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RBI punishments have begun to move from punitive to punishing in nature


The dull world of monetary fines levied by the Reserve Bank of India (RBI) is rarely in the news. However, in May 2021, the RBI levied a punishment of 10 crore on a private bank, which made headlines since it was the biggest ever imposed by India's bank regulator. However, even when adjusted for the currency rate and the size of the banking industry, it is a relatively tiny sum by worldwide standards.


Globally, regulatory fines levied on banks and other financial firms began to rise beginning in 2010. According to a Fenegro study, financial institutions were slapped with fines and penalties totalling $10.4 billion in 2020. In India, the trend toward higher fines may have begun just in 2018. Until 2017, breaches such as failures in regulatory reporting under legislation such as the Foreign Exchange Management Act resulted in fines of less than one lakh rupees. Some banks paid fines of approximately 2 crore in 2019. The RBI revised its circular on monetary penalties in January 2020, giving a clearer structure for the size of fines. Unsurprisingly, fines increased further in 2020, to 3-4 crore, which became even more prevalent in 2021, with 10 crore reaching a new high. If the current trend continues, Indian banks should ready themselves for possibly greater fines for regulatory violations.


Most banks do not feel that their normal business practices may violate client privacy, promote money laundering, create a systemic breakdown, or result in a crisis with significant societal consequences. Operating standards based on consensus have evolved to foster a system-wide view that such dangers are remote. Such standards apply to both internal and external disclosure levels and risk reporting. A single actor has little incentive to invest in processes and controls that will reduce the possibility of such hazards. Furthermore, a bank would claim that its individual contribution to any systemic risk is negligible and that ‘no one else is doing it.' This results in what is known as a "tragedy of the commons," in which society suffers but no one bank can be blamed. However, the systemic risk persists due to factors such as under-reporting of bad debts, lax supervision over credit disbursement (even when norm-compliant), frequent breaches of consumer data, and so on.


The banking sector ends up laying the stage for a financial catastrophe in the absence of well-thought-out, objective and justified regulatory action. The January 2020 circular from the RBI was a promising start. However, awareness and systemic capacities must be developed. An improved capacity to assess societal costs and consequences will be beneficial. The RBI may improve the impartiality and transparency of fine sizing. The central bank might think about providing more specific clarifications on fine-sizing variables, such as a bank's motive behind a lapse, as well as offering comprehensive criteria for qualitative evaluations. These changes should give bank consumers, shareholders, and other stakeholders hope. Large fines, which may function as deterrents against bad banking practices, may have arrived in India.

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