The Reserve Bank of India (RBI) has pulled up commercial banks for neglecting various regulatory requirements. | |
| The central bank has pointed out that most of the banks do not have comprehensive structures, policies and manuals to address compliance risks. |
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| This, however, has not received the required attention of banks, as a number of instances of non-compliance and lack of proper interpretation of regulatory guidelines are being reported in successive RBI inspection reports. |
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| In an effort to tone up banks' compliance, the RBI has come out with draft guidelines. The compliance processes remain "weak" and compliance officer has not been an effective instrument. |
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| The Basel Committee defines compliance risk as "the risk of legal or regulatory sanctions, material financial loss, or loss to reputation a bank may suffer as a result of its failure to comply with laws, regulations, rules, related self-regulatory organisation standards, and codes of conduct applicable to its banking activities". |
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| The guidelines make the board of every bank responsible for ensuring that appropriate policy is in place to manage compliance risk and implementation. |
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| Banks will set up a compliance department to ensure implementation of various laws such as the Banking Regulation Act, guidelines and standards and codes prescribed by bodies such as Indian Bank's Association. The department will also be responsible for banks' internal policies and fair practices code. |
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| The department should also attend to the banks' compliance to directions from other regulators (Irda, Sebi, etc) in cases where the activities of the bank are not limited to the banking sector. |
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| Banks have been told that the material compliance failures, which may attract a significant risk of legal or regulatory sanction, financial loss or loss of reputation, should be reported to the board or its panel promptly. |
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| The compliance department will be free to report to senior management on any irregularities. It will also have right of direct access to the board of directors bypassing normal reporting lines. |
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| The compliance risks in new products and processes should also be thoroughly analysed. The new products will be subjected to intensive monitoring for the first six months to see to it that the parameters of compliance risk are adequately monitored. |
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| The chief compliance officer will participate in the quarterly informal discussions held with the RBI. Banks should conduct an annual compliance risk assessment to identify and assess major compliance risks faced by them and prepare a plan to manage the risks. |
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