RBI blasts banks on poor compliance, blames it for frauds

Reserve Bank deputy governor MK Jain Tuesday slammed banks for poor compliance with regulations, and pointed out that high value frauds and fines are a result of their lackadaisical attitude on this. Jain said in some cases, the lack of compliance has been "recurring", wherein banks have also ignored RBI's instructions to commit the same mistakes time and again. "Despite the benefits offered for good compliance culture and the cost of poor conduct, the compliance culture at banks is far from satisfactory," Jain, the commercial-banker-turned-central-banker, said speaking at the annual industry conference Fibac.

"During the process of supervisions, the Reserve Bank has observed various lacunae in the compliance culture. Some weaknesses and irregularities observed have been recurring in spite of the commitments to the Reserve Bank," he added.

Jain said he expects banks to make "serious efforts" on the compliance side, and look at the aspect beyond a regulatory mandate. "It won't be an exaggeration to say that some big losses suffered by banks on account of frauds could have been avoided if they had good compliance culture."

He pointed out that between January and July, RBI has marked out 70 instances where banks have been cumulatively fined Rs 122.9 crore, with a majority of it being levied for lack of compliance.

Jain said compliance should be a shared responsibility and not just limited to the top management. Banks have board-adopted policies on corporate governance, but the same should not be looked as a compliance function alone, he said, asking for the effective implementation of the same.

Listing out the benefits of good compliance, he said it is imperative for banks to develop a "culture of compliance" and exhorted them to "eschew" the tendency to look at this aspect as a cost and warned that there can be severe costs including reputational loss and also fines which will have to be incurred by the lenders for a lack of compliance. Jain said the focus on compliance increased subsequent to the financial crisis, especially in areas like know-your-customer and anti-money laundering.

The comments from the deputy governor in charge of banking supervision come months after recent episodes including the unprecedented move by the regulator to cut short the tenure of private sector lender Yes Bank's promoter-chief executive Rana Kapoor after finding out non-compliance on a slew of regulations including governance, loan approvals, compensation policies etc.