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Why RBI imposed Penalty on Punjab National Bank? Understand in simple language


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The Reserve Bank of India (RBI) has imposed a monetary penalty of Rs 1.32 crore on Punjab National Bank for rule violations. The penalty was imposed because the bank sanctioned working capital demand loans to two State Government-owned Corporations against amounts receivable from the Government by way of subsidies, refunds, and reimbursements. Let’s understand what this means.

The penalty was imposed on the bank for making a risky loan. Here’s a breakdown:

  • Working capital demand loan: This is a short-term loan meant to cover a company’s day-to-day expenses.
  • Sanctioned to State Government-owned Corporations: The bank gave the loan to two companies controlled by the state government.
  • Against amounts receivable from the Government: The bank based the loan on the expectation that the companies would receive money from the government (subsidies, refunds, etc.).

The problem is that the bank gave money based on a promise and not on the companies’ own financial strength. If the government delays or denies the payments, the companies might struggle to repay the loan, putting the bank at risk. The bank lent money to companies assuming the government would pay them back soon. This is risky because it relies on the government’s actions, not the companies’ ability to repay.

Additionally, the bank failed to preserve the records pertaining to the identification of customers and their addresses obtained during the course of business relationship in certain accounts. The central bank conducted a Statutory Inspection for Supervisory Evaluation (ISE 2022) of Punjab National Bank’s financial position as of March 31, 2022. Based on supervisory findings of non-compliance with RBI directions and related correspondence, a notice was issued to the bank advising it to show cause as to why a penalty should not be imposed.