RBI imposed penalty on HDFC Bank and Axis Bank, Big lapses found in Banks

The Reserve Bank of India (RBI) recently imposed monetary penalties on HDFC Bank and Axis Bank for not following certain regulatory guidelines. Here’s a detailed look at the reasons behind these penalties and what it means for the banks.

HDFC Bank Penalized ₹1 Crore for Non-Compliance

On September 3, 2024, the RBI fined HDFC Bank ₹1 crore for failing to comply with specific RBI guidelines related to interest rates on deposits, the conduct of recovery agents, customer service, and risk management in outsourcing financial services.

Why was HDFC Bank fined?

1. Gifts to Depositors: HDFC Bank gave gifts exceeding ₹250 in value (such as paying the first-year premium for complimentary life insurance) to depositors when accepting certain deposits. This exceeded the permissible limit set by RBI.
2. Opening Ineligible Accounts: The bank opened savings accounts for entities that were not eligible.
3. Improper Contact Timing: The bank’s recovery agents contacted customers outside of allowed hours, specifically before 7 am and after 7 pm.

These violations came to light during the Statutory Inspection for Supervisory Evaluation (ISE 2022) conducted by the RBI, which reviewed the bank’s financial position as of March 31, 2022. Following these findings, the RBI issued a notice to HDFC Bank, asking why a penalty should not be imposed. After considering the bank’s responses, RBI decided to proceed with the penalty.

What does this mean?

The RBI clarified that this penalty is based on deficiencies in regulatory compliance and does not affect any specific transactions or agreements between the bank and its customers. This action does not prevent further actions that the RBI may take against HDFC Bank.

Axis Bank Penalized ₹1.91 Crore for Multiple Violations

Axis Bank faced a higher penalty of ₹1.91 crore for contravening the Banking Regulation Act, 1949, and failing to comply with RBI’s directions on deposit interest rates, KYC norms, and collateral-free agricultural loans.

Why was Axis Bank fined?

1. Ineligible Accounts: The bank opened savings accounts for entities that were not eligible.
2. Duplicate Customer Codes: Axis Bank issued multiple customer identification codes to some customers instead of a unique code for each individual, violating RBI’s KYC guidelines.
3. Collateral Security for Agricultural Loans: The bank took collateral for agricultural loans up to ₹1.60 lakh, which goes against RBI’s directive of collateral-free loans for amounts up to this limit.
4. Unauthorized Business Activities: A subsidiary of Axis Bank was found to be engaged in technology services, which is not allowed for banks under Section 6 of the Banking Regulation Act.

The issues were discovered during the Statutory Inspection for Supervisory Evaluation (ISE 2023), which reviewed the bank’s financial status as of March 31, 2023. After considering the bank’s response to the show-cause notice, the RBI determined that the violations warranted a penalty.

What does this mean?

Just like in HDFC Bank’s case, the RBI stated that the penalty is strictly for regulatory non-compliance and does not affect the validity of transactions or agreements between Axis Bank and its customers. Other actions may still be taken by RBI if necessary.

Conclusion

These fines highlight the importance of banks adhering to regulatory guidelines to protect customer interests and maintain the integrity of the banking system. Both HDFC Bank and Axis Bank have been penalized for lapses in compliance, and it serves as a reminder to all banks to stay vigilant about following RBI regulations to avoid similar actions in the future.