Compliance Culture Of Indian Banks Is Far From Satisfactory : RBI Deputy Governor

The compliance culture of Indian banks is far from satisfactory, resulting in the Reserve Bank of India imposing monetary penalties (on 70 occasions) amounting to ₹122.9 crore on various commercial banks in the January-July 2019 period, according to Deputy Governor MK Jain.

During the course of the supervisory process, the RBI has observed various lacuna in the compliance culture of Indian banks, Jain said at the FIBAC 2019 annual banking conference.

Some of the weaknesses and irregularities observed have been recurring, in spite of affirmation by bank managements that they have carried out remediation, he added.

“My expectation from the banks is that they will make serious efforts towards overall improvement of the compliance function. It won’t be an exaggeration to say that some of the big losses suffered by banks on account of frauds could have been avoided if a good compliance culture was ingrained in their respective banks.

“Lot of improvement is needed in compliance culture across banks. As a supervisor of banks, the RBI has keen interest in sound corporate governance and compliance culture,” said Jain. The Deputy Governor observed that banks should eschew the tendency to treat compliance merely as a cost.

“But it should be recognised that proper conduct saves the bank from possible loss of reputation and penalties. Trust generates hidden earnings, which most banks don’t bother to quantify and hence, don’t realise. “A poor compliance culture will lead to heavy costs for banks. Globally, from the beginning of the financial crisis, and up to 2020, penalties and fines on banks are expected to top $400 billion,” explained the Deputy Governor.

Jain emphasised that it is very important for banks to demonstrate a very good compliance culture to maintain their reputation and build the trust of customers, investors, and regulators. Such culture is important for banks to avoid poor conduct, while absence or inadequacy of it may lead to unacceptable conduct by banks and loss of trust.

“A good compliance culture can benefit banks in many ways, including lower organisational and individual risk, less hesitance, and more confidence among employees while performing their jobs, improved transparency which enables better decisions, enhanced relationship with regulators and other stakeholders, low reputational risk, enhanced valuation among investors, and help attract and retain talent and ensure employee engagement,” he explained. Banks, therefore, need to embrace compliance if they want customer satisfaction, which eventually leads to better return on equity.

Jain cautioned that inadequate compliance culture will lead to heightened compliance risk, including legal or regulatory sanctions, material financial loss or loss to reputation to the bank as a result of its failure to comply with laws, regulations, rules, and related self-regulatory organisational standards and code of conduct applicable to banking activities.