RBI To Implement A New Penalty Framework For Banks

The Reserve Bank of India (RBI) is reportedly contemplating a comprehensive review of its penalty system. The proposed changes under consideration involve a potential increase in penalty amounts. This adjustment could be based on factors such as the size of the regulated entities, their systemic importance, and the frequency of repeat offenses.

Clawback of Payouts

• A significant aspect of the review is the exploration of clawback provisions for payouts to CEOs and key management personnel (KMP).
• Clawback provisions are rules in a contract that say when it’s alright to take back money given to an employee and give it back to the employer.
• This measure could notably impact state-run banks, whose compensation packages have been a subject of debate, especially in comparison to those offered by private banks.

Additional Capital Charges

• Speculation surrounds the possibility of imposing additional capital charges on regulated entities.
• This move, if implemented, would add another layer of financial responsibility for these entities, potentially reshaping their risk management practices.

Corporate Governance Emphasis

• The initiative to revamp the penalty system aligns with the RBI’s broader goal of enhancing corporate governance standards within regulated entities.
• The central bank aims to underscore the importance of robust governance structures in maintaining the stability and integrity of the financial system.

RBI’s Focus on Governance

• The apex bank’s commitment to corporate governance was highlighted in a meeting with the boards of state-run and private banks in May.
• RBI Governor Shaktikanta Das discussed various governance issues, ethics, the role of boards, and supervisory expectations. The ongoing review is seen as a continuation of this focus on governance matters.

Recent Penalties Imposed

• On November 16, the RBI imposed a monetary penalty of ₹90.92 lakh on Axis Bank. The penalty was attributed to Axis Bank’s failure to preserve customer identification records and making persistent calls to some customers.
• Similar penalties were imposed on Manappuram Finance and Anand Rathi Global Finance on the same day, indicating the RBI’s commitment to enforcing regulatory compliance across different financial entities.

Earlier Instances

• Prior to these recent penalties, on November 6, the RBI had imposed monetary penalties on four cooperative banks and a non-banking financial company (NBFC) for deficiencies in regulatory compliance.
• Even large public sector lenders, such as the State Bank of India (SBI), Indian Bank, and Punjab and Sindh Bank, have not been immune. Penalties were levied on SBI earlier in the year for non-compliance with RBI’s directives on ‘Loans and Advances – Statutory and Other Restrictions’ and ‘Guidelines on Management of Intra-Group Transactions and Exposures.’

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