In a significant move to curb potential fraud within the financial sector, the Reserve Bank of India took action against Paytm, signaling a broader crackdown. Last month, RBI suspended most activities of Paytm’s banking affiliate. The suspension was a result of alleged lapses in customer verification, with Paytm accused of using a single identity document to open thousands of accounts.
According to experts, this crackdown reflects growing vigilance of authorities, as regulatory concerns intensify amid a rush by lenders to open more accounts and attract deposits to meet the surging demand for loans in India’s rapidly growing economy. The RBI is increasingly focusing on ensuring proper customer verification, with frequent fines imposed on banks and fintech firms for lapses in this regard.
Fines on banks
The RBI, which can impose fines of up to Rs 5 crore for violations, has intensified its penalties in the current fiscal year. Fines imposed have surged, indicating a stricter stance on Know Your Customer (KYC) compliance. The central bank’s recent actions include ordering Visa to immediately stop a payments service and the suspension of Paytm Payments Bank’s acceptance of fresh credits.
In 2023, the RBIlevied a combined monetary penalty of Rs 10.34 crore on three banks, with Citibank NA facing Rs 5 crore, Bank of Baroda Rs 4.34 crore, and Indian Overseas Bank Rs 1 crore. This penalty stems from the banks’ failure to comply with certain directives issued by the RBI.
In November last year, the RBI imposed a penalty of ₹90.92 lakh on Axis Bank Ltd., as a result of serious lapses. The penalty, outlined in an order dated November 2, 2023, was a consequence of Axis Bank’s non-compliance with specific guidelines mandated by the RBI.
The regulatory directives that Axis Bank failed to adhere to include the Reserve Bank of India’s (Know Your Customer (KYC)) Directions, 2016, as well as guidelines related to Loans and Advances – Statutory and Other Restrictions, Managing Risks and Code of Conduct in Outsourcing of Financial Services by banks, and the Code of Conduct for Opening and Operating Current Accounts.
The RBI highlighted that the bank also neglected to ensure appropriate behaviour from recovery agents when communicating with delinquent borrowers. Moreover, the bank failed to ensure that tape recordings of the text or content of calls made by agents to certain customers were maintained.
In 2019, the RBIlevied a monetary penalty of Rs 10 million on HDFC Bank. The penalty was a consequence of the bank’s non-compliance with RBI’s directives concerning ‘Know Your Customer (KYC/ Anti-Money Laundering (AML) norms’ and the reporting of frauds. This penalty was imposed utilising the regulatory powers vested in the RBI under the provisions of Section 47A(1)(c) read with Section 46(4)(i) of the Banking Regulation Act, 1949. The RBI’s decision took into account the bank’s failure to adhere to the aforementioned directives issued by the regulatory authority.
Lapses continue
While the RBI has been emphasising the need to strengthen risk management in the financial sector, cases of customer verification lapses continue to be a major concern. Despite increased spending on technology by banks to detect potential money laundering and prevent fraud, reported fraud cases in India have risen significantly. The number of reported frauds of over Rs 100,000 increased by 68 percent from April to September last year, according to an RBI report.
The case of Paytm, a once high-flying fintech star, has drawn significant attention. Paytm faced a severe setback when the RBI barred its banking affiliate from accepting fresh credits in customer accounts or mobile wallets. The initial February 29 deadline was later extended to March 15, and Paytm is currently in talks with other banks to address outstanding merchant payments.
This regulatory crackdown emphasizes the challenges of compliance and accountability in the increasingly interconnected financial system, with numerous links among banks, fintechs, and other entities. The RBI’s stern actions underscore the importance of adherence to rules and regulations across the financial sector.
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