1. The Arantangi Co-operative Town Bank Limited
Key Details
- State: Tamil Nadu
- Penalty Amount: ₹50,000/-
- Date of Order: October 22, 2025
- Violation Area: Declaration of dividend by UCBs
- Charge Sustained: Paid dividend from “accumulated profits of previous years”.
Root Cause Analysis (RCA)
The primary root cause is likely a misinterpretation or lack of adherence to RBI’s guidelines regarding dividend distribution. Regulatory norms generally mandate that dividends must be paid out of the “current year’s net profits” only after adjusting for accumulated losses and making all statutory provisions. Using profits from *previous* years, without meeting all current eligibility criteria, points to:
- Weak Financial Oversight: The Board/Management failed to correctly ascertain eligible distributable profits based on current year performance and capital adequacy.
- Inadequate Compliance Function: The compliance team failed to veto the dividend declaration based on the improper source of funds.
- Pressure to Show Performance: Potential internal pressure to declare a dividend despite insufficient eligible current-year profits.
Preventive Controls
- Board Resolution & Certification: Mandate a specific “financial certification” (signed by the CEO/CFO and Compliance Officer) confirming eligibility criteria (CRAR, NNPA, Provisioning) and that the source of funds is solely the current year’s net profit.
- Regulatory Update Training: Conduct mandatory annual training for the Board and Senior Management specifically on RBI’s Master Directions for Dividend Declaration to prevent misinterpretation of capital rules.
- Audit Integration: Integrate the dividend declaration policy into the scope of the “concurrent/internal audit” to catch non-compliance before the final declaration.
Lesson Learnt
“Strict interpretation of regulatory profitability norms is paramount. Dividends must reflect the bank’s “current financial strength” and be sourced only from net profits specifically eligible for distribution, as prescribed by the central bank, to safeguard capital adequacy.”
2. Kamuthi Co-operative Urban Bank Ltd.
Key Details
- State: Tamil Nadu
- Penalty Amount: ₹50,000/-
- Date of Order: October 22, 2025
- Violation Area: Know Your Customer (KYC)
- Charge Sustained: Failed to upload the KYC records of customers onto Central KYC Records Registry (CKYCR).
Root Cause Analysis (RCA)
Failure to upload records to CKYCR, an essential component of India’s Anti-Money Laundering (AML) framework, suggests operational and technical deficiencies. The core issue is a breakdown in the mandated process (which requires submission shortly after establishing an account relationship):
- Technical Integration Gap: Poor or non-existent integration between the bank’s core banking solution (CBS) and the CKYCR portal, preventing automated data transfer.
- Data Quality and Validation: KYC records failed CKYCR validation checks (e.g., mismatch of PIN codes, missing mandatory fields) leading to bulk rejection of uploaded files.
- Lack of Ownership/Monitoring: Absence of a dedicated officer responsible for tracking the CKYCR rejection reports and ensuring timely re-submission and remediation.
Preventive Controls
- Automated CKYCR Trigger: Implement an automated workflow in the CBS that flags all new accounts and pushes data to CKYCR immediately upon successful account opening.
- Pre-Upload Validation: Introduce a “validation layer” in the CBS to check data consistency (e.g., matching PIN codes with district/state) against CKYCR specifications before the actual upload attempt.
- Daily Reconciliation: Establish a daily report showing ‘CKYCR Upload Status’ (Success/Failure/Pending) and assign the Compliance Officer to review the failure log for immediate action and correction.
Lesson Learnt
“CKYCR compliance is non-negotiable for AML/CFT protocols. A bank must invest in “robust, integrated technology” and operational discipline to ensure timely and accurate customer record filing to the central repository.”
3. The Shevapet Urban Co-operative Bank Limited
Key Details
- State: Tamil Nadu
- Penalty Amount: ₹50,000/-
- Date of Order: October 23, 2025
- Violation Area: Exposure Norms and Statutory / Other Restrictions UCBs
- Charge Sustained: Sanctioned loans more than the prescribed regulatory limit to certain “nominal members”.
Root Cause Analysis (RCA)
The core failure here is the breach of prudential “exposure limits” specifically concerning nominal members (who hold limited rights and shares). RBI imposes stricter, often lower, limits on lending to nominal members to manage credit concentration risk. The causes include:
- Lack of Distinction in Underwriting: Loan underwriting processes did not correctly differentiate between a full member and a nominal member when applying the lending ceiling.
- Poor Training/Awareness: Credit sanctioning authorities were unaware or improperly trained on the specific, lower exposure limits applicable to nominal members.
- Systemic Loophole: The Core Banking System did not have a “hard stop” to prevent loan disbursement above the lower threshold for nominal members.
Preventive Controls
- System Hard Stop: Implement a mandatory system check in the Loan Management System (LMS) that automatically “prevents the sanction” of any loan exceeding the nominal member’s regulatory limit.
- Clear Loan Policy: Update the bank’s internal loan policy to clearly define and bold the lending power and exposure limits for different membership categories (e.g., nominal vs. full members).
- Periodic Review: The Internal Audit function should periodically review a sample of loans sanctioned to nominal members to verify compliance with the correct lower exposure ceiling.
Lesson Learnt
“Strict adherence to single and group borrower exposure limits, especially for restricted categories like nominal members, is crucial for managing credit risk. Controls must be “embedded in the core lending system”, not merely rely on manual checks.”
4. The Valparai Co-operative Urban Bank Ltd.
Key Details
- State: Tamil Nadu
- Penalty Amount: ₹1,00,000/- (Rupees One Lakh)
- Date of Order: October 23, 2025
- Violation Area: Know Your Customer (KYC)
- Charge Sustained: Failed to upload the KYC records of customers onto Central KYC Records Registry (CKYCR) “within the prescribed timeline.”
Root Cause Analysis (RCA)
While similar to Bank 2, the specific mention of “within the prescribed timeline” suggests a failure of “process discipline” and capacity management. The regulatory clock for CKYCR submission starts immediately after account opening, and delays are treated as non-compliance:
- Manual Delay/Batch Processing: Reliance on manual processes or batch uploads run infrequently (e.g., weekly), causing KYC submission to fall outside the mandated short window (typically 7-10 days).
- Prioritization Misalignment: CKYCR submission was treated as a low-priority, back-office task performed only when staff capacity allowed, rather than a critical, time-bound regulatory function.
- Absence of Aging Report: Lack of an internal tracking mechanism that generates alerts for KYC records pending CKYCR upload beyond a specific internal threshold (e.g., 2 days post account opening).
Preventive Controls
- Time-Bound SLA: Define a Service Level Agreement (SLA) for all front-line and back-office staff requiring CKYCR processing to be completed within “2 working days” of account opening.
- Automated Alerts: Implement an automatic notification system that escalates to the Compliance Head when a new account’s KYC record remains un-uploaded after 3 days.
- Daily Compliance Dashboard: Create a simple daily dashboard showing the number of accounts opened vs. the number of accounts successfully uploaded to CKYCR, ensuring “100% reconciliation daily”.
Lesson Learnt
“Regulatory timelines are strict deadlines, not targets. Operational processes must be optimized and automated to ensure “zero deviation” from time-bound compliance mandates like CKYCR, protecting the bank from both penalties and heightened regulatory scrutiny.”
5. The Tumkur District Co-operative Central Bank Limited
Key Details
- State: Karnataka
- Penalty Amount: ₹1,00,000/- (Rupees One Lakh)
- Date of Order: October 22, 2025
- Violation Area: Contravention of “Section 20” read with Section 56 of the Banking Regulation Act, 1949 (BR Act).
- Charge Sustained: Sanctioned loan to “one of its directors”.
Root Cause Analysis (RCA)
Section 20 of the BR Act strictly “prohibits” a banking company from granting loans or advances to or on behalf of its directors or entities in which the directors are interested. This is a critical governance requirement. Sanctioning a loan to a director points to a fundamental failure of ethical conduct and compliance:
- Governance Failure: The Board/Credit Committee failed to enforce the statutory prohibition, indicating a lapse in ethical conduct and adherence to the BR Act.
- Override of Controls: Manual override or deliberate circumvention of internal controls that should have flagged the applicant as a “prohibited party” (i.e., a director).
- Absence of Conflict Check: Failure to implement a robust, automated mechanism that cross-references all loan applicants against the list of directors, their relatives, and associated entities.
Preventive Controls
- Automated Director Check: Institute a mandatory, non-bypassable check in the LMS that “blocks the processing” of any loan application where the applicant’s name or KYC identifier matches the list of directors and related parties.
- Annual Declaration: Require all directors and senior management to submit an “annual sworn declaration” confirming their and their relatives’ financial exposures and interests in the bank.
- Ethics & Statute Training: Conduct specialized, mandatory training for all members of the Credit Committee and Board on the specific “prohibitions under Section 20” of the BR Act.
Lesson Learnt
“Conflicts of interest must be actively managed and prohibited by systemic controls. Statutory restrictions, particularly those concerning loans to directors and related parties, are “zero-tolerance areas” that protect the bank’s public trust and fiduciary responsibility to depositors.”