1. Key Details of the Penalty
| Detail | Description |
| Bank Name | Indian Overseas Bank (IOB) |
| Date of Order | September 29, 2025 |
| Penalty Amount | ₹31.80 lakh (Rupees Thirty One Lakh Eighty Thousand only) |
| Reason for Penalty | Non-compliance with certain directions issued by RBI on ‘Priority Sector Lending (PSL) Targets and Classification’ |
| Specific Non-Compliance | The bank collected loan-related charges in certain PSL accounts, where each account had a sanctioned loan amount up to ₹25,000/-. |
| Statutory Power | Imposed under Section 47A(1)(c) read with Sections 46(4)(i) and 51(1) of the Banking Regulation Act, 1949 |
| Inspection Context | Statutory Inspection for Supervisory Evaluation (ISE 2024) |
| Reference Date of Inspection | Financial position as on March 31, 2024 |
2. Root Cause Analysis (RCA)
The specific non-compliance was the collection of loan-related charges on small Priority Sector Lending (PSL) accounts (loan amount ₹25,000/-). This action is typically prohibited by RBI guidelines to ensure credit is affordable for smaller, priority borrowers.
The potential root causes leading to this sustained charge against the bank could be:
- Systemic Failure in Implementation: A failure to correctly configure the bank’s Loan Management System (LMS) to automatically exempt PSL accounts with sanctioned amounts
₹25,000/- from levy of loan-related charges.
- Procedural or Training Deficiencies: Lack of clarity in internal Standard Operating Procedures (SOPs) or insufficient training of branch staff responsible for loan disbursement and charge application. This could have led to manual collection of charges despite the explicit RBI prohibition.
- Supervisory Oversight Weakness: The bank’s internal audit or compliance function failed to detect this systematic error or procedural deviation over the period leading up to the March 31, 2024.
3. Preventive Controls
To prevent the recurrence of such non-compliance, the bank should implement the following controls:
- System Automation and Hard-Coding: Hard-code the restriction within the core banking and loan origination systems. The system must be configured to reject the collection of any loan-related charge if the PSL flag is set and the sanctioned amount is ₹25,000/- or less.
- Pre-Disbursement Compliance Checklist: Introduce a mandatory, system-generated compliance checklist that requires sign-off from a supervisory authority confirming ‘Nil’ loan charges for all eligible PSL accounts before final disbursement.
- Targeted Compliance Audit: Conduct a special, time-bound internal audit of all PSL accounts sanctioned below ₹25,000/- after the ISE 2024 inspection to ensure immediate rectification and refund of any charges wrongfully collected.
- Refresher Training: Conduct mandatory, focused refresher training for all relevant personnel (branch staff, compliance, and IT team) on the specific nuances of PSL guidelines, particularly concerning charges and fees for small loans.
4. Lesson Learned
The primary lesson learned is the absolute necessity of meticulous adherence to RBI regulations, especially those concerning vulnerable customer segments under Priority Sector Lending.
- Primacy of Compliance in System Design: Regulatory compliance, particularly related to fees and charges, must be embedded at the design stage of all banking products and IT systems, rather than being an oversight function.
- Risk of Minor Non-Compliance Scaling Up: A seemingly minor, repetitive non-compliance—like collecting a small charge on a small loan—can lead to a significant aggregate penalty and severe regulatory criticism when applied across a large volume of transactions.
- Prompt and Thorough Rectification: The process (reply to notice, additional submissions, oral hearing) indicates the RBI followed due process before imposing the penalty. Banks must treat supervisory findings with utmost seriousness, ensuring not just a reply but complete and demonstrable systemic rectification to avoid penalties.
- The Penalty is For Deficiencies in Regulatory Compliance: The RBI explicitly states the action is based on deficiencies in regulatory compliance and does not comment on the validity of customer transactions. This reinforces that the focus is on the bank’s internal control failures to follow the rules.