RBI fines 19 Banks – Rs1.95crs

RBI fines 19 Banks – Rs1.95crs

What is common between these 10 banks – Seven Private Sector , 1 State run and 11 Foreign Banks?

Seven private sector banks –  ICICI Bank, HDFC Bank, Axis Bank, Kotak Mahindra Bank, ING Vysya Bank, Development Credit Bank and YES Bank.

1 Public Sector Bank – State Bank of India

11  foreign banks – Citibank, Standard Chartered Bank, Hongkong and Shanghai Banking Corporation (HSBC),  Deutsche Bank, BNP Paribas, Credit Agricole, Royal Bank of Scotland, Bank of America, DBS Bank, JP Morgan Chase Bank, Barclays,

Well, all the above banks are part of the RBI’s Press Release dt.26/04/2011

The Press Release can be accessed @ http://www.rbi.org.in/scripts/BS_PressReleaseDisplay.aspx?prid=24300

The gist of the Press Release is that RBI has decided to impose Penalty on 19 Commercial Banks for Non-compliance of its instructions on Derivatives.

The penalty amounts varies between Rs5lacs to Rs15lacs, a total of Rs1.95crs and have been imposed in exercise of the powers vested with it under the provisions of Section 47A(1)(b) read with Section 46(4)(i) of the Banking Regulation Act, 1949.

The highest penalty of Rs 15 lakh each was imposed on six banks — Axis Bank, Barclays Bank, HDFC Bank, ICICI Bank, Kotak Mahindra Bank Ltd and Yes Bank.

Eight other banks were slapped with penalties of Rs 10 lakh each. These were BNP Paribas, Citibank NA, Credit Agriocole CIB, Development Credit Bank Ltd, ING Vysya Bank, the Royal Bank of Scotland, Standard Chartered Bank and the State Bank of India.

The remaining  five  — DBS Bank, Deutsche Bank AG, Hongkong and Shanghai Banking Corporation Ltd, Bank of America  and JP Morgan Chase Bank NA — were asked to pay a penalty of Rs 5 lakh each.

The basis process to arrive at the penalties were

a)       Issuing of Show Cause Notices to these banks, by RBI.

b)       The Banks responding   written replies and also oral submissions.

c)       On examination of written replies and oral submissions, RBI found that the violations were established and the penalties were thus imposed.

What were the violations?

The penalties have been imposed on these banks for contravention of various instructions issued by the Reserve Bank in respect of derivatives, such as,

a)   failure to carry out due diligence in regard to suitability of products,

b)   selling derivative products to users not having risk management policies

c)   and not verifying the underlying/ adequacy of underlying

d)   and eligible limits under past performance route.

Banks sell derivatives to help company’s hedge risks against fluctuations in foreign exchange value and interest rates, and earn a fee. The RBI is empowered to regulate interest rate derivatives, foreign currency derivatives and credit derivatives.

Well, my interest lies, as to what RBI will do with the Rs1.95crs it collects as penalty from the Banks and will the Banks get Income-Tax relief for the penalties paid by them?

In my view, RBI should channel the Rs1.95crs towards Customer Education Programs.

What do you say folks?


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