The Reserve Bank of India (RBI) on Friday said it has imposed a penalty of Rs 10 crore on HDFC Bank in relation to irregularities found in its auto loan portfolio. This is one of the largest penalties imposed by the regulator on a bank in recent times.
The action was taken after the regulator conducted an investigation into a whistle-blower complaint alleging misdeeds in the bank’s auto loan portfolio. The irregularities were linked to the marketing and sale of third-party non-financial products to the bank’s customers, RBI said.
"An examination of documents in the matter of marketing and sale of third-party non-financial products to the bank’s customers, arising from a whistleblower complaint to RBI regarding irregularities in the auto loan portfolio of the bank, revealed, inter alia, contravention of the afore-said provisions (section 6(2) and section 8) of the (Banking Regulation Act, 1949) Act and the regulatory directions," RBI said in a notification on Friday evening.
A notice was issued to the bank advising it to show cause as to why a penalty should not be imposed for contravention of the provisions of the Act/directions, RBI added. After considering the bank’s reply to the show-cause notice, oral submissions made during the personal hearing and examination of further clarifications/documents furnished by the bank, RBI came to the conclusion that the charge of contravention of provisions of the Banking Regulation Act was substantiated and warranted imposition of monetary penalty.
According to people familiar with the matter, the whistle-blower complaint had alleged that HDFC Bank's car loan customers were given GPS devices bundled as part of the auto without their knowledge. This is in violation of the Banking Regulation Act guidelines on the matter, which prohibits banks from indulging in non-financial business, among others.
According to the whistle-blower allegations, executives involved in these dealings sold the GSP devices to achieve sales targets from the years 2015 to 2019 and also used these illegally to track customers in case of loan defaults, as per people in the know. HDFC Bank is understood to have tied up with a firm called "Trackpoint GPS" for these devices, it was alleged.
Addressing the issue in an earnings concall in July of last year, the bank’s former MD and CEO Aditya Puri had said, "We had received some whistleblowing complaints. Internal inquires carried out in the matter on the complaint received has not bought out any conflict-of-interest issue, nor does it have any bearing on our loan portfolio. The inquiry did bring out other aspects related to personal misconduct exhibited by a set of employees, for which appropriate disciplinary actions have been initiated or taken. Based on the internal inquiry timing, the appropriate action was taken against a set of employees of the auto loan business segment for their act of personal misconduct. Ashok Khanna, being head of the referred business segment, had also participated in the inquiry process. Subsequently, he superannuated on March 31, 2020, upon expiry of his tenure and as per the original term of employment. Based on further development in the inquiry process, appropriate action as necessary will be taken in the highest form of corporate governance."
Ashok Khanna, former group head of secured vehicle loans, an HDFC Bank veteran, and close aide of its long-time managing director Aditya Puri exited the bank in March 2020. The exit was linked to the auto loan GDP controversy, but the bank has denied any linkage.
Five regional managers and two central officials were fired after an internal inquiry into the matter by HDFC Bank found evidence of impropriety and links with the vendor, reports have suggested.
RBI clarified that the monetary penalty action was based on deficiencies in regulatory compliance and is not intended to pronounce upon the validity of any transaction or agreement entered into by the bank with its customers.
CNBC-TV18 reached out to HDFC Bank for a comment on the development. A spokesperson for the bank said, "We have received the communication from RBI and will abide by it."