2 PSU Bank Stocks In Focus This Week; RBI Imposes Rs 10.34 Crore Penalty On Bank Baroda, IOB, Citibank

The Reserve Bank of India (RBI) has imposed up to Rs 10.34 crore penalty together on three lenders, two of which are PSU banks and 1 belonging to the private sector due to non-compliance with certain directions. These are Bank of Baroda, Indian Overseas Bank and Citibank N.A. Share prices of BOB and IOB will be in focus this week following the penalties.

Of the total Rs 10.34 crore penalty, the highest was levied on Citibank up to Rs 5 crore, followed by a Rs 4.34 crore fine on Bank of Baroda and the rest of Rs 1 crore on IOB.

It needs to be noted that before levying penalties on these lenders, RBI had carried out an inspection on them, and after finding non-compliances the central bank had also issued a notice seeking the reason behind the irregularities from the three banks.

After considering the banks reply to the notice and oral submissions made by it during the personal hearing, RBI came to the conclusion that the aforementioned charge of non-compliance was substantiated and warranted the imposition of a monetary penalty.

Here are the details of the penalties on these 3 banks.

Citibank:

RBI imposed a monetary penalty of Rs 5 crore on Citibank for contravention of Section 26A of the Banking Regulation Act, 1949 (the BR Act) read with Paragraph 3 of 'The Depositor Education and Awareness Fund Scheme, 2014 - Section 26A of Banking Regulation Act, 1949 - Operational Guidelines', Section 10(1)(b)(ii) of the BR Act, and non-compliance with RBI Directions on 'Managing Risks and Code of Conduct in Outsourcing of Financial Services.

Upon carrying an inspection of Citibank's financial position as on March 31, 2021, RBI found out non-compliance by the bank to the extent it (i) failed to credit the eligible amount to Depositor Education and Awareness Fund within the prescribed time period, (ii) paid remuneration in the form of commission to its certain staff members, and (iii) outsourced monitoring and disposal/closure (decision-making function) of AML (Anti-Money Laundering) alerts to a Group company.

Bank of Baroda:

BOB is one of the leading PSU banks in the country. It faced a penalty of Rs 4.34 crore for non-compliance with certain directions issued by RBI on 'Creation of a Central Repository of Large Common Exposures - Across Banks' dated September 11, 2013 read with 'Central Repository of Information on Large Credits (CRILC) - Revision in Reporting' dated February 13, 2014, 'Loans and Advances - Statutory and Other Restrictions', and 'Reserve Bank of India (Interest Rate on Deposits) Directions, 2016'.

RBI found non-compliance by the bank to the extent it (i) failed to ensure accuracy and integrity of data on large exposures submitted to RBI with respect to some accounts, (ii) sanctioned a term loan to a Corporation (a) in lieu of or to substitute budgetary resources envisaged for certain projects; (b) without undertaking due diligence on the viability and bankability of the projects to ensure that revenue streams from the projects were sufficient to take care of the debt servicing obligations; and (c) the repayment/servicing of which was made out of budgetary resources, (iii) sanctioned a working capital demand loan to a Corporation against amounts receivable from the government by way of subsidies, and (iv) did not pay interest rate on the deposits accepted from senior citizens, as per the schedule of interest rates disclosed in advance.

Indian Overseas Bank:

IOB was charged with Rs 1 crore penalty, the lowest compared to the other two banks. RBI imposed the penalty as it found IOB's non-compliance with certain directions issued by RBI on 'Loans and Advances - Statutory and Other Restrictions'.

RBI observed that IOB sanctioned (1) term loans to two Corporate entities (i) in lieu of or to substitute budgetary resources envisaged for certain projects; (ii) without undertaking due diligence on the viability and bankability of the projects to ensure that revenue streams from the projects were sufficient to take care of the debt servicing obligations; and (iii) the repayment/servicing of which was made out of budgetary resources, and (2) a term loan to another Corporate entity (i) without undertaking due diligence on the viability and bankability of the projects to ensure that revenue streams from the projects were sufficient to take care of the debt servicing obligations; and (ii) the repayment/servicing of which was made out of budgetary resources.