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Two of India’s largest banks, Yes Bank and ICICI Bank, have each been fined more than $100,000 following supervisory investigations into their internal practices.

On Monday (May 27), the Reserve Bank of India (RBI)  Yes Bank INR9.1m ($109,000) for imposing unfair penalty charges on customers and for internal account irregularities, and  ICICI Bank INR10m ($120,000) for failing to conduct proper due diligence before issuing loans.

Yes Bank’s case dates back to March 2022, when the RBI conducted a statutory inspection for supervisory evaluation to determine its financial health. The regulator discovered that Yes Bank had levied illegal charges on certain savings accounts for non-maintenance of minimum balances.

In India, savings account holders must typically maintain a monthly minimum balance in order to avoid facing penalty charges from the bank. In Yes Bank’s case, all but one of its 11 individual  include a monthly minimum balance requirement, ranging from INR10,000 to INR50,000 ($120-$600).

However, in a 2014 , the RBI tightened its rules on how banks are expected to handle minimum balance shortfalls. The aim was to ensure that banks do not take “undue advantage” of “customer difficulty or inattention” to extract penalty charges from them.

Accordingly, banks were required to give a one-month grace period before penalty charges were deducted, and customers had to be clearly notified of the possible deductions.

If after one month the minimum balance was not restored, banks could levy penalty charges, but the charges had to be “directly proportionate” to the shortfall and expressed as a percentage. Further, banks had to ensure that customers’ balances did not turn negative purely due to deduction of penalty charges.

In Yes Bank’s case, the RBI found that it had levied penalty charges against customers with “insufficient” or “zero balances”.

The RBI also found evidence of misuse of internal accounts at Yes Bank. It said that Yes Bank had opened and operated certain internal accounts in the name of its customers for unauthorised purposes, such as “parking funds” and “routing customer transactions”.

After the RBI served Yes Bank with notices of its failure to comply with the two directives, the bank was invited to produce a “show cause” letter explaining why the RBI's penalties should not be applied.

Based on Yes Bank’s response, as well as oral and other submissions during subsequent examinations, the RBI upheld its monetary penalty against the bank.

Lack of due diligence at ICICI Bank

As with Yes Bank, the non-compliant practices at ICICI Bank were uncovered by the RBI during a March 2022 statutory inspection for supervisory evaluation.

The RBI found that ICICI Bank had sanctioned term loans to certain entities “without undertaking due diligence” on the viability or bankability of the projects the loans would be used for, thereby violating the regulator’s 2014 directive on .

ICICI Bank was unable to ensure that revenue streams from the projects were sufficient to take care of the debt servicing obligations, the RBI found. The bank also lent to certain entities without ensuring that funding proposals were for “specific monitorable projects”.

As with Yes Bank, the RBI gave ICICI Bank a chance to show cause that a monetary penalty should not be imposed, but the regulator upheld its original enforcement order following the bank’s response.

The two fines highlight the RBI’s attention to detail during its statutory inspections of large-scale financial institutions.

ICICI Bank is currently India’s second-largest bank  and its third-largest credit card issuer, with more than 16m as of January 2024.

Yes Bank is among India’s 125 largest listed companies and is a top ten credit card issuer, with almost 2m cards in circulation.

In September 2024, as covered by 91����ԭ��, both banks will come under a new RBI directive that seeks to put an end to exclusive credit card issuer and network deals.

The move is being seen as a means to promote RuPay, India’s low-cost domestic network, while reducing the dominance of Visa and Mastercard.

India’s largest issuers, including ICICI Bank and Yes Bank, will face new challenges in ensuring compliance with the directive.