The multi-crore fraud at the Gurgaon branch of Citibank has prompted the banking regulator to review existing norms for the portfolio management services (PMS) of banks.
With the Reserve Bank of India's (RBI's) inspection report on the Citibank fraud ready, banking industry sources said RBI would compile a comprehensive report on the loopholes in PMS guidelines.
The report, which is being prepared by the department of banking supervision, will be discussed by the board for financial supervision and the guidelines revised based on feedback.
According to RBI norms, no bank can offer PMS without specific permission. However, bank-sponsored non-banking financial services companies are allowed to offer discretionary PMS.
PMS offered by banks are classified into four categories: Referral services, investment advisory, non-discretionary and discretionary.
Sources said present norms do not clearly distinguish between investment advisory and non-discretionary PMS.
The regulator will address the issue while revising the norms. It will also look into the way discretionary PMS are provided by banks.
According to sources, the central bank may also bring in norms to govern relationship managers, something current guidelines do not.
"Some countries do have norms for relationship managers, and the central bank feels the need to have some kind of code of conduct for them," said a source.
Sources also said that until fresh guidelines are formed, RBI may go slow on issuing fresh permission to banks for PMS. Some government-owned banks, which were planning to offer PMS, are now awaiting RBI's revised norms before starting operations.
Present norms do not allow funds to be accepted by portfolio managers for less than one year.
In addition, portfolio funds cannot be deployed in the overnight, inter-bank term deposit & bill rediscounting markets or lent to corporate bodies.
Banks must maintain client-wise records of funds accepted and investments made. Portfolio clients are entitled to a statement of account.
The fraud at Citibank's Gurgaon branch was unearthed in December 2010. Nearly Rs 400 crore (Rs 4 billion) was siphoned out of 20 accounts of high net-worth individuals.
Following this, the central bank carried out a branch inspection. Banks violating guidelines on PMS can be subject to deterrent action.
That includes higher reserve requirements, withdrawal of refinance by RBI and denial of access to money markets, apart from a bar on PMS activity.
