Moneycontrol Pro Panorama | Keeping finance clean

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Financial entities are being pulled up left, right and centre by the regulator on transgressions involving simple know-your-customer processes to serious ones such as evergreening of loans. Over the past year, mainstream banks such as Standard Chartered Bank, Axis Bank and HDFC Bank have been penalised by the Reserve Bank of India (RBI) for violating the norms. Others, such as Paytm Payments Bank Ltd has faced a sledgehammer which threatens to put a lock on their business.

It may seem that the regulator is being draconian, but the truth is far from it.

Take the case of Paytm. The RBI banned the fintech pioneer’s payments bank from onboarding new customers beginning March. This means Paytm itself needs to find a nodal bank where its wallet customers can house their balances. Banks are unwilling to partner up. The reason is that the RBI’s allegations pertain to serious and repeated breaches of KYC norms that in turn has the risk to facilitate money laundering and fraud.

Each bank account must show the information that belongs to a bonafide customer through mapping mobile phones and identity proof. However, if this basic step is missed or deliberately eliminated or worse misused to launder illicit money, the financial system can be hurt. The financial intermediary faces a crisis of confidence and various stakeholders could stare at losses depending on their exposure.

Fintechs have been glib about KYC norms with the RBI now asking card networks such as VISA to stop business to business payments through their network due to KYC holes.

To be fair, financial intermediation is becoming complex. A single transaction involves two banks, card network operators in the case of credit or debit cards, payment gateways in the case of online purchases and even point of sale machines supplied by payment service providers to the merchant. As money travels, it also takes with it the information of the giver and the receiver.

Regulators need this information flow to track the underlying money flow and ensure the safety and security of all parties involved. But if any step is missed or disguised, the information flow breaks down and that puts the entire system at risk.

Fintechs have taken umbrage over the regulator’s interventions. But there is no substitution of following the simple steps of KYC and fintechs must adhere to these or risk losing the trust of their customers.

Financial intermediaries depend on trust to function. The reluctance of banks to tie up with Paytm shows what a breakdown of trust can do to the business. Many banks have in the past indicated the discomfort of tying up with fintechs for lending, given shoddy KYC practices.

Banks themselves have slipped up time and again on KYC and other norms only to be penalised by the regulator. Take the case of Bank of Baroda’s debacle with its mobile app bob World where bogus mobile numbers were tagged to existing account numbers to bump up the users for the app. The public sector lender was told to suspend onboarding of any customer on the app by the RBI.

This litany of problems has led to unease among investors in the market. The Nifty Bank index has not been able to shake itself off for a great start this year and has continued to underperform the broad Nifty.

By the look of it, the RBI is fortifying its supervision and its officials have stressed governance and following basic norms at every opportunity. Investors should take heart that the regulator’s eagle eye would mean fewer surprises for them from the banking sector down the line.

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Aparna Iyer
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