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Rajesh Goyal 


I will like to congratulate Mr Subbarao, RBI Governor, who has publicly admitted that penalties prescribed in Indian Law  for violating banking norms are "peanuts",   I have written on many earlier occasions about the petty penalties for violation of the norms.   In 2011, in an article relating to Rs 32,000 crore scam in derivatives, I have written the following :-


"RBI, the only regulator of our Banking system,  had miserably failed to take timely steps so as stop the Banks openly flouting these rules.   In a reply to RTI query,  RBI appears to have taken a stand that it does not vet all the forex derivatives products sold by banks in the country.   However, under pressure from all sides, RBI in April 2011  fined 19 commercial banks, including the country’s largest, State Bank of India, for mis-selling derivatives products to clients  RBI has imposed a small fine of Rs 5-15 lakh on these banks for not complying with its instructions on derivative products.  Who had to pay this fine? Poor shareholders of these banks  had to pay these fines as orders were not to recover the same from salaries of CMDs / EDs etc.  Is a penalty of few lacs on a Bank is sufficient when losses to the economy are in thousands of crores of rupees?  Has any other action like suspension or dismissal of any Head of the Bank or other officials has taken place?  Why RBI had not forced some Heads to roll down for such a big scam.  In 2G scam, even ministers have been jailed when the matter was taken up seriously by honourable SC"


Had RBI listened at that stage and taken strong action against top bosses, today Banks would not have dared to flout the banking norms again and again.


Now, after almost two years of my writing the above views at ABS website, RBI Governor has realised and has been humble to admit that  penalties slapped by RBI are indeed 'peanuts'.   However, he has conveniently shifted  the onus of responsibility on Parliament.   RBI Governor dismissed the perception that the central bank is going soft on errant banks which have been exposed recently by Cobrapost sting operation.   He has tried to wash his hands by saying that he leaves it to Parliament the issue of amending laws to provide heavier penalty on banks indulging in such acts.   Why did he not send a strong recommendations to GoI to enact laws which are in line with global trends?  On number of matters, I am a fan of RBI as it has a global view, but in case of bringing transparency in these matters, RBI has never tried to take the things head on with GoI.   Thus, there is a need for immediate recommendation from RBI to GoI that such penalities should be in line with global trends and not "peanuts" as admitted by RBI governor himself.




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On the question of action that is being contemplated by RBI on banks which have flouted the norms and are alleged to have indulged in money laundering, RBI Governor is reported to have said 'I cannot tell you because action on this has to be taken at lower level at the RBI'.     Further to the question of the amount of penalty which could be imposed on erring banks, he said the RBI can levy a maximum of Rs 1 crore. He candidly admitted that  “Barclays was penalised $450 million  (at current rate it is about Rs 2,500 crores) and HSBC was some amount like that. So we are talking about peanuts here.”


It appears RBI Governor has chosen an easy way to bring himself out of the mess exposed by Cobrapost.    First of all, under his very nose,  Mr K C Chakraborty openly dared to give a clean cheat to three private sector banks exposed in the first leg of the expose.     I have yet to come across any news wherein he snubbed his Deputy for such bizarre statement to the press.     Now RBI Governor says action will be taken at a lower level ?  Does he mean that it will be at DG level or even lower than DG level.   If it is so, then we know the fate of the action., which will tantamount to cover up the misdeeds rather than cleaning the system.    I wonder why the action against banks has been delegated at a lower level?  Is it considered to be a small issue by RBI?   I feel such actions must be taken with the approval of RBI Governor and not by a low ranked officers in RBI, as it directly affects India as a nation.


Based on the media reports,  we can now fairly predict that some banks may be slapped with maximum penalty upto Rs 1 crore only.  Such penalties too will be paid only and only from the shareholder's pocket as such penalties will be out of the profit of the bank and not from the pockets of CMDs / EDs who are responsible for flouting of banking norms.   For small mistakes, the lower ranked officers are penalised by stopping their increment, reversion to lower posts or even dismissal.    I can guarantee on receipt of orders for such penalties, most of the CMDs / EDs will be grinning as they are neither going to lose any money from their pocket or losing their shirt.  It is an open secret in the banking circles that lower ranked officers are threatened and cajoled by top bosses to violate KYC and other norms, so as to meet the targets.    People who try to resist are made fun of in the open meetings and are pulled on for no fault of theirs.  


I hope, RBI Governor, will explore the possibilities of fixing responsibilities even beyond the monetary penalties.   In case, RBI Governor believes that his hands are tied owing to low monetary penalties in law, he needs to explore the possibilities of strict action against some of the defaulting banks by ordering dismissal of some of the CMDs / EDs so that a strong message is sent in the banking industry that such non sense will not be tolerated in future.



I am of the view that RBI has sufficient powers to take action against top brass, in case of such violations so as to send a strong message among them.   If RBI fails this time, all the top brass of flouting banks,  will soon show their grin in public as our politicians do after every scam.



I would also like to raise one more question i.e. regarding the internal enquiries set up by banks which have mostly given clean chit to their respective banks.   These were nothing but sham to cover up the misdeeds of top brass.     In case RBI finds violations, then why RBI should not also hold responsible those who have connived with top brass in giving clean chit in their internal enquiry.   In case they are also taken to task, in future, even internal enquiries will be more prudent and fair.



I hope RBI Governor will listen to my plea,  and ensure that maximum penalty as per law is imposed and at least some heads roll out (not at lower level but at the top level) so that the process of cleaning up the banking sector starts in the right earnest.   I hope he will leave his imprint before he retires.





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