RBI Circular number RBI/2020-21/20 DOR.No.BP.BC/7/21.04.048/2020-21 Dated 6th Aug 2020
To take appropriate measures for strengthening credit discipline” & to eliminate concerns emanating from the use of multiple accounts by borrowers, There is a “need for discipline” by the banks in opening current accounts so no bank can open current accounts for customers who have availed credit facilities in the form of cash credit (CC)/ overdraft (OD).
Expenses incurred by the borrower for day to day operations should be routed through CC/ OD account, if the borrower has a CC/ OD account, else through a current account rather than opening a new current account,
1. Now Banks can’t open current accounts for borrowers who have a cash credit account with any other bank.
2. Banks with over 10% exposure can open CC/OD accts; other lenders can have collection accounts; but have to debit money only to CC/OD accounts of banks that have more than 10% exposure to borrower
If borrowers don’t have any cash-credit account with any bank, they fall under 3 categories-
a) Less than (<) Rs. 5cr loans from banks: for these corporates banks can open current Account after obtaining undertaking from customer
b) Borrowers with (>) Rs. 5 crore to (<)Rs. 50 crore loans from banking system, only lending banks may open current Account, non lending banks may only open collection accounts i.e. these accounts can receive money which have to be paid into the cash-credit Accounts.
c) More than (>) 50 crore loans, one lender bank has to open an escrow account & only this bank can open current Account. Other banks can open collection accounts, but no Non fund based facility can be given on balances in these accts; non-lending banks can’t open CAs
3) Bankers await FAQ from RBI on how &when database on lenders will be put together drawing from RBIs CRILIC and other credit bureaus. Also how will these be monitored?
Notification as below for complete details:-
i. No bank shall open current accounts for customers who have availed credit facilities in the form of cash credit (CC)/ overdraft (OD) from the banking system and all transactions shall be routed through the CC/OD account.
ii. Where a bank’s exposure1to a borrower is less than 10 per cent of the exposure of the banking system to that borrower, while credits are freely permitted, debits to the CC/OD account can only be for credit to the CC/OD account of that borrower with a bank that has 10 per cent or more of the exposure of the banking system to that borrower. Funds will be remitted from these accounts to the said transferee CC/OD account at the frequency agreed between the bank and the borrower. Further, the credit balances in such accounts shall not be used as margin for availing any non-fund based credit facilities. In case there is more than one bank having 10 per cent or more of the exposure of the banking system to that borrower, the bank to which the funds are to be remitted may be decided mutually between the borrower and the banks. It may be noted that banks with exposure to the borrower of less than 10 per cent of the exposure of the banking system can offer working capital demand loan (WCDL) / working capital term loan (WCTL) facility to the borrower.
iii. Where a bank has a share of 10 per cent or more in the total exposure of the banking system to the borrower, it can provide CC/OD facility as hitherto.
iv. In case of borrowers covered under guidelines on loan system for delivery of bank credit issued vide circular DBR.BP.BC.No.12/21.04.048/2018-19 dated December 5, 2018, bifurcation of working capital facility into loan component and cash credit component shall henceforth be maintained at individual bank level in all cases, including consortium lending.
v. In case of customers who have not availed CC/OD facility from any bank, banks may open current accounts as under:
a) In case of borrowers where exposure of the banking system is ₹50 crore or more, banks shall be required to put in place an escrow mechanism. Accordingly, current accounts of such borrowers can only be opened/maintained by the escrow managing bank. However, there is no restriction on opening of ‘collection accounts’ by lending banks subject to the condition that funds will be remitted from these accounts to the said escrow account at the frequency agreed between the bank and the borrower. Further, the balances in such accounts shall not be used as margin for availing any non-fund based credit facilities. While there is no prohibition on amount or number of credits in ‘collection accounts’, debits in these accounts shall be limited to the purpose of remitting the proceeds to the said escrow account. Non-lending banks shall not open any current account for such borrowers.
b) In case of borrowers where exposure of the banking system is ₹5 crore or more but less than ₹50 crore, there is no restriction on opening of current accounts by the lending banks. However, non-lending banks may open only collection accounts as defined at (v) (a) above.
c) In case of borrowers where exposure of the banking system is less than ₹5 crore, banks may open current accounts subject to obtaining an undertaking from such customers to the effect that customers shall inform the bank(s), if and when the credit facilities availed by them from the banking system becomes ₹5 crore or more. The current account of such customers, as and when the exposure of the banking system becomes ₹5 crore or more and ₹50 crore or more, will be governed by the provisions of para (v) (b) and (v) (a) respectively.
d) Banks are free to open current accounts of prospective customers who have not availed any credit facilities from the banking system, subject to necessary due diligence as per their Board approved policies.
2. Banks shall monitor all current accounts and CC/ODs regularly, at least on a quarterly basis, specifically with respect to the exposure of the banking system to the borrower, to ensure compliance with these instructions.
3. Banks should not route drawal from term loans through current accounts. Since term loans are meant for specific purposes, the funds should be remitted directly to the supplier of goods and services. Expenses incurred by the borrower for day to day operations should be routed through CC/OD account, if the borrower has a CC/OD account, else through a current account.
Impact / Benefits Analysis
1. The reason behind this move hasn’t been stated by the RBI, however, it can be linked to the Rs 4000 crore PMC cooperative bank scam wherein multiple accounts were opened.
2. A customer can open multiple accounts there is no monitoring of funds. Also the same customer can withdraw a huge amount from the same bank from different accounts, which can possibly lead to fraud cases and scams.
3. If a customer opens multiple accounts and there is no monitoring of end use of funds, there is a possibility that the same customer could indulge in maleficence by drawing down money from the same bank through a different account. There is also a possibility that the money could be used to repay the first credit facility and keep using the same modus operandi which can potentially lead to a wider concern
4. The policy is surely a step towards preventing huge bank scams we have witnessed in the past years!
5. RBI suspects that many corporates run collection accounts (which are used for holding sale proceeds and other receipts) with other banks so that the consortium leader cannot impound the fund or push the borrower to fork out interest on loans. This is particularly true for stressed accounts
6. Many midsized and smaller banks, which do not lead consortia, fear a dip in CASA (current and saving accounts) numbers that enable banks to lower cost of fund.
7. This move will avoid hoodwinking the system and reduce the blind spots thus protecting the depositor’s money
New rules likely to benefit corporate lenders, Public sector Banks, will take away Current Accounts from banks like HDFC, ICICI, Axis which have good cash Mgmt products.
It is advised to get the compliance done asap for existing current & CC/OD accounts, banks need to ensure compliance with the above instructions within a period of three months. Further discipline needs to be maintained in future.