Opinion | RBI fines should hurt those responsible—not just the bank

Every time the Reserve Bank of India (RBI) imposes a monetary penalty on a bank, a familiar sentence appears in the press release: the action is for “deficiencies in regulatory compliance” and does not affect the validity of customer transactions.

Over the years, these penalties have become so routine that they barely make headlines anymore. Yet they raise a fundamental question that India’s banking system has failed to answer.Who really pays for regulatory failures?

The All India Bank Employees’ Association (AIBEA) has now thrown this question into the spotlight by urging the Finance Ministry to introduce a national accountability policy that fixes responsibility on officials whose actions—or inaction—lead to regulatory penalties.It is a proposal that deserves serious debate.

The RBI’s supervisory philosophy is not to punish banks for the sake of punishment. Monetary penalties are intended to improve governance and strengthen compliance. Over the years, banks have been fined for violations ranging from KYC and anti-money laundering lapses to cyber security failures, fraud reporting deficiencies and customer protection issues.

The central bank has consistently maintained that these are compliance failures, not judgments on customer transactions. But once the penalty is imposed, the cheque is written by the institution.In public sector banks, that ultimately means the burden is shared by the Government of India, public shareholders and depositors.

Ironically, those who had no role in the compliance failure bear the financial cost, while the individuals responsible often remain anonymous.That is hardly a model of accountability.To be fair, banking is a complex business.

Not every RBI penalty is the result of individual negligence. Many arise from legacy technology, ambiguous regulations, process failures or genuine interpretation differences. There are also instances where the board or senior management may have created conditions that made compliance failures inevitable.

This is precisely why accountability cannot become a witch-hunt.Instead, India needs a structured framework that distinguishes between human error, systemic deficiencies and deliberate misconduct.Where an investigation finds wilful disregard of regulatory instructions, gross negligence or repeated violations, there is little justification for allowing the institution alone to absorb the financial consequences.

The principle already exists elsewhere in corporate governance. Directors and key managerial personnel are expected to discharge fiduciary responsibilities. Banking should be no exception.Equally important, accountability must not stop at branch managers.

One of the weaknesses of Indian banking has been its tendency to fix responsibility at the lowest operational level while strategic and systemic failures escape scrutiny.

If deficient compliance systems, understaffed departments or unrealistic business targets contribute to regulatory breaches, the chain of accountability should extend all the way to senior management and, where appropriate, the board.That would represent genuine governance reform.However,

AIBEA’s proposal to recover penalty amounts from officials should be implemented with caution.Regulatory penalties often run into crores of rupees. Recovering entire amounts from individual employees may neither be legally sustainable nor practically fair.

Any framework should follow due process, establish clear evidence of responsibility and ensure that recoveries are proportionate. Otherwise, it risks creating a culture of defensive banking where officers become reluctant to take commercial decisions for fear of personal liability.

The larger objective should not be revenue recovery.It should be behavioural change.Banks should be required to publicly disclose the nature of regulatory violations, whether internal accountability was fixed and what corrective measures were taken. Transparency itself can be a powerful deterrent.

Annual reports should go beyond merely mentioning that a penalty was paid; they should explain what went wrong and how similar failures will be prevented.The RBI has steadily tightened supervision over the past decade. In FY2024-25 alone, it imposed penalties totalling ₹54.78 crore on 353 regulated entities for compliance violations, underscoring that regulatory enforcement has become more active and data-driven.

The next logical step is ensuring that accountability follows enforcement.Ultimately, good governance is not about collecting fines. It is about creating institutions where compliance is owned, responsibility is visible and mistakes have consequences for those who make them—not just for the organisations they serve.

If the Finance Ministry is serious about strengthening governance in public sector banks, AIBEA’s suggestion should not be dismissed as a trade union demand. It should be viewed as the beginning of a much-needed conversation on one of Indian banking’s biggest blind spots.

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