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When scores of companies complained to the Reserve Bank of India (RBI) that they lost hundreds of crores of rupees in currency derivatives manipulatively sold by banks, the central bank slapped the lenders with penalties in the range of Rs 5-15 lakh. That was 2011.

Come 2024, when the regulator found IIFL Finance Ltd in violation of its guidelines on gold loans, it ordered the company to shutter the business, landing a debilitating blow.

The shift in the magnitude of the penalty between then and now not only captures how RBI has moved from kid gloves to boxing gloves in treating regulatory breaches, but also what is in store for potential violators.

“RBI’s penalties used to be in lakhs or a few crores of rupees,” said R Gandhi, former deputy governor of RBI. “There was criticism that it was not pinching enough to make them take corrective actions. When transgressions are systemic than transactional, it’s not a few transactions that need correction rather a procedure itself. Now the principle seems to be substantive penalties which will bring desired behavioral change. The message is: until you correct, you can’t grow.”

RBI under governor Shaktikanta Das has acquired a consultative approach to monetary policy as well as forming regulations in contrast to what it was under his predecessor Urjit Patel. But when it comes to treating the violators, it is punching with an iron fist.


The past few months have seen RBI penalising banks and non-banking finance companies for violations of its rules. There is a paradigm shift in its approach when it comes to the impact it wants to create.

RBI ordered Paytm Payments Bank to shut down its business for not complying with rules regarding know your customer (KYC) and prevention of money laundering. The move eroded its market value by nearly half in a matter of days.

In the case of JM Financial Products, RBI ordered it to ‘cease and desist’ from funding against shares and debentures, including loans to investors to subscribe to initial public offerings, a key business for the company.

For IIFL Finance, the regulator banned the company from doing any gold loans business for not sticking to its guidelines. The fallout: it had to seek emergency liquidity assurance from billionaire Prem Watsa.

“Regulatory actions like stopping a business has much more impact on the regulated entity than mere levying a monetary penalty of some amount,” said Srinivasan Varadarajan, non-executive chairman, Union Bank of India. “The remedial actions by the entity will also be more robust as all stakeholders will take it more seriously. Market credibility and price action will also be impacted more adversely.’’

The business blunting action of the regulator is not sudden, but has been growing over the past few years when it shifted to a different approach after being criticised for being soft on some occasions.

In December 2020, it ordered HDFC Bank to stop its digital initiatives and issuing of credit cards for outages in internet and mobile banking, a move which many considered disproportionate to the faults. Last year, state-run Bank of Baroda was banned from onboarding customers on its app for wrongdoings.

When Mastercard Inc did not comply with its guidelines on data protection, it banned the company from issuing cards in the country, its mainstay.

“Regulated entities are expected to comply… It is not just with regard to cards — credit or debit cards — it is with regard to other regulatory guidelines also,” governor Shaktikanta Das said on August 6, 2021 when asked about the actions against HDFC Bank and Mastercard. “It is our responsibility to ensure compliance. So, all of our actions are basically an outcome of our keenness to ensure that the regulatory guidelines are complied (with).”


Historically, the RBI approached penalising the regulated entities based on their overall compliance and not specific violations and the monetary penalties prescribed by laws were also meagre which did not have much impact on the violators even when penalised. It had its supervision, inspection and the enforcement functions all rolled into one. Those who identified the violations were themselves in charge of penalising as well. That led to a situation where one or two breaches were seen kindly since the entity would have complied in most other aspects.

“It is an evolution of supervision, and enforcement,” said Gandhi. “Earlier, there was a view that every violation need not be punished. In some cases, moral suasion was enough, or a wrap in the knuckles.”

Furthermore, the central bank was also under pressure from external forces to change its way and keep pace with global developments post the Lehman Brothers blow up when banks were fined billions of dollars for violations and India was still stuck in its socialist era of penalties.

“The level of penalties should be an effective deterrent to violations and signal to all other regulated entities that the potential of gain from a violation will be outweighed by the penalty,’’ said Justice Srikrishna Commission which was tasked with rewriting financial sector regulations. “To act as a deterrence, the penalty should be a multiple of the illegitimate gain from the violation. The amount of penalty should also be dependent on whether the action was deliberately done or due to reckless behaviour or due to negligence.’’

This led to the birth of a separate enforcement department in the RBI in 2017 that penalised independent of those who did the supervision and inspection.


As the excesses of credit binge post the great financial crisis (GFC) began playing out with defaults on the rise, the financial sector came under severe stress as capital position of many lenders was wiped out. Infrastructure Leasing & Financial Services (IL&FS) went belly up in 2018 as the biggest bankruptcy in Indian history. Yes Bank had to be rescued by cobbling up an alliance of banks that invested thousands of crores in equity. Dewan Housing Finance Ltd, and PMC Bank crumbled due to corruption and slack regulatory monitoring.

“The adverse developments in a few regulated entities in the past exposed some fault lines, primarily in terms of inadequate governance, inappropriate business model and weak internal assurance functions,” said the then deputy governor MK Jain. “RBI, therefore, undertook a review of its approach towards supervision as well as the existing practices to identify the root causes for these gaps.”

That hastened the way the regulator supervised, inspected and punished violators. To ensure a unified and systemic approach, a unified Department of Supervision was created, bringing all banks, NBFCs and co-operative banks under one umbrella. That reduced the supervisory arbitrage and information asymmetries and addressed the complexities from inter-connectedness.

In the last few years, it has deployed tools such as stress testing, vulnerability assessment, micro data analytics, artificial intelligence and machine learning to enhance early warning system.

These tools and the heavy punishments are part of the design of RBI that wants to avoid future blow ups and not squander the clean up it has achieved with lakhs of crores of capital investments.

“The time to fix the roof is while the sun is shining,” deputy governor Rajeshwar Rao has said. “The banking sector in India at this juncture is sound, resilient, and financially healthy. So, the time is perhaps right to improve the plumbing by addressing the gaps.’’

Governor Das has a mission — ‘future-proofing’ the Indian financial system and these penalties are key milestones in that journey.

  • Published On Mar 15, 2024 at 08:27 AM IST

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