RBI actions not fine PDF Print E-mail
Wednesday, 12 June 2013 01:18
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Just a slap on the wrist for KYC violations a bad idea


Shareholders of various banks fined between R1 crore and R5 crore for flouting KYC norms to help customers avoid reporting transactions to the taxman must be breathing a sigh of relief since, for all practical purposes, the fines add up to little more than a slap on the wrist. Indeed, RBI’s report into the sting operation on the banks cited transactions that were split up into multiple ones to circumvent the R50,000-floor for reporting to the taxman, of the same PAN numbers being used for different people’s transactions, among others. The RBI report also talked of the float these banks got while allowing large cash transactions with cooperative banks. Possibly one reason for the lenience could be RBI’s systemic report into 30 banks found the practice was widespread. Also, with just 1% of the system alerts thrown up in the sample banks RBI inspected getting reported to the tax authorities, there are yawning gaps in RBI’s inspection system. As for the cooperative banks link that RBI found was a systemic risk—“these banks may be an easier conduit for facilitating substantial amounts of cash in entering the banking system”—it remains true there is nothing that specifically bans this, though it is surprising that the private banks allowed such large sums of cash to be deposited without any alerts getting triggered.

With the fines now out of the way, hopefully RBI will put in place a more stringent system to ensure such transactions don’t continue to take place. Physical ledgers to report cash, for instance, tend to allow bank staffers some discretion whereas the idea should be that all transactions get captured by a computer and are reported automatically. And while it is up to the managements of individual banks to ensure transactions don’t get split up to avoid reporting, RBI needs to persuade other regulators like the insurance one to not allow unlimited amounts of cash to be paid while purchasing policies—linking all transactions to Aadhaar’s Unique ID should be another priority. The biggest issue that RBI has not yet come up with a solution to, of course, is the link between cooperative banks and commercial banks—disallowing the ‘at par’ facility that allows commercial banks to be used by customers of cooperative banks is an obvious way to address the problem. RBI knows best how quickly such a nexus could turn into a systemic risk.

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