RBI red flags Ujjivan Small Finance Bank’s processes and systems

This news item first appeared in the Moneylife magazine. When the Moneylife Magazine publishes an item related to corporate governance lapses, people take it seriously, very seriously. This news item has been doing the rounds on social media – both WhatsApp and twitter. This is of special interest of investors since Ujjivan Small Finance Bank recently got SEBI’s approval to launch its IPO which is expected to hit the markets in early December.

Let us look at exactly what has the RBI inspection found.
Ujivan - RBI InspectionTo summarize the findings of the RBI inspection of the Ujjivan Small Finance Bank, for the financial year FY17-18

  • Lack of a system to tag PSL (Priority Sector Loan) advances, mis-categorizing of PSL advances
  • Lack of a rating methodology to assess borrowers
  • Lack of a fraud management system
  • Weak customer grievance redressal system
  • Deficiencies in anti-money laundering (AML) and KYC protocols
  • Lack of an independent compliance department
  • Rate of interest mentioned in the sanction letter different from the one mentioned in the loan agreement.
  • Non-optimizing of core banking software and the software used for micro-lending (not sure what non-optimizing means)

These are very serious findings.

The news item seems to have been so widely read on social media that other national business newspapers like Economic Times, Business Standard, Business Today, Bloomberg Quint have also published it on their platforms.

At this moment, we do not know the extent of the deficiencies in the operations of Ujjivan Small Finance Bank because, right now we do not have access to the RBI inspection report. We do not know the full details of the what is the position of RBI in the deficiencies found.

However, we can make an intelligent guess about how severe/damaging the findings are by looking at how RBI has dealt with deficiencies found at certain other banks.

Google is a distinct advantage that this generation of investors has over previous ones and we should make full use of it.

RBI imposes penalty on HDFC Bank for not complying with anti-money laundering norms

  • RBI inspection found that HDFC Bank had violated RBI directions pertaining to AML (anti-money laundering) and KYC (know-your-customer) norms.
  • HDFC Bank’s customers were found to have submitted forged bills to be able to remit foreign currency in violation of RBI norms.
  • RBI issued a show-cause notice as to why penalty should not be imposed on HDFC Bank
  • The bank was not able to suitably satisfy RBI through written submissions and oral arguments
  • RBI decided to impose a Rs 1 Cr penalty so as to teach HDFC bank a lesson and get them to streamline processes.


RBI slaps a penalty of Rs 7 Cr on State Bank of India
RBI found deficiencies in the operations of the State Bank of India in the following areas

  • Non-compliance of income recognition and asset classification norms.
  • Reporting of data on Central Repository of Information on Large Creditors (CRILC)
  • Fraud risk management
  • Classification and reporting of frauds

In fact, a Moneylife analysis of the inspection reports of SBI revealed some very damaging findings, including ever-greening of loans


 RBI imposes 11 Cr penalty on seven PSBs
Allahabad Bank, Bank of Maharashtra, Bank of Baroda, Bank of India, United Bank, Overseas Bank of India

  • RBI inspections had found deficiencies in regulatory compliance.
  • The banks were found to be in violation of directions issued by RBI on “Code of Conduct for opening and operating Current Accounts”
  • RBI was not satisfied with the replies of all these esteemed public sector banks and resorted to imposing monetary penalty.

RBI bans Bandhan Bank from opening new branches
As per the conditions of granting a banking license to Bandhan Bank in 2014, RBI had mandated Bandhan Bank to reduce the promoter holding to less than 40% within 5 years of starting banking operations. Since the promoters of Bandhan Bank did not comply with this licensing condition, RBI imposed the following restrictions on the operation of Bandhan Bank in Sep-18

  • RBI barred Bandhan Bank from opening new branches without its prior approval (This was not required before Sep-18)
  • RBI froze the salary of the MD&CEO of Bandhan Bank – the founder Mr. Chandra Shekhar Ghosh


Let us not forget the IPO scam of the mid-2000s
SEBI raps HDFC Bank: IPO scam
RBI fines HDFC Bank again in the IPO Scam
The scam involved a single person opening hundreds of savings accounts and demat accounts to be able to garner “allotment” in the IPO process. These were the boom times in India and an IPO was a sure-shot way to make large amounts of money in the stock market. In one case, a certain Mr Purshottam Budhwani opened 286 different savings bank accounts in several of HDFC Bank’s Mumbai branches with different customer IDs. In fact, RBI made the following comment in its investigation report

“In the light of the findings of the inspections, the confirmation by HDFC Bank appears to be totally divorced from reality as established,” it said.

Now, this is a very severe comment to be written especially in an investigation report by RBI about the operational procedures of any bank.


In the case of Ujjivan Small Finance Bank, there does not seem to be a case of imposition of any penalty for non-compliance of RBI rules/directions. Also, reading other parts of the DRHP of Ujjivan Small Finance Bank reveals that no regulatory/statutory action has been taken against Ujjivan in the recent past or no such action is pending
Page 292 of DRHP – Litigation involving the bank
Ujjivan - No regulatory action
Page 297 of the DRHP – Actions taken by Regulatory and Statutory Authorities
Ujjivan - No disciplinary action
If the RBI had serious reservations on the lapses observed during the annual inspection exercise, they would have at least issued a show-cause notice and/or imposed a penalty on the bank.

Prima Facie and given the evidence we have at this moment, I do not see any serious concerns regarding the operational procedures adopted by the bank. Also, the biggest concern with respect the investing in any lending business is the judgment exercised in its lending practices. There don’t seem to be adverse observations with regards to non-performing assets (NPA) of the bank.

I will change my opinion when I have access to additional information about the matter. I have filed an RTI application with RBI to be able to access the entire inspection report and study it in detail.


Please do not consider this article as a stock recommendation. The article is an illustration of the kind of analysis that goes into fundamental research and equity investing. I hold the shares of Ujjivan Financial Services.
Please seek advice from your investment advisor before making any investment decisions. The author (@amey153) is a SEBI registered Investment Advisor.


If you want to seek investment advice click here and someone from my team will get in touch with you within 48 hours.


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