RBI Puts Rs 75 Lakh Fine On HDFC Bank For KYC Norm Violations

RBI Penalty On HDFC Bank: Reserve Bank of India (RBI) has levied a monetary fine of Rs 75 lakh on HDFC Bank Limited for non-adherence with specific provisions of the Know Your Customer (KYC) Master Direction. This is on the basis of the RBI inspection that found the bank to have defaulted on critical customer identification and risk classification obligations. HDFC Bank did not actively comply with the KYC norms directed by RBI.

This penalty on HDFC Bank by RBI was imposed under the powers vested in it by Section 47A(1)(c) and Section 46(4)(i) of the Banking Regulation Act, 1949. The regulator said that the penalty was being levied due to lapses in regulations and was never in a position to question the validity of the customer transactions and agreements of the bank.

RBI's Findings On Inspection

The Reserve Bank of India carried out a Statutory Inspection for Supervisory Evaluation (ISE 2023) of HDFC Bank on its financial position as of March 31, 2023. The inspection found areas of non-compliance under KYC norms, i.e., customer identification codes and risk assessment.

As per RBI, HDFC Bank did not provide a Unique Customer Identification Code (UCIC) to all the customers, as mandated under the guidelines of the regulator. The bank instead provided several customer identification numbers to some of the customers, contrary to the principle of having a single identity for every individual within the banking system.

Apart from this, the report revealed that the bank failed to classify its customers in the correct manner as low-risk, medium-risk, and high-risk following its own perception and estimation of risk. It is important for monitoring possible risks and avoiding fraud transactions.

Regulatory Action And Bank's Response

It was in response to these revelations that RBI had served a show-cause notice to HDFC Bank requesting why it should not be penalised for non-compliance with the regulator's directions. The bank replied to the notice and submitted further representations, but the RBI was not satisfied with its reasons. Consequently, the central bank upheld the charges and went ahead with the monetary penalty. HDFC bank has repeatedly did not adhere to the KYC norms.

RBI's official release highlighted that this regulatory action was taken on the grounds of compliance gaps and did not concern the merits of transactions undertaken by the bank. It also explained that further action could be taken against the bank, as may be warranted in the said situation.

The RBI Master Direction on KYC guidelines was initially released on February 25, 2016, and updated from time to time, the most recent update of which was done on November 6, 2024. It is intended to ensure that banks follow strict customer identification procedures, anti-fraud, and anti-money laundering measures.

Regulatory supervision and customer due diligence can be influenced by HDFC Bank's deficiencies in having one customer identity and classifying customers properly based on risk. The fine acts to reinforce the requirement for banks to possess robust KYC procedures by reminding the RBI's strict position on compliance with financial regulations.

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