Penalties rise as RBI turns up scrutiny of banks, NBFCs

The reasons included non-compliance with guidelines on lending, delay in paying interest to senior citizens, and not specifying the date of interest rate reset on some loans.

The penalty data, available till 24 November, does not include action against cooperative and regional rural banks.

Some of the prominent lenders penalized this year include ICICI Bank, State Bank of India (SBI), Paytm Payments Bank, Bajaj Finance, Citibank and Mahindra & Mahindra Financial Services.

The regulator itself publishes consolidated data on penalties, but on a fiscal year basis. In 2021-22, it penalized banks and non-banks in 44 instances, compared to just 18 in the previous fiscal, showed data available in RBI’s report titled Trend and Progress of Banking in India 2021-22.

Experts said it is reassuring that the regulator is keeping a close eye, and neither the lenders nor the regulator wants a return of the asset quality stress seen between 2013 and 2018.

“This is a credit positive as it is important for individual lending entities and the financial system to be aware that the regulator is watching and is willing to take action," said Saswata Guha, senior director, financial institutions (banks), Fitch Ratings, adding that RBI’s recent actions on unsecured loans is an example of increased regulatory oversight.

On 16 November, RBI increased risk weights on consumption loans, credit card exposures and loans to non-bank financiers by 25 percentage points each to rein in unfettered growth of unsecured loans. Separately, governor Shaktikanta Das said last week that RBI has significantly strengthened its regulation and supervision of banks, NBFCs and other regulated entities in recent years.

Das said RBI is monitoring entities it regulates through various on-site and off-site tools, stress testing, vulnerability assessments, thematic studies, and data dump analysis, among others. These, Das said, are part of its “proactive and forward-looking supervisory approach".

The penalties levied range from a few lakh rupees to crores. In October, RBI imposed a fine of ₹12.19 crore, among highest this year, on private-sector lender ICICI Bank. Reason: It found that the lender had sanctioned or committed loans to companies where two of its directors were also directors, marketed and engaged in the sale of a non-financial product, and failed to report frauds to RBI within the prescribed timelines.

Earlier, this April, RBI had imposed a fine of ₹6.77 crore on Mahindra & Mahindra Financial Services after it found that the NBFC had failed to comply with guidelines on fair practices related to disclosure of annualized rate of interest charged to borrowers during the sanction, and failed to give notice of change in terms and conditions when it charged higher rate of interest.

Legal experts said RBI retains the discretion to levy penalties depending on the gravity of the non-compliance, with powers available under the RBI Act of 1934.

“While it would greatly help to have a compendium of penalties that may be levied by the RBI, this may not be practically feasible given the number of regulations and compliances that are outlined as being applicable to NBFCs and banks," said Pritha Jha, partner, Pioneer Legal, a law firm.

It is, therefore, usual that while ordering a penalty, RBI specifies within the order the directions, regulations and Act under which the penalty is being levied, added Jha.

At Fitch, Guha said, regulatory framework is a key input into the assessment of banks’ operating environment score, and increased regulatory oversight was one of the considerations when it revised ratings scores to ‘bb+’ from ‘bb’.