MC Explains: Why did RBI bar SBM Bank from the Liberalised Remittance Scheme?

The Reserve Bank of India (Photographer: Dhiraj Singh/Bloomberg)

The Reserve Bank of India (RBI) on January 23 barred SBM Bank (India) Ltd to stop all transactions under Liberalised Remittance Scheme (LRS) with immediate effect until further orders.

This isn’t the first time RBI is penalising SBM Bank, a a subsidiary of Mauritius-based SBM Holdings, for rule violations. What prompted the RBI action?.

If you have read the news and are wondering what the fuss is all about, here is an explainer.

What is the issue about? 

The RBI, in exercise of its powers under sections 35A and 36(1)(a) of the Banking Regulation Act, 1949, directed SBM Bank to stop, with immediate effect, all LRS transactions until further orders.

LRS is a programme that allows individuals in India, including minors, to freely remit up to $250,000 per financial year (April-March) for a variety of permissible transactions, such as current or capital account transactions or a combination of both.

The scheme was introduced by RBI in 2004 to allow Indian residents to make foreign currency transactions with greater ease.

Why did RBI act? 

The central bank, in a press release, said that the action against the SBM Bank had been taken due to certain material supervisory concerns observed at the bank.

Bankers say the action may have been taken because of non-compliance with certain procedures.

Also read: RBI asks SBM Bank to stop all remittance transactions with immediate effect

What next? 

The central bank has asked bank to stop LRS transactions with immediate effect, but bankers and experts say the bank may work towards compliance with procedures and seek to have the ban removed as soon as possible.

Experts believe that the ban will be removed as soon as SBM Bank complies with all the procedures laid down by the central bank and other authorities.

Past penalties on SBM Bank

This is not the first time SBM Bank is under regulatory glare. Earlier too, RBI imposed penalties on it for violating certain norms of the Banking Regulations Act.

In October, 2019, the RBI had imposed a penalty of Rs 3 crore on SBM Bank  for non-compliance by SBM Bank (Mauritius) Ltd.

RBI had conducted a scrutiny to examine the implementation of SWIFT related operational controls in SBM Bank (Mauritius) Ltd at its Indian operations.

When did SBM commence banking operations? 

SBM Bank (India) commenced operations on December 1, 2018 after receiving a banking license from RBI through the Wholly Owned Subsidiary (WOS) route.

SBM Bank is a subsidiary of Mauritius-based SBM Holdings. SBM Group is a financial services group offering products and services including deposits, lending, trade finance and cards, among others, according to its website.