Banks have probably exonerated themselves after an internal investigation into the sting operations showed there was no compromise on know your client (KYC) norms since no transaction happened. But they could still face a regulatory penalty for lax internal governance standards, said two people familiar with the thinking.

"Banks in their reports have not found any violation of know your customer norms,'' said one of the persons who did not want to be identified.

These are not the complete findings of the probe, there may be more. "It is possible that banks could be held responsible for violation of internal governance and select branches could be penalised.''

RBI and the banks were probing into alleged irregularities and banking practices that are in violation of the law. That followed a sting operation by, an online news provider, which captured on camera suggestions by bankers that could help clients avoid tax, convert black money into accounted money, and even siphon-off funds. "We do not discuss individual banks in public domain,'' the Reserve Bank of India said in an e-mail response.

ICICI Bank spokesperson said that the bank has submitted the inquiry report to RBI. HDFC Bank and Axis Bank did not respond to emails seeking comment. RBI, whose investigation findings are not known, is expected to issue a show-cause notice to the banks and then decide whether to levy a penalty, or let off with a warning. "It (RBI) is concerned with the lack of internal controls to check employee behaviour,'' said the same person quoted above.

"According to the principle on internal governance, a bank cannot absolve itself from any action of its employees—even if it is giving advice to clients.'' Bank staff selling unsuitable products to clients has become a menace with thousands of clients complaining that bankers are misleading them. Regulators across the globe are tightening standards and even the RBI has faced issues in the past.

"Apart from penalising select bank branches for non adherence to internal governance, RBI is also expected to frame norms for relationship managers particularly when it comes to sale of investment products, '' the sources said.

The three banks suspended nearly 40 staff who were caught on camera and ICICI Bank and HDFC Bank appointed auditors Deloitte Touche Tohmatsu to conduct a full, independent forensic enquiry into the reported events.

RBI has kept an open mind on what was happening in the banking sector. "I believe systems are largely safe,'' RBI governor had said. "However, there is a need for some corrective action and based on the findings of the investigation, we will take corrective action.

"I cannot at this time say or make broad, sweeping statement that there are no transactions taking place at all."

Keywords:Banks , internal investigation into the sting ,KYC, customer,internal governance,RBI, tax, convert black money,accounted money,ICICI Bank , HDFC Bank , Axis Bank,RBI governor,Business news