firm Stakeholders Empowerment Services’ co-founder and managing director J N Gupta said it is very important for a regulator to pass a speaking order so that any person reading it will know the issue at hand and will understand what went wrong and how it can be corrected. “In the case of RBI, it does not pass speaking orders and that is where the flaw is,” said Gupta, who was earlier the Executive Director of the Sebi.

“Since you have no appeal, these (RBI’s) orders are not challenged on merit. So, with this kind of arrangement in the regulatory system, RBI can easily get away with passing only a cursory or main order without giving reasons and explanation,” Garg said, adding that RBI should change its approach and evolve as a model regulator.

While the FSLRC argued for an appellate tribunal which will hear appeal against the RBI for its regulatory functions, the RBI was against such a proposal.

Interestingly, except for Kotak Mahindra Bank which took the apex bank to the Bombay High Court over promoter shareholding issue, no other lender has challenged RBI, in the recent past. The RBI has a system of the Banking Ombudsman where an aggrieved bank customer can raise disputes or unfair actions and services of a bank.

Some experts feel that RBI orders mention clauses under which the violations have happened and so the orders are very short. “When RBI passes orders for any irregularity at a bank, they usually make references to certain clauses or sub-clauses of the regulation under which the non-compliance has happened. So, there is no need for any further elaboration in the order passed,” said Ashvin Parekh, managing partner, Ashvin Parekh Advisory Services LLP.

Bankers, however, said that a detailed order from the RBI may increase the scope for interpretation, which if not analysed correctly, may shake confidence in the banking system. “I think RBI should not make public all the details in their orders. People are not mature enough to understand them. This might create unnecessary fear in the minds of people and they can lose confidence in the banks. You cannot allow people to take interpretation calls,” said a banker who preferred anonymity.

“Like SAT, there is a need for an appellate authority to challenge RBI orders. Once the orders are appealable, the appellate body will look into the entire merit. If you put a one-line order, you can also get fired,” said a legal expert who is the counsel for several companies.

Sonam Chandwani, Managing Partner, KS Legal and Associates, said, “The RBI issues precise penalty orders, as these are passed following extensive investigations. As SEBI works more like a court, they highlight the findings, the key details of the case, and the rationale behind the decision that was made, which is typically appealed at SAT.”

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