RBI penalty no threat for banks?

The penalty imposed by The Reserve Bank of India (RBI) on 19 banks will hardly be a deterrent for banks sitting on huge balance sheets.

The penalty imposed by The Reserve Bank of India (RBI) on 19 banks will hardly be a deterrent for banks sitting on huge balance sheets. The penalty, which ranges from Rs5 to Rs15 lakh, is as low as the 0.001% of the net profit of the banks, prompting people to think whether it will at all discourage banks from violating norms in future.

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The RBI on Tuesday penalised 19 banks, mostly private and foreign, for violating instructions while selling derivative products to the companies. The list includes top names such as State Bank of India (SBI), ICICI Bank, HDFC Bank, Axis Bank, Standard Chartered Bank, Citibank, Hong Kong & Shanghai Banking Corporation (HSBC), Deutsche Bank, Bank of America and others.

The RBI feels that the penalty will act as a deterrent since banks will have to explain to customers and regulators in their respective countries about the penalty.

“It is not only about the monetary side of penalty. It is about the shame of being penalised,” said a RBI official. “Their image will be tarnished and they will have to explain customers about the reason of being penalised,”

In case of SBI the penalty comes to around 0.001% of the bank’s net profit. In the case of ICICI Bank it is merely 0.003% of the net profit.

“The penalty will have some efficacy in discouraging banks to indulge in mis-selling,” said a banking analyst of a broking house.