KYC Concerns Likely Led To RBI Restrictions On SBM Bank India — BQ Exclusive

The Reserve Bank of India on Monday restricted SBM Bank India from using the liberalised remittance scheme for transactions with immediate effect. "This action is based on certain material supervisory concerns observed in the bank," the regulator said in a short statement on its website.

According to the first of the two people quoted above, SBM Bank India allowed foreign remittances by Indian residents through tie-ups with fintech partners. These were not direct customers of the bank and KYC checks for them were being conducted by the partners.

This became a concern for the regulator, the people quoted above said.

According to SBM Bank India's website, it works with a host of fintechs including HOPRemit, Vested, Instarem and INDmoney, which allow foreign remittances by resident Indians. These funds may be used to purchase foreign stocks, exchange-traded funds, and payments to foreign merchants.

The RBI was also concerned with the sudden rise of foreign exchange outflow through the LRS route because services such as those provided by SBM Bank India were becoming very popular.

The RBI and SBM Bank India didn't immediately respond to queries emailed on Tuesday.

Typically, to access the LRS, a customer must submit a set of KYC documents to a bank. The customer must also clarify the end use of these funds to the concerned bank.

According to the RBI's guidelines, customers are allowed to send out $250,000 under the LRS in a financial year. The funds cannot be used to purchase restricted items such as lottery tickets. It can also not be used for margins or margin calls to overseas exchanges or counterparty, foreign exchange trading, purchase of foreign currency convertible bonds in the secondary market, terrorism financing, among others.

The regulator has asked SBM Bank India to review its KYC policies and ensure that a direct check is conducted, before it will be allowed to access the LRS again, the first person quoted above said.

This is not the first time that SBM Bank India's fintech tie-ups have faced regulatory ire. In June 2022, the RBI had blocked the use of the prepaid payment instrument as a credit card. Fintech players such as Uni, Slice, Kissht, Lazypay, Jupiter, among others, were affected. SBM Bank India worked with many of these prepaid card startups which sought to create a credit card alternative.