RBI to revamp penalty system, aligning fines with bank size

The Reserve Bank of India (RBI) is taking significant steps to enhance corporate governance among regulated entities, including a revamp of its sanction system. The central bank is considering a new approach that would potentially increase fines based on the size and significance of the entity, as well as the frequency of violations. This move, announced today, is part of a broader initiative to align penalties with the systemic importance of financial institutions and comes after several banks faced fines for regulatory non-compliance.

The RBI's renewed focus on corporate governance was evident earlier in the year during discussions led by Governor Shaktikanta Das with bank boards in May. The talks emphasized the need for improved ethics and supervisory roles within the banking sector. In recent weeks, there have been multiple instances of monetary penalties being imposed on financial institutions for regulatory lapses.

On November 15, Axis Bank (NS: AXBK ) incurred a fine of ₹90.92 lakh due to breaches in Know Your Customer (KYC) Directions and financial service outsourcing norms identified during evaluations in 2022. Similarly, Manappuram Finance (NS: MNFL ) and Anand Rathi Global Finance were also fined for non-compliance with specific directives and KYC discrepancies on November 16. Earlier in November, four cooperative banks and Early Salary Services Private Ltd. were penalized for not adhering to regulatory requirements. Furthermore, earlier this year, the State Bank of India (NS: SBI ) faced a significant penalty amounting to ₹1.30 crore (approx. $155,942) for failing to comply with prescribed norms on loans and group transactions management.

The RBI's proposal includes exploring clawbacks for payouts to executives at government banks and introducing additional capital charge proposals for regulated institutions. These measures aim to hold top executives accountable and ensure that banks operate within the framework of stringent regulatory compliance.

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