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Tuesday, 21 May 2013 00:00
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Financial transactions have to be linked to unique IDs


Though much of the media attention following the Cobrapost sting operations focused on the role of a few private banks, as RBI’s report on it points out, the practice of what are called structured solutions—splitting deposits across various branches of the same bank to avoid the taxman’s attention—may be endemic. There are obviously different methods that have been used across different banks—accepting large cash deposits without asking for valid PAN proof and even using the same PAN number across different accounts are some of them. RBI has also identified another major lacunae involving cooperative banks where, as it happens, adherence to know-your-customer norms is more relaxed than it is in commercial banks. According to RBI, cooperative banks would open current accounts in commercial banks which would allow their customers to present at-par cheques payable at the commercial banks—large sums of this money, eventually, wound up getting invested in mutual funds and insurance. In other words, as the report puts it, “these banks may be an easier conduit for facilitating substantial amounts of cash in entering the banking system”.

Individual banks clearly need to be penalised for their poor surveillance. But with just around 1% of the system alerts that got thrown up in the sample branches RBI inspected getting reported to the tax authorities, this shows up yawning gaps in RBI’s own inspection system. More than that, there are systemic solutions that are called for. Banks, for instance, cannot be held responsible for verifying if PAN cards given to them are genuine; similarly, there are no RBI guidelines that prevent commercial banks from offering facilities to cooperative banks. In transactions like insurance, the regulator has no limits on the cash that can be paid for investment in different policies. In other words, RBI needs to sit down with various regulators in the Financial Stability and Development Council and come up with common guidelines and even incentive structures that prevent the regulatory arbitrage that this encourages today. Linking PAN cards with unique IDs of the Aadhaar kind, perhaps even using some part of the de-duplicating backend that UIDAI has created, is probably an important regulation that needs to be put in place if structured transactions are to be caught. It is just as well that RBI has commissioned a thematic study of 30 banks since, as the report says, similar transactions could be taking place across other banks as well—banning of sale of gold coins and other such transactions, as is being contemplated, are at best short-run solutions. At some point, RBI will have to figure out how it plans to tackle the issue of implementing KYC and other rules in cooperative banks since, going by its report, this is the single-largest systemic issue.


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