Reserve Bank spells out punitive measures for Y2K-laggard banks

Anirban Nag

Mumbai, Feb 10: The Reserve Bank of India (RBI) has decided to enforce stiff measures including hiking of capital adequacy, restriction on branch expansion and suspension from the call money and the debt market on banks that fail to comply to Y2K requirements by March 31, 1999.

This is the first time that the apex bank has spelt out the enforcement measures that it will undertake to ensure Y2K compliance in the banking sector. It has already extended the deadline for compliance from December 30, 1998 to March 31, 1999. While foreign and the new generation banks have almost complied with the Y2K norms, a few of the public sector banks including the large ones are still lagging behind.

In a recent letter to all chairmen and chief executives of commercial banks, the bank's department of banking supervision, Y2K project cell, has spelt out the measures that the RBI will take. While specific course of action will be decided by the Reserve Bank taking into account the findings of the on-site inspections andinformation contained in the monthly reports submitted by banks the enforcement measures may include one or combination of the following:

issue supervisory letter of caution

impose higher CRAR

impose monetary penalties on a graduated scale as may be decided on a case by case basis

restricting expansionary strategies of banks like opening branches, subsidiaries

Y2K compliance will be an overriding criterion while evaluating the performance of the chairman/managing director/chief executive

suspension from participation from call money markets, clearing securities trading The RBI letter further states that some banks are lagging behind in their compliance efforts. In a warning issued to all banks, the letter says,"We would like to once again impress upon you that the Y2K problem is more than a technical issue and has serious business related implications. Apart from business continuity problems and loss to customers, Y2K non-compliance also has serious system wideconsequences," the RBI says.

As a result the RBI has instructed banks to work out a contingency plan to assure business continuity in the event of vendor default or unforeseen Y2K induced breakdown. Banks have complained to the RBI that a few software vendors are deliberately going slow with their work and as a result they may have to face problems. "Banks are expected to complete this exercise by March 31, and forward to us a copy of their contingency plans duly approved by their board of directors," the letter says.

The apex bank has further emphasised that the responsibility to appropriately address the Y2K problem within each institution, its subsidiaries and external linkages or interfaces would solely rest with the top management and board of directors. "In view of the crucial nature of the problem and its likely impact on the business of banks, it is expected that banks will review their compliance strategies to make their system Y2K compliant," the RBI letter states.

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