The recent Citibank fraud has made the government review the regulatory issues regarding wealth management and private banking services offered by the banks.
The sub-committee of Financial Stability and Development Council, which met in New Delhi on Friday, has discussed the issue of wealth management services by banks.
The sub-committee is headed by the governor of Reserve Bank of India. This was the first meeting of the sub-committee since the formation of FSDC in December.
Banks have to take the RBI's approval for offering portfolio management services. However, bank sponsored non-banking financial services companies are allowed to offer discretionary PMS.
RBI guidelines also mandate that PMS should be entirely at the customer's risk, without guaranteeing, either directly or indirectly, a pre-determined return.
Funds for portfolio management cannot be for less than one year. Portfolio funds are not be deployed for lending in call money, inter-bank term deposits and bills rediscounting markets and lending to corporate houses.
The fraud in Citibank's Gurgaon branch broke out in December involving nearly Rs. 400 crore (Rs. 4 billion) being siphoned out from 20 accounts of high net-worth individuals.
The other issue which was discussed during the meeting was global developments in respect of policies for systemically important financial institutions and their possible impact on financial institutions in India.
RBI had recently highlighted issues regarding regulation of SIFIs and the need to develop criteria to identify a systemically important institution. RBI also said drawing a sharp distinction between a SIFI and a non-SIFI requires considerable judgement and has a moral hazard downside.
The meeting also discussed issues like information sharing arrangement among regulators for systemic risk assessment and financial stability issues that are of particular relevance to emerging market economies.
The other members of the subcommittee who participated in the meeting are the four deputy governors of RBI and one of its executive directors, V S Das, heads of market, insurance and pension regulators, the finance secretary, chief economic advisor, among others.
The Sub-Committee of the FSDC has been formed to assist the FSDC. The sub-committee has replaced the High Level Coordination Committee on Financial Markets.