RBI CHANGES THE NORMS FOR OPENING OF A CURRENT ACCOUNT

RBI CHANGES THE NORMS FOR OPENING OF A CURRENT ACCOUNT

RBI has directed all banks not to open current accounts for those customers that have availed cash credit or overdraft facilities.

Reserve Bank of India (RBI) on Thursday, 6th August 2020, has issued a notification through which they have instructed all the Banks to maintain discipline at the time of opening of the Current Account for businesses. 
 

As per the notification, RBI has directed all the banks not to open current accounts for those customers that have availed cash credit or overdraft facilities. The RBI governor had made emphasis on this point and said that there is a "need for discipline" on the same.


This step is taken in order to ensure that instead of having multiple current accounts across banks, the borrowers should make their payments to and from a current account with that bank which has the major exposure to the borrower

In the said notification, the emphasis is also given on bringing a much-needed discipline in the creditor’s collective action for the requisite speedier resolution of stress in the accounts of borrowers.
 

Key highlights of the notification

1.  The bank cannot open a current account for the borrower who has existing Cash Credit (CC) or Overdraft (OD) facility and all the transactions must be routed via cash credit or overdraft account.

2.  a.  When a bank's exposure to a borrower is less than 10% of overall banking system exposure – The Cash Credit and Overdraft facility can be easily availed but the same can be used only for credit purposes. All the debit transactions are required only to remit funds to the borrower’s cash credit or overdraft facility account held with a bank that has an exposure of 10% or more of the banking system total exposure to the borrower. 
 


 

b.  When a bank's exposure to a borrower is more than 10% of overall banking system exposure – The banks can provide the borrower the facility of Cash credit or overdraft.

In case the borrower has availed loans from more than 1 bank and that more than 1 bank has an exposure of 10%, then the bank from where the funds are to be remitted has to be decided mutually between the borrower and the banks.

3.  The banks can provide cash credit or overdraft facility to the borrower in that case only where the bank is holding a share of 10 % or more in the overall exposure of the banking system to the borrower.

4.  All large borrowers are required to maintain the balances at individual banks in all cases if they have a working capital facility bifurcated between a loan component and a cash credit component, including consortium lending.

5.  As per the following norms, the banks may open current accounts for those customers who have not availed CC/OD facility from any bank:

i.  In case, the borrower’s exposure of the banking system is Rs. 50 crores or more- 

  • Then in this case the banks shall be required to put in place an escrow mechanism. And as per this escrow mechanism, the borrower's current account can be opened or maintained. 
  • There are no such restrictions imposed on the opening of ‘collection accounts’ by lending banks. As per the frequency agreed between the bank and the borrower, funds will be transferred to these accounts to the said escrow account.
  • The balance of such accounts will not be used as a margin for availing any non-fund-based credit facilities. 
  • The debit balance of collection accounts shall be limited to the purpose of remitting the earnings to the said escrow account, as there is no prohibition on the amount or number of credits in the said account. 
  • The non-lending banks are prohibited to open any current account for such borrowers.
     

ii.  In case the borrower’s exposure of the banking system is more than Rs. 5 crores but less than Rs. 50 crores- 

The lending banks can open the current account for these borrowers as there is no restriction on the same. on the opening of current accounts by the lending banks. Only the Collection account can be opened by the lending banks. In case the borrower’s exposure to the banking system is less than Rs. 5 crores – 

The banks can open current accounts for these borrowers but they will obtain an undertaking from such borrowers to the effect that borrowers will inform the bank(s), if and when the credit facilities as availed by them become more than Rs. 5 crores.

When the banking systems exposure becomes Rs. 5 crores or more and Rs. 50 crores or more, then the current account of such customers will be governed by the provisions of para (5) (ii) and (5) (i) respectively. 

iii.  As per the Board approved policies and subject to necessary due diligence, the Banks are free to open current accounts of potential customers who have not availed any credit facilities.

6.  On a quarterly basis, the banks are required to monitor all current accounts and Cash credit or overdraft regularly, in order to maintain the compliances. 

7.  The banks must not route any withdrawal transaction from the term loans as availed via current accounts by the borrower. Instead of that, the term loan amount should be remitted directly to the supplier of goods and services. Borrowers day to day operation expenses should be routed through the cash credit or overdraft account if he or she has one; otherwise the same should be routed through a current account.

8.  Within a period of 3 months from the date of this circular, the banks with regards to existing current and Cash credit or overdraft accounts should maintain compliance as per the above instructions. 
 

Edited by Minu Mishra

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