Banks Face Systemic Risk, Says RBI Governor

Cooperative-commercial link could fuel systemic risk: RBI--Financial express---IRA DUGAL: MUMBAI, MAY 21 2013, 01:12 IST

After HDFC Bank, ICICI & Axis, central bank casts net wider to include 30 banks

The Reserve Bank of India (RBI) has stumbled upon a possible nexus between cooperative and commercial banks that, in its opinion, could be allowing large amounts of unaccounted funds to be channelled into banks.

The RBI has extended its initial probe into three private sector banks to 30 banks — the thematic study on these banks is yet to be made public. Commercial banks, RBI’s report says, allowed clients of cooperative banks to issue at par cheques on them for third-party payments and remittances. Large parts of this money may have found its way into mutual funds and insurance schemes.

The central bank may disallow cheques of commercial banks to be used by a third party, as a demand draft or an at par cheque. The RBI plans to re-visit allowing cooperative banks to draw at par cheques on commercial banks for third-party payments and remittances, since it believes this is necessary to prevent systemic risks to the banking system. The RBI has found instances of DD payments being stopped, although this is not permitted; the central bank feels that DDs may have been obtained by depositing cash and the cancelled DDs are repaid by a pay order, a process allowing unaccounted money to become legitimate. Indeed, concerns on the “inter-connectedness” in the system, the RBI says warrants a relook at the ‘fit and proper’ criteria of existing banks.

In a report that captures how a few banks have been flouting KYC and other norms relating to customer identification, thereby allowing customers to transact in cash, the RBI highlights the inadequacies in the system needed to flag large cash transactions or suspicious transactions noting that less than 1% of these were reported to the Financial Intelligence Unit (FIU) over the past three years. “This could be mainly attributed to the negligible number of employees deployed by each of these banks for monitoring and closure of alerts,” the central bank notes. The report follows an investigation by the RBI into allegations of money laundering in the banking system by the news website Cobrapost.

The probe revealed that banks were accepting cash deposits above R50,000 without proper PAN card details and also that transactions were being split to keep the amount below R50,000 so that customers did not need to submit a PAN card. The report notes that “there was predominance of high value of cash transactions without PAN. Moreover, in many cases where PAN was provided, it was dummy PAN.”

The most serious concerns appear to be centred around the “huge amounts of cash” being funnelled into the banking system through cooperative banks. The RBI feels banks are drawn to this kind of business due to the float funds and fixed deposits they may attract from cooperative banks. The report finds that Axis Bank had a float of R863 crore or 3.2% of daily current account balances while HDFC Bank had a float of R473 crore or 1.15% of the average daily current account balances.

The RBI may also clamp down on banks selling third-party products including gold and insurance products, since it has stumbled upon several malpractices. At ICICI Bank, for instance, it was found that cash deposits of R1 -10 lakh were being accepted for investment in insurance products. At HDFC Bank, it was found that KYC norms were not being followed for walk-in customers to whom it sold insurance products. ICICI Bank did not respond to an email query sent by FE.

The RBI has also expressed its discomfort with what it terms “perverse incentive structures” which lead to transactions being completed without banks following the rules.

At both HDFC Bank and at ICICI Bank, it was found that incentives over and above the stated commission were being offered by the group's own insurance companies – HDFC Ergo & HDFC Standard Life and ICICI Prudential respectively.

This includes foreign trips being offered to sales staff. While banking sources say these trips are often for training purposes, the regulator has nevertheless raised the question whether an “arm's length” relationship is being maintained by between group entities.

As reported by FE earlier, banks are now going slow on sale of gold as a product after the RBI found the top three private banks flouting rules set by the RBI. At ICICI Bank, 13 cases were found where transactions ranging from Rs 1 lakh to Rs 10 lakh from a single customer were being split to below Rs 50,000 to avoid detection. At HDFC Bank, 300 cash transactions took place in 2012-13 where more than Rs 50,000 was accepted in cash to buy gold. At Axis Bank, 208 instances were found where cash of more than Rs 50,000 was accepted for purchase of gold without even PAN identification. Axis Bank did not respond to an email query sent by FE.

The report also finds huge cash deposits in NRO accounts at ICICI Bank which were not backed by evidence detailing the source of funds. In 46 cases, the amounts exceeded Rs 10 lakh and in 53 cases, the amounts ranged between Rs 1 lakh and Rs 10 lakh. These cash deposits were made by third parties from different locations without disclosing names and addresses. ICICI Bank did not respond to a query sent by FE.

While the report finds many instances of wrongdoing in each of India's top three private banks, it also seeks a clarification from HDFC Bank linked to the current scrutiny as also last Annual Financial Inspection. The report notes that “In the case of HDFC Bank, last AFI and the current scrutiny have revealed a number of irregularities and violations of RBI regulations and KYC/AML guidelines.”

The RBI has initiated talks with the management to fix a time frame of improvement of procedures following which the central bank says it may consider action. Responding to the comments, Aditya Puri MD and CEO, HDFC Bank said: “I don't know the authenticity of the report you are talking about. We are in correspondence with the RBI and providing appropriate documents. We will update you on the final results.” Puri added: “I categorically state that we have excellent relations with the RBI and you can confirm that with the regulator.”

CASH & CARRY

* Co-operative banks with weak KYC norms allowed to operate via commercial banks

* Meanwhile, commercial banks benefitted from

the float it gave them

* Commercial banks accepting large cash deposits, without PAN nos; one PAN used across multiple accounts

* Transactions split across branches to avoid the

taxman’s glare

Focus on ‘fit & proper’ criteria for all bank licences

At a time when the RBI is preparing to licence new private sector banks, the issue of inter-connectedness among group entities is back on the radar. As part of its recent inquiry into allegations made by news website Cobrapost, the regulator has found linkages between the banking, insurance and mutual fund arms of groups like ICICI Bank, HDFC Bank and Axis Bank that did not pass the ‘arm’s length’ test applied by the regulator. In light of these findings, the RBI notes that “all banking licences need to be reviewed from the ‘fit and proper’ criteria which involves assessment of the promoters, management, CEOs, etc, even for the existing banks.” It adds, “We need to revisit these issues afresh in the background of certain practices that have come to light.”

http://www.financialexpress.com/news/cooperativecommercial-link-could-fuel-systemic-risk-rbi/1118419/0

Chidambaram to address IBA annual general meeting-Business Line 22nd May 2013

MUMBAI, MAY 21:  

Finance Minister P. Chidambaram will address the 66th annual general meeting of the Indian Banks’ Association (IBA) on June 6.

In his address, the Minister is expected to touch upon issues such as the violation of Know Your Customer norms by banks, and the importance of ethics and sound corporate governance practices in banking. Slowdown in credit and deposit growth, deterioration in asset quality, getting the stalled projects off the ground, and the need for consolidation in the banking sector, especially among state-owned banks, are also expected to figure in his speech.

The IBA will elect new office bearers at the AGM.

RBI moots review of all bank licences on 'fit & proper' norms

Note to finance ministry says adherence to the guidelines needs to be evaluated

The Reserve Bank of India (RBI) has proposed a review of all banking licences from the ‘fit and proper’ angle, following the allegations made by Cobrapost.

In a report to the department of financial services in the finance ministry, RBI has said “all banking licences need to be reviewed on the fit-and-proper criteria, which involves assessment of the promoters, management, CEOs, even for the existing banks”.

The issue basically relates to inter-connectedness among entities forming part of a banking conglomerate, with insurance, mutual funds and brokerage arms in its ambit. The RBI note has said the review is necessary to ensure that an arm’s length is maintained from these various operations, to avoid a systemic risk.

However, the central bank has also said this is a judgemental call, and the decision needs to be taken after due deliberations.

The RBI letter has also suggested taking up the issue at the Financial Stability and Development Council (FSDC) or its sub-committee, so that it can be approached in a holistic manner, after getting feedback from other regulatory agencies.

The country’s three largest private banks — ICICI Bank, HDFC Bank and Axis Bank — were last month named by online portal Cobrapost for money laundering. The sting operation conducted by the portal alleged some officials of these banks had offered to launder unaccounted money by investing in insurance schemes.

However, the RBI report did not find merit in the allegations of money laundering in the banking system. ICICI Bank and HDFC Bank have insurance subsidiaries but Axis Bank does not have such an arm. It offers insurance products of Tata AIG and Max Life Insurance Company as a corporate agent.

Earlier this year, RBI had ringfenced banking operations from other activities of promoters and group companies in its guidelines for new banks. “Promoter/promoter groups’ business model and business culture should not be misaligned with the banking model and their business should not potentially put the bank and the banking system at risk on account of group activities,” it had said.

The promoter of any new bank will have to float a non-operative financial holding company (NOFHC), according to the guidelines. The NOFHC will hold the bank, as well as all other financial service entities of the group regulated by RBI or other financial sector regulators. The objective, the guidelines say, is that the holding company should ringfence the regulated financial service entities of the group, including the bank, from other activities of the group and also that the bank should be ringfenced from other regulated financial activities of the group.

As such, only non-financial service companies, entities and non-operative financial holding company in the group, and individuals belonging to promoter group, will be allowed to hold shares in the NOFHC. The financial service entities in which the NOFHC holds shares cannot be shareholders.

TIGHTENING THE GRIP

* The issue relates to inter-connectedness among entities forming part of a banking conglomerate, with insurance, MF and brokerage arms in its ambit

* Review needed to ensure an arm’s length is maintained from various operations to avoid systemic risk

* RBI has suggested taking up the issue at FSDC or its sub-panel to approach it in a holistic manner, after getting feedback from other regulatory agencies

http://www.business-standard.com/article/finance/rbi-moots-review-of-all-bank-licences-on-fit-proper-norms-113051900120_1.html

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