Mumbai, Jan. 24: A day after it imposed penalties on seven banks for their involvement in the IPO share allotment scam, the Reserve Bank of India (RBI) will now look into the internal control system of banks. It will also run a check on its own structure to see if the central bank had received a warning on the scam and whether its officers had ignored early tipoffs.

RBI governor Y.V. Reddy said commercial banks had failed to maintain a system of checks and balances. Reddy feels it was not a systemic failure, nevertheless, it will look into banks’ internal system.

“It was the failure of checks and balances. Not a systemic one. The procedure adopted was through account payee cheques,” Reddy said. RBI regulations permit account payee cheques to be credited into the account of another person under certain circumstances. This procedure was misused by banks.

Yesterday, the central bank had levied monetary penalties ranging between Rs 5-20 lakh on seven banks for their involvement in the scam. They included Bharat Overseas Bank, Indian Overseas Bank (IOB), HDFC Bank, Vijaya Bank, Citibank, ICICI Bank and Standard Chartered Bank.

Bharat Overseas Bank had collected account payee cheques of individuals who were not customers of the bank, besides crediting the proceeds of the refund orders to accounts other than the accounts of the payees.

Even ICICI Bank’s internal control failed and account payee cheques were accepted across the counter without proper authorisation. As the relaxation relating to account payee cheques have been misused, the RBI has directed commercial banks not to credit account payee cheques to another account.

Replying to a query, Reddy admitted that the penalties imposed were small as the law prevented it from imposing a penalty of more than Rs 5 lakh on a single offence.

The RBI had started investigations into the role of commercial banks after it received a communication from Sebi. While Sebi had mentioned only two banks, the RBI found 14 branches of these seven banks were involved.