The Reserve Bank of India (RBI) has stumbled upon a possible nexus between cooperative and commercial banks that, in its opinion, could be allowing large amounts of unaccounted funds to be channelled into banks.
The RBI has extended its initial probe into three private sector banks to 30 banks — the thematic study on these banks is yet to be made public. Commercial banks, RBI’s report says, allowed clients of cooperative banks to issue at par cheques on them for third-party payments and remittances. Large parts of this money may have found its way into mutual funds and insurance schemes.
The central bank may disallow cheques of commercial banks to be used by a third party, as a demand draft or an at par cheque. The RBI plans to re-visit allowing cooperative banks to draw at par cheques on commercial banks for third-party payments and remittances, since it believes this is necessary to prevent systemic risks to the banking system. The RBI has found instances of DD payments being stopped, although this is not permitted; the central bank feels that DDs may have been obtained by depositing cash and the cancelled DDs are repaid by a pay order, a process allowing unaccounted money to become legitimate. Indeed, concerns on the “inter-connectedness” in the system, the RBI says warrants a relook at the ‘fit and proper’ criteria of existing banks.
In a report that captures how a few banks have been flouting KYC and other norms relating to customer identification, thereby allowing customers to transact in cash, the RBI highlights the inadequacies in the system needed to flag large cash transactions or suspicious transactions noting that less than 1% of these were reported to the Financial Intelligence Unit (FIU) over the past three years. “This could be mainly attributed to the negligible number of employees deployed by each of these banks for monitoring and closure of alerts,” the central bank notes. The report follows an investigation by the RBI into allegations of money laundering in the banking system by the news website Cobrapost.
The probe revealed that banks were accepting cash deposits above R50,000 without proper PAN card details and also that transactions were being split to keep the amount below R50,000 so that customers did not need to submit a PAN card. The report notes that “there was predominance of high value of cash transactions without PAN. Moreover, in many cases where PAN was