RBI initiating action against ICICI, HDFC Bank and Axis Bank after Cobrapost expose’

Reserve Bank deputy governor H R Khan today said the central bank was initiating action against ICICI Bank, HDFC Bank and Axis Bank over money laundering allegations by Cobrapost.

He said actions were on the way, adding scrutiny had been done and actions were being taken both in respect of systemic level and the individual banks, when asked if RBI had completed investigations on Cobrapost exposes.

He said he would not be able to elaborate on the details but actions were being taken both at the system level and the individual bank level. He was speaking on the sidelines of an event organised by National Housing Bank in New Delhi.

In response to a question as to when RBI would release the investigation report, he said, he could not give a time frame but it would be out soon.

Three of the largest private banks in India, ICICI bank, HDFC Bank and Axis Bank were last month named by online portal Cobrapost for facilitating money laundering.

The sting operation conducted by the portal alleged that a number of bank officials had offered to launder unaccounted money by investing in insurance schemes.

In the immediate wake of the expose, Reserve Bank governor D Subbarao had said then that a number of  corrective steps would be taken to strengthen the banking system.

He had said, then that he believed systems were largely safe, there was, however a need for some corrective action and based on the findings of the investigation, the bank would take corrective action.

Meanwhile, Cobrapost's sting operations which alleged three private sector banks were violating know your customer and anti money laundering norms, were turning out to be the tip of the proverbial iceberg.

Perverse incentive schemes offered to the bank employees that lured them into selling insurance and mutual fund products had been identified as the root cause of the problem by the Reserve Bank of India (RBI) which was investigating the allegations.

The probe therefore, which started with three banks – had now been extended to 34 major banks in the country which sold such products. Business Standard quoted an unnamed source as saying that it was not that only the three banks had indulged in such practice, it was likely the practice was prevalent in other banks too. RBI had always been wary about such distribution tie-ups as arms length was not maintained by the bank and its partner.

What was worse was that, as investigations revealed, insurance and mutual fund agents were found to be sitting in bank branches to sell such products which misled the customer into thinking that the agent was a member of the bank staff, exposing the banks to reputational risks.

The central bank also noted that commission income from selling insurance and mutual fund products by banks had also increased in recent period.

It also observed that the insurance or the mutual fund house decided the targets for bank employees and paid them the incentives directly. RBI had questioned banks on the practice.