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RBI action against Kotak and other banks should not be a surprise
KV Prasad Jun 13, 2022, 06:35 AM IST (Published)
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Summary
In the case of IIFL Finance or JM Finance, and more recently in the case of Kotak Mahindra Bank, the regulator has detailed the background to the action, explaining why the regulatory action was necessitated.
The series of actions against financial entities by Reserve Bank of India (RBI) has led to a debate on the larger message the regulator wants to send out to the ecosystem, and whether imposing business restrictions is the best way to deal with non-compliance.
“If you see the recent actions against regulated entities, it will become clear what the RBI wants banks and other regulated entities to prioritise and focus on. (RBI) is keen to enforce good risk management and assurance practices, compliance with regulatory guidelines, board effectiveness, fairness to customers, and good governance,” said a person directly familiar with the RBI’s actions, on the condition of anonymity.
Secondly, regulatory or supervisory action taken on entities is “not a moment of surprise for anyone,” said another person familiar with the regulatory functioning.
“When issues are found, RBI engages in bi-lateral discussions for at least a year.. Once inspection findings reveal deficiencies, RBI seeks a response, gives time to rectify, checks to see if compliance is done or not- there is a lot of back and forth and this process takes a year or more so there is adequate time. Many discussions are held and more than adequate time is given to banks or other entities before such action is taken,” said this person.
As to whether placing restrictions was the best re-course to dealing with non-compliance issues, the person quoted earlier explained, that the RBI has various tools at its disposal, from warnings, to fines, to business restrictions, change in management and in the worst case scenario license cancellation in extreme cases, and it choses the appropriate tool after much deliberation.
It is only when warnings, bi-lateral engagements do not work does the RBI act to impose business restrictions, explained one of the people quoted before.
“Business restrictions don’t impact customer service – every single action if you see places embargo on new customer acquisition or new products until they fix their system. Servicing existing clientele is not impacted by supervisory actions, that’s always on RBI’s mind. New business impact will finally impact shareholders similar to a penalty, so no change in impact target. Also this will hurry up the entity to expedite remediation,” said a person closely involved with RBI’s functioning.
On the question of why action is taken against select entities, when in certain cases, other banks or NBFCs may also be at fault or non-compliant at some level as well, one of the persons explained, “while many entites may be doing it, RBI looks at (1) persistent non-compliance as well as (2) the proportionality of the effect of non-compliance on the ecosystem, and acts accordingly. This is to ensure there is demonstrative affect.”
In the past, such regulatory actions would be accompanied by just a line or two on the reason behind the action. However, this has now changed after Reserve Bank took feedback from stakeholders to demanded a more detailed reasoning for their understanding of the regulator’s point of view, explained the people quoted earlier.
In the case of IIFL Finance or JM Finance, and more recently in the case of Kotak Mahindra Bank, the regulator has detailed the background to the action, explaining why the regulatory action was necessitated.
“These detailed press releases are also intended to send a message to others to take notice, and fix their house if it is not in order,” added one of the person quoted earlier.
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