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, RBIs 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
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 arms 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.