Context:
RBI imposed penalties in 281 instances totaling ₹86.1 crore in FY24, up from ₹40.4 crore (211 cases) in FY23.
- State-run and private banks saw increased penal action; foreign banks and small finance banks saw a decline.
- Highest historical penalty: ₹58.9 crore on ICICI Bank (March 2018) for HTM securities violations.
RBI’s Scale-Based Enforcement Framework
- A new enforcement strategy aligns penalties with a regulated entity’s (RE’s) size, complexity, and risk.
- This move followed high-level meetings by RBI Governor Shaktikanta Das with public and private bank boards in May 2023.
- Clawback provisions from RBI’s 2019 circular (effective FY20) are being tested but face long litigation timelines (e.g., Yes Bank case).
Legal Framework
- RBI is empowered under Sections 46 and 47A of the Banking Regulation Act, 1949, but has yet to act against individuals.
- Suggestion: Adopt a UK-style Senior Managers & Certification Regime (SMCR) for personal liability.
Fraud Detection: Lag Still a Major Problem
- FY24 frauds involved ₹21,367 crore in 18,461 cases vs ₹2,623 crore (14,480 cases) in FY23.
Technology Gaps in Fraud Detection
- Most systems detect known fraud patterns, causing delays in identifying new fraud techniques.
- Jaya Vaidhyanathan, CEO, BCT Digital: Calls for real-time surveillance, adaptive AI/ML systems to shift from detection to fraud prevention.
Need for Sector-Wide Governance Reform
- Experts note India’s penalties are modest compared to global regulators.
- RBI’s governance reforms need to expand beyond banks to all regulated entities (REs), including NBFCs, HFCs, CICs, etc.
- Current penalties may be seen as just another operating expense unless backed by stronger governance-linked pay structures and disclosure norms.
