RBI Imposes ₹91 Lakh Penalty on HDFC Bank for Compliance Lapses

The Reserve Bank of India (RBI) has imposed a monetary penalty of ₹91 lakh on HDFC Bank, citing violations of the Banking Regulation Act and multiple compliance shortcomings, including issues related to Know Your Customer (KYC) norms. The central bank announced the action following its Statutory Inspection for Supervisory Evaluation (ISE) of the bank’s financial position as of March 31, 2024.

The penalty, the RBI clarified, is purely a result of compliance deficiencies and does not affect the validity of customer transactions or agreements. However, the action highlights regulatory concerns over processes followed by one of India’s largest private-sector lenders.

Inspection Uncovers Regulatory Violations

According to the RBI, the inspection revealed multiple instances where HDFC Bank failed to meet regulatory and statutory requirements. Based on these findings, the bank was issued a notice asking why a penalty should not be imposed. After evaluating the bank’s responses and reviewing additional submissions, the RBI confirmed that violations had indeed occurred.

The regulator pointed out the following key areas of non-compliance:

1. Use of Multiple Benchmarks for the Same Loan Category

HDFC Bank reportedly used more than one benchmark within a single loan category, which goes against regulatory expectations of consistency and transparency. This practice can create confusion for customers and raise concerns about internal pricing discipline.

2. Outsourcing KYC Compliance Checks

The RBI found that HDFC Bank outsourced KYC verification for some customers to external agents. While outsourcing is permitted under controlled conditions, banks remain fully responsible for compliance with KYC guidelines. In HDFC Bank’s case, the regulator found deficiencies in these outsourced processes.

3. Prohibited Activities by a Wholly Owned Subsidiary

The central bank also noted that a wholly owned subsidiary of HDFC Bank had undertaken activities not permitted under Section 6 of the Banking Regulation Act. The Act clearly specifies the forms of business a banking company can engage in, and activities outside this purview violate statutory norms.

These findings collectively led the RBI to impose the ₹91 lakh monetary penalty.

Penalty Reflects Compliance Issues, Not Customer Impact

The RBI emphasised that the penalty reflects lapses in internal processes and compliance mechanisms. Importantly, it clarified that the action does not invalidate any customer-related transactions, contracts, or loan agreements issued by the bank.

This distinction is critical in ensuring that customers face no disruption in services or the legitimacy of financial dealings as a result of the regulatory action.

The regulator also added that the imposition of a monetary penalty is “without prejudice to further regulatory action”, indicating that additional supervisory steps may follow if needed.

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Separate Penalty on Mannakrishna Investments

In an unrelated action, the RBI also imposed a penalty of ₹3.1 lakh on Mannakrishna Investments. The penalty relates to violations of governance-related requirements under the Master Direction for Non-Banking Financial Company – Scale Based Regulation, 2023.

While the RBI did not provide detailed descriptions of the specific governance lapses, the action underscores the regulator’s continued focus on strengthening compliance culture within the broader financial ecosystem, covering both banks and non-banking financial companies (NBFCs).

Regulatory Focus on Compliance Intensifies

The latest penalty on HDFC Bank comes at a time when the central bank is tightening oversight on compliance frameworks across the financial sector. India’s banking regulator has repeatedly highlighted the need for strong governance, robust internal controls, and strict KYC compliance, especially at large banks handling millions of customer accounts.

RBI’s actions in this case send a strong signal to the industry: compliance violations—whether procedural or systemic—will attract strict scrutiny and monetary penalties.

A Look Ahead for HDFC Bank

While the RBI’s penalty does not affect customer transactions, it puts the spotlight back on HDFC Bank’s internal processes. As India’s largest private lender by market capitalisation, regulatory compliance remains a key expectation from both the market and policymakers.

The bank is expected to tighten its oversight on:

• KYC and customer verification processes

• Subsidiary activities and regulatory boundaries

• Uniform loan benchmarking practices

The central bank’s assessment and penalty serve as a reminder that even major institutions are subject to stringent supervision and must maintain industry-best compliance standards.

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