Regulation is a set of rules and guidelines on how to do banking business such that financial stability is attained and that stakeholders' interest are taken care of. In other words regulations are the contours within wh

CS Professional · Banking - Law and Practice · PYQS · December 2019
Regulation is a set of rules and guidelines on how to do banking business such that financial stability is attained and that stakeholders' interest are taken care of. In other words regulations are the contours within which the banks have to operate. Compliance is essentially doing business as per regulations and as per well established ethical business practices and rules. To comply is to adhere with regulations which are beneficial to the Banking Institution. Banks in India have a good track record in regard to regulation, governance, operations and compliance. However, post the global financial crisis and a plethora of new regulations and guidelines, both global and local; there is a pressure on banks for complete compliance. Now-a-days there is renewed demand for governance and transparency. New regulations are indeed creating new compliance challenges and risks. Needless to say, the cost of compliance is on the increase. About the Case : The Global Bank Ltd. proposed to open their full fledged Branch in "Financial District" of Hyderabad. Based on the survey conducted by the Branch, Bank found lot of Business Potential i.e. Deposits, Advances and other Miscellaneous Business (Including Cross Selling of Third Party Products etc.) exist as Big IT Companies, IT Professionals are located. Bank applied for license to Reserve Bank of India (RBI) and RBI has given approval to open their branch in Financial District. Inauguration date is finalized and Bank proposed to inaugurate the Branch in the Hands of Country Head Mr. Gopal of M/s Indian Software Ltd. who is going to visit to Financial District, Hyderabad on that particular date on official work. Bank has given wide publicity for opening ceremony of the Branch particularly in TWIN Cities of Hyderabad in various newspapers. Good Media coverage was given and Bank is expecting ₹5 Crore of Deposits on the First day of opening of the Branch. Some of the IT Companies given assurance to Asst. General Manager (AGM) and Mr. Rohit Aggarwal, Branch Head that they wish to open their office Current Account with The Global Bank Ltd., Financial District Branch. The Branch was inaugurated on the fixed date by Country Head Mr. Gopal of M/s Indian Software Ltd. Mr. Gopal was happy and he gave a promise to Mr. Rohit Aggarwal that he would instruct Finance Department of M/s Indian Software Ltd. to shift all staff members Salary Accounts with The Global Bank Ltd., Financial District Branch from other banks. After one week of inauguration 20 officials of M/s Indian Software Ltd. met Mr. Rohit Aggarwal, Branch Manager and they wish to avail Home Loans, Car Loans, Education Loans and Personal Loans from Financial District Branch of The Global Bank Ltd. (Due to lower rate of interest, processing charges etc., and also branch is nearer to their office.) As Mr. Rohit Aggarwal is new to Credit Management i.e. processing and sanction of Loans and Advances and that too in bulk lot i.e. 20 officials with 4 products each, he requested 20 officials of M/s Indian Software Ltd. to visit again to the Branch on the next day evening. Immediately, he visited to the Zonal Office of The Global Bank Ltd. and met Mr. Prasad, Asst. General Manager (AGM) and appraised the credit requirements of M/s Indian Software Ltd. officials i.e. Home Loans, Education Loans, Car Loans and Personal Loans for 20 officials. Immediately, Mr. Prasad, AGM called Chief Manager (Advances) of Zonal Office and instructed him to provided full information on Credit Management process to Mr. Rohit Aggarwal as he is new in Credit Function of the bank. Mr. Prasad, AGM also instructed the Chief Manager (Advances) to discuss in details with Mr. Rohit Aggarwal on important areas like Legal and Regulatory Compliance with regard to General Banking and Credit Management in particular of the Bank and also its importance in Banks to mitigate the Credit and Operational Risks. He also informed that the following Acts are the important legal and regulatory guidelines which are relevant in Credit and General Banking Functions of the Bank which are to be discussed with Mr. Rohit Aggarwal to avoid the remarks/irregularities or mistakes pointed out earlier in Compliance Audit of the Bank. Banking Regulation Act, 1949. Reserve Bank of India Act, 1934. The Credit Information Companies (Regulation) Act, 2005. Power of Attorney Act, 1882. Indian Stamp Act, 1899. Transfer of Property Act, 1882. The Central Registry of Securitization Asset Reconstruction and Securities Interest of India (CERSAI Act) and its importance. The Recovery of Debts Due to Banks and Financial Institutions Act, 1993. The Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act). After meeting with Asst. General Manager is over, both Chief Manager (Advances) and Mr. Rohit Aggarwal sit in the discussion room of Zonal Office and Chief Manager (Advances) starts discussion on importance of Legal and Regulatory Compliance in Banks in processing of Advances of the Bank particularly the above mentioned Acts. If you are appointed as a Compliance Officer of The Global Bank Ltd., how you will advise to Mr. Rohit Aggarwal, Branch Manager to remove the Knowledge Gaps on Legal and Regulatory Compliance in Banks with regard to processing advance products and general banking aspects of the Bank particularly on the following areas: Briefly explain the objectives of Regulations in Banking Sector and why compliance function in Banks is important?

Answer & Explanation:

Objectives of Regulation The objectives of bank regulation and the emphasis vary between jurisdictions. The most common objectives are as under: Prudential Management is to reduce the level of risk to which bank creditors are exposed to (i.e., to protect depositors). Reduction in systemic risk to reduce the risk of disruption resulting from adverse trading conditions for banks causing multiple or major banks failures. Avoid misuse of banks to reduce the risk of banks being used for criminal purposes, e.g. laundering the proceeds to crime. To protect banking confidentiality. Credit allocation to favoured sectors. It includes rules about treating customers fairly and having corporate social responsibility. Strong measures taken by the Central Banks in disciplining banks which had committed violations Anti Money Laundering (AML) Laws/ Rules and other lapses speak volumes for the importance attached by regulatory authorities on the aspect of compliance. The growing instances of violations have also attracted the attention of media and public. In this background, the major risk faced by banks today is not the penalty that the banks paid to the regulator but the reputation risk, as even minor violations are high-lighted in the media. Consequently the impact on the banking sector is substantial. Hence there is a growing importance and relevance of compliance function in banks. There are number of issues that will lead to better compliance. The first is a clear message from the top management about the commitment to compliance and zero tolerance for non-compliance. The second issue is having appropriate systems. If the systems and processes are well laid the chance of non-compliance is reduced. The third factor is about having skilled and exclusive vertical within the organization that will monitor and mentor compliance. Here again a clear message from the top management is essential because there exists a view that compliance and business decisions are contrary to each other. Compliance should not be sacrificed in the name of business or because there is cost attached to the compliance function.

Topics: Banking Regulation and Compliance

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