What changed
RBI observed that commercial banks offering 'at par' cheque book facilities to cooperative banks were not treating these as correspondent banking relationships. The circular explicitly classifies such arrangements as correspondent banking, requiring banks to monitor and review them for credit and reputational risks. Banks must now retain the right to verify cooperative banks' KYC and AML compliance records.
What it means for you
Commercial banks must now apply the same rigorous due diligence to 'at par' facilities for cooperative banks as they do for other correspondent banking relationships. This includes assessing the cooperative bank's management, business activities, AML/CFT compliance, and purpose of the account. Banks face increased responsibility to ensure cooperative banks adhere to KYC/AML norms, reducing the risk of money laundering and fraud.
What you must do
- Review all existing 'at par' cheque book arrangements with cooperative banks and reclassify them as correspondent banking relationships.
- Conduct enhanced due diligence on cooperative banks, including their management, business activities, and AML/CFT compliance status.
- Update internal policies to include the right to verify KYC/AML records of client cooperative banks under these arrangements.
- Monitor and assess credit and reputational risks arising from these correspondent banking relationships periodically.
Who it affects
All scheduled commercial banks (excluding RRBs), Cooperative banks using 'at par' cheque facilities, Compliance and risk management teams of commercial banks
What is an 'at par' cheque facility in this context?
It is a facility where a cooperative bank opens a current account with a commercial bank and uses the cheque book to issue 'at par' cheques to its customers for remittances and payments, effectively using the commercial bank's credit standing.
Why is RBI treating this as correspondent banking?
Because the commercial bank is providing banking services to another financial institution (cooperative bank) on behalf of its customers, which mirrors the structure of correspondent banking and carries similar risks.
What happens if a cooperative bank fails KYC/AML compliance?
The commercial bank must have the right to verify records and can terminate or restrict the arrangement to mitigate credit and reputational risks.