Indian Financial Entities Penalized by RBI for Violations of KYC Norms
The Reserve Bank of India (RBI) has taken action against several mainstream banks, including Standard Chartered Bank, Axis Bank, and HDFC Bank, for failing to comply with Know Your Customer (KYC) norms. These violations range from simple KYC processes to more severe issues like evergreening of loans. In addition to the traditional banks, the RBI has also penalized Paytm Payments Bank Ltd, a fintech company, for serious breaches of KYC norms.
KYC norms require that each bank account has proper verification, including mobile phone and identity proof verification, for legitimate customers. Failure to adhere to these standards can result in illicit money movements, which can pose risks of money laundering and fraud. Such misuse can damage the financial system and stakeholder trust.
Fintech companies have come under criticism for their flexible approach to KYC requirements, leading the RBI to request card networks like VISA to halt certain payments over KYC concerns. The use of disguises or gaps in the information flow on money movement can jeopardize the entire financial system, given the involvement of multiple parties like banks, card operators, payment gateways, and payment service providers.
The non-compliance of fintechs with KYC norms highlights the critical importance of trust in financial partnerships. This has led traditional banks to reconsider their relationships with fintech firms. A recent example is the Bank of Baroda's bob World app debacle, where fake mobile numbers were connected with real account numbers, resulting in regulatory action and investor unease.
To prevent such incidents and maintain stability in the banking sector, the RBI is enhancing its supervision efforts and stressing the importance of governance and adherence to basic norms. These measures are expected to give investors confidence in a more stable market environment.
Analyst comment
Negative news. The regulator has penalized mainstream banks and banned Paytm Payments Bank from onboarding new customers for violations of KYC norms. Fintech firms’ non-compliance is damaging trust and leading to reconsideration of partnerships. The RBI’s enhanced supervision efforts may bring stability but investor unease remains.
