Sucheta Dalal :RBI & the art of crediting a/c payee cheques
Sucheta Dalal

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RBI & the art of crediting a/c payee cheques  

Jan 30, 2006

The year 1992 was in the previous century, so the Reserve Bank of India (RBI) has probably forgotten the Harshad Mehta scam and its lessons. That is why RBI Governor Venugopal Reddy told the media in his post-credit policy press conference that crediting account payee cheques in others’ accounts was ‘‘for convenience under contingencies’’ but the banks have misused it. ‘‘In future, account payee cheques have to go account payee’’, he warned.


This stunning statement reveals that the central bank has completely forgotten that it considered the wrong credit of account-payee cheques a serious issue in 1992. ANZ Grindlays Bank had then credited nine cheques worth Rs 506 crore of National Housing Bank (NHB) into Harshad Mehta’s bank account. State Bank of India (SBI) had similarly facilitated the scamster.


The NHB was fully owned and controlled by the RBI and the central bank took advantage of its clout to force ANZ Grindlays bank into a long and expensive arbitration that lasted a decade. ANZ Grindlays’ strongly argued that crediting Account Payee cheques into brokers’ accounts was ‘‘an accepted market practice’’ in the wild days leading up to the scam. RBI fully backed NHB in contesting this and eventually extracted a massive Rs 1,522 crore settlement (including interest) from ANZ Grindlays when it was in a hurry to close the issue and merge with Standard Chartered Bank.


A similar deal was struck with State Bank of India. Since it emerged a winner then, RBI forgets that it did not allow ‘‘convenience’’ as an excuse in 1992, although it was more valid then. In fact, its own antiquated and non-automated systems caused the regulatory dialectics that ballooned into a massive scam; but only banks suffered the consequences.


Less than four years after ANZ Grindlays’ Bank and SBI settled the NHB dispute at a hefty cost to themselves, the RBI Governor is patting his organisation’s back for quick action in the IPO scam and says, ‘‘from hence forth, account payee cheques will only be credited into payee accounts’’. He clearly doesn’t think that disregard of this basic rule despite major scandals in the past and present is a systemic issue.


The same memory lapse apparently extends to monetary penalties in the IPO scam. The RBI has slapped fines ranging from Rs 5-20 lakh on seven banks— Bharat Overseas Bank, Indian Overseas Bank (IOB), HDFC Bank, Vijaya Bank, Citibank, ICICI Bank and Standard Chartered Bank. They colluded in various degrees with a set of dubious characters to open thousands of depository accounts and corner IPO quotas reserved for retail investors.


Banks are guilty of flouting Know Your Customer (KYC) rules to accept account payee cheques from persons who were not customers, or crediting thousands of refund orders bearing different names into one account. The penalty imposed by the RBI is a joke rather than a deterrent. In most cases it is not even equal to the annual salary of a junior bank official and signals that there is a negligible price attached to breaking the rules.


In many countries, a mere reprimand by the central bank is a major blot, but that is not true in India where the RBI has hardly been an alert or efficient regulator. More surprising is the RBI Governor’s claim that the ‘‘law of the land’’ prevented penalties from being any higher than the paltry Rs five to 20 lakh. Maybe the RBI will explain how it managed to levy stiffer penalties following the securities scam of 1992?


At that time Citibank was made to pay Rs 50.50 crore, Standard Chartered Bank paid Rs 34.2 crore, Hong Kong and Shanghai Bank paid Rs 17.9 crore, Bank of America paid Rs 11.6 crore and among Indian banks, SBI paid Rs 11.2 crore. Yet, many of us felt that banks had got away lightly given the enormity of their involvement in the scam. It must, however, be admitted that foreign banks also brought in overseas funds to fulfil commitment made under their Portfolio Management Scheme.


The same rules that allowed RBI or the government to levy stiff penalties then could have been invoked this time too. Contrast the RBI’s benign attitude with fines levied by the US central bank. State Bank was once fined a million dollar for a single instance of accepting a cash deposit in excess of the limit prescribed under US money laundering laws. It was again slapped a $7.5 million penalty for failure to establish and maintain procedures to ensure compliance with the Bank Secrecy Act and maintain correct and accurate books and records.


RBI’s attitude raises questions about whether it even understands the logic and philosophy of using crushing penalties as a deterrent by killing the temptation to earn quick profits by cutting corners. If the Securities and Exchange Board of India (Sebi) realised the need for statutory power to levy stiff monetary fines a few years ago and amended the Sebi Act accordingly, why was the RBI silent? The RBI even has senior level representation on the Sebi board.


Banking secrecy rules allow the RBI the luxury of suppressing its supervisory lapses and as well as the mischief of regulated entities, but even this did not hide spectacular failures such as the Global Trust Bank, Nedungadi Bank, Madhavpura Mercantile Cooperative Bank cases. Its attitude is more worrying because of the growing body of evidence that banks routinely flout KYC norms or collude with tax evaders to launder cash income through the banking system.


The RBI has signalled to them that the cost of getting caught will, at worst be Rs 20 lakh. Such complacency is astonishing when the Finance Minister knows and publicly states that he has information about crores of rupees being deposited and withdrawn in bank branches across the country everyday and the Income Tax Department has backed it up with evidence that such mischief occurs in large banks as well as the small cooperative banks. This is a systemic issue that needs urgent fixing


-- Sucheta Dalal