The dark, hidden and ugly side of banks in India – Part 1

RBI imposed penalties worth crores of rupees on J&K Bank, Bank of India and Canara Bank in Jan 2025 for unfair and improper business practices

A few years ago, replying to an RTI filed by a media organisation, the government of India, particularly the Ministry of Finance, conceded that Indian banks have unclaimed accounts and deposits worth over 5,000 crores. That was at least 10-15 years ago. Today, the unclaimed deposits in Scheduled Commercial Banks (SCBs) in India have crossed Rs 35,000 crore (as of March 2023) and continue to rise year after year.

According to an estimate banks in India today are holding about Rs 82,000 crores worth of unclaimed funds in disputed, forgotten, and dormant accounts, FDs, Bonds, insurance, and provident funds whose owner is untraced, or dead. This is in addition to around Rs 33,114 crores deposited in the Depositor Education and Awareness Fund (DEAF) as of March 31, 2020.

Reasons for unclaimed funds:

• Transfer, change of address or contact details without informing the bank
• The account holder lost the passbook or cheque-book
• The account holder forgot the account number and balance amount in it
• The account holder forgot the signature in a particular account number 
• Death of the account holder
• Improper details about the nominee or legal heirs 
• Legal disputes over ownership of funds

Banks do not own the unclaimed funds, but they retain the unclaimed deposits and use them to earn interest and get more profit before transferring the money to the Depositor Education and Awareness Fund (DEAF) managed by the Reserve Bank of India (RBI) after about 10 years.

This is the darkest and ugliest reality of banking. The corrupt and greediest banker who defrauds the maximum number of customers and denies them their rights – enjoys the fruits of his crime and plays around with their hard-earned money for at least 10 years – without paying any interest.

How Banks Benefit from Unclaimed Funds

• Use of Funds for Operations (Before Transfer to DEAF)
• Banks retain unclaimed deposits for up to 10 years before transferring them to DEAF. During this period, banks can use these funds to earn interest from investments and borrowers.
• Many of the dormant savings or fixed deposit accounts belong to the period when interest rates were quite low. Still, banks generally stop or reduce interest payments in inactive accounts after a certain period, to earn more profit and increase their margins.
• Since account holders are not withdrawing money from dormant accounts, banks have greater liquidity to deploy the funds elsewhere.
• After 10 years, banks have to transfer unclaimed deposits to the DEAF fund managed by the RBI. However, some banks claim interest reimbursement thereafter if and when the rightful owner claims their money.

RBI’s penalties on J&K Bank, Bank of India and Canara Bank 

Recently, in January 2025, the Reserve Bank of India – the banking regulator – imposed financial penalties worth Rs 3.31 crore on Jammu and Kashmir Bank (on January 14, 2025), for deficiencies in financial inclusion, particularly the Basic Savings Bank Deposit Account (BSBDA), lapses in compliance with KYC norms and violation of RBI guidelines on lending practices.

Likewise, the Bank of India was fined Rs 1 crore by RBI in January 2025, for violating the Banking Regulation Act, of 1949. The violation pertained to Section 26A of the Banking Regulation Act, 1949, in conjunction with the Depositor Education and Awareness Fund Scheme, 2014. This was so because the bank failed to follow the directive related to the Depositor Education and Awareness Fund (DEAF) which mandates that banks transfer unclaimed deposits and inoperative account balances to the DEAF within a stipulated timeframe.

Significantly, this was not the first time that the Reserve Bank of India (RBI) imposed a monetary penalty on the Bank of India for non-compliance with regulatory directions. In 2024 too, the Reserve Bank of India imposed a penalty of Rs 1,40,76,000 on the Bank of India for flouting RBI’s guidelines on interest rates for deposits and advances. The Apex Bank also identified deficiencies in the bank’s customer service protocols and non-compliance with established standards. The RBI also known as the banker’s bank also discovered that BOI was not complying with the revised reporting requirements for large credits to the CRILC and provisions outlined in the Credit Information Companies Rules, 2006. The RBI’s inspection revealed these non-compliances based on the bank’s financial reports from March 31, 2021, to March 31, 2022. After going through the bank’s reply to the notices issued, the RBI concluded that the charges were substantial and warranted the imposition of the penalty.

Similarly, Canara Bank had to dish out Rs 1.63 crore on January 7, 2025, for violating RBI’s directions on priority sector lending and deposit interest rates.

No doubt, these penalties directly impact the bank’s profitability, they also reflect the RBI’s mood to ensure a stable and transparent banking platform where rules and financial regulations are strictly followed, customer rights are protected, and there is overall financial stability.

The Modus-operandi or Trojan horse

This is a gambit or move in chess where a player typically sacrifices an insignificant piece – say pawn to trap the Bishop, Queen or Checkmate the King. Such unethical and unfair trade practices taking advantage of customers who are not financially literate or aware of their rights may include:

• Banks charge excessive or hidden fees for services, which are not spelt out.
• Banks use complex language or misleading terms, making it difficult for customers to understand the terms and conditions in contracts.
• Banks may charge exorbitant interest rates or impose unfair penalties on customers who default on payments.
• Banks may not provide clear and timely information to customers about their accounts, transactions, or changes to terms and conditions.
• Banks may mis-sell financial products, such as insurance policies or investment schemes, to customers who may not fully understand the risks or benefits.

Case studies: How the banks cheat customers to make money?

Banks often alter the loan terms and interest rates without obtaining proper customer consent, leading to regulatory penalties and legal challenges. Here are some notable case studies:

• Bhagwan and Madhu Jindal secured a home loan of Rs 1.2 crore from Punjab National Bank (PNB), Chandigarh in August 2020. Subsequently, they applied for an additional Rs 25 lakh as an overdraft on the existing loan. However, when they decided to transfer their loan to another bank, it was found that the bank had altered the loan agreement without their consent. The consumer forum ruled in favour of Bhagwan and Madhu Jindal and passed strictures against the bank for not obtaining proper authorization for changes to the loan terms. The case was reported in the Hindustan Times.

Also Read: Is Bank of India trying to suppress a fraud in its backyard?

• The Delhi High Court heard a case in which a bank unilaterally transitioned a customer’s loan to a different interest rate system without consent, resulting in higher charges. The court ruled this action violated the agreed terms and RBI guidelines, ordering the bank to refund the excess interest charged.
• Rani (name changed) – a widow in her 50s approached the Punjab National Bank branch in Amritsar to encash an FD for about Rs 25,000 made by her late husband. To her utter surprise, the bank refused to entertain her request as they did not have any computerised record of the period when the FD was made. Instead of looking at the matter, the bank official told her that he did not have the time to go through the manual ledgers locked up in the store room. After another 2-3 visits to the bank, to get her money – Rani stopped following up on the matter and accepted it as a bad dream and loss.
• In yet another case, a customer approached the State Commission in New Delhi, alleging that ICICI Bank increased the interest rate on his home loan and extended the EMI tenure without informing him. The Commission directed the ICICI Bank to compensate Rs 1.62 lakh to the customer along with interest, plus an additional Rs 1 lakh towards compensation and costs. The bank’s appeal to the National Consumer Disputes Redressal Commission (NCDRC) was dismissed.

These case studies underscore the importance of transparency and ethical practices in banking operations and demonstrate how banks cheat customers by deliberately not obtaining proper consent before making changes in mutually agreed terms. These cases also reinforce the need to transparently communicate changes in pre-defined terms to avoid regulatory penalties and legal challenges.

Customers are the lifeblood of banking

Customers are one and the only source of profit and the main source of earnings for the banks. No bank can survive without the trust and deposits from customers. Without the customers, no bank can survive, let alone thrive.  

Trust is the bedrock upon which the banking-customer relationship is built. When customers entrust their hard-earned money to a bank, they expect that institution to act in their best interests, safeguarding their deposits and providing fair, transparent services.

Banks that prioritize building and maintaining customer trust are more likely to attract and retain customers, ultimately driving business growth and profitability.

Also Read: Fitch Ratings: Indian Banks may face intense pressure

Customer deposits are the lifeblood of banking, providing the necessary funds for banks to lend, invest, and generate revenue. Without deposits, banks would be unable to provide loans, credit, and other financial services that drive economic activity. In essence, customer deposits enable banks to perform their fundamental role in facilitating economic growth and development.

Trust and deposits are inextricably linked. When customers trust a bank, they are more likely to deposit their money, secure in the knowledge that their funds are safe and being used responsibly. Conversely, when banks demonstrate their trustworthiness through transparent, customer-centric practices, they attract more deposits, leading to business growth and profitability.

Conclusion

In conclusion, customers are the very foundation upon which the banking industry is built. Their trust and deposits are the primary drivers of a bank’s profitability and growth. As such, banks must prioritize building and maintaining customer trust. This is the only way banks can create a loyal customer base, drive business growth, and contribute to the overall health and stability of the financial system.

Trust does not develop overnight. It is a long, painful process to build trust but takes only – one stupid mistake or slip of the tongue and a few minutes to lose everything.