Fund Diversion

RBI moves to tighten current account operating norms to check fund diversion

Draft circular suggests current accounts to be opened and operated only with lead bank in consortium.

MUMBAI: In a move to tackle fund diversion, the Reserve Bank of India (RBI) has proposed sterner rules on opening and running of current accounts of corporate borrowers.

Current accounts, according to a draft circular shared by the regulator with the banking industry, can “only be opened” with the lead bank in a lending consortium while other banks having collection accounts will have to transfer funds at the end of the day to the current account with the consortium leader.

RBI has suggested that the rule would apply to accounts of corporates which have borrowed and availed credit facilities of Rs 50 crore or more from the banking system.

“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...,” a senior banker told ET.

However, once the proposed regulation is executed, 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. “On one hand RBI wants discipline in opening current accounts.

On the other hand, a low CASA often does not go well with the regulator which occasionally points this out in the course of inspection,” said another banker.

According to RBI, while there would be no restriction on the amount or number of ‘credits’ in collection accounts with other banks (which are not leading consortium), the ‘debits’ should be limited to remitting the proceeds to the current or escrow accounts maintained with the lead bank.

The regulator has indicated that all such ‘existing’ current accounts where the account holding bank is not the consortium leader/ escrow managing bank would either have to be converted into collection account or closed, after giving due notice to the account holders, within three months from the date of the final circular.

Accordingly, no debits would be permitted in such accounts after the stipulated period of three months other than for remittance to the lending bank(s).

Such rules, said veteran banker PH Ravikumar, could impact many SMEs which have to deal with long delays in payments from their clients. “These customers open current or collection accounts with other banks to draw credits that could be used to continue production and meet order. But RBI and lead banks fear that allowing such customers to withdraw funds ostensibly for production, may be diverted by promoters for making preferred payments or to their relatives and associates.

Also, there are inflows which are not from regular businesses but as new private borrowings by the stressed account to improve their production capabilities. Here, lending banks tend to impound those credits as well. It would help SMEs if the practice of unilaterally impounding credits at operating level in bank branches is stopped particularly for SME accounts,” said Ravikumar.

The draft circular further suggests that while customers (with Rs 5-50 crore credit) may open current accounts with any lending bank (which is not a consortium leader), only collection accounts can be run with non-lending banks.

The proposed regulation owes its origin to RBI’s 2004 directive to banks advising them to ensure that their branches do not open current accounts of entities which enjoy credit facilities (fund based or nonfund based) from the banking system without specifically obtaining a No-Objection Certificate (NOC) from the lending bank(s). Later, banks were allowed to open current accounts of prospective customers in case no response was received from existing bankers within a fortnight.