Current Account Chaos: Thousands Of Businesses Disrupted As Banks Rush To Comply With New Rules

A series of steps that were intended to protect the banking system from fund diversion have left lakhs of small businesses in distress as lenders rush to comply with one-year-old guidelines issued by the Reserve Bank of India, pertaining to opening and maintaining of current accounts.

The new rules, issued in August 2020, were to be implemented within three months at first. However, the regulators had permitted more time for banks to comply.

With banks continuing to drag their feet, the RBI had communicated a hard deadline of July-end to lenders last month, two bankers familiar with the matter said.

Only about a month ago, did lenders start sending notices to their account holders to shut all excess current accounts and move all their balances to one lender, the head of a medium-sized private bank told BloombergQuint.

According to industry estimates, only 25-30% of the account holders responded to notices sent by banks and have taken necessary action to be compliant with the RBI guidelines.

Those that did not are seeing their current accounts being frozen.

Even if the account holders do reach their respective branches to take action, the process is likely to take at least a few days, the managing director and chief executive officer of a large public sector bank said on the condition of anonymity.

The number of accounts which would need to be shut down across the banking system is "mind-boggling", the second banker quoted above said.

Given the extent of disruption being faced, particularly by small businesses, the regulator may have to consider some relief, a person in the know said.

An email sent to the Reserve Bank of India on Saturday was not answered.

Essentially, the RBI's norms are trying to ensure that a borrower routes payments to and from current accounts maintained with banks which have the highest loan exposure to them. This was done as a number of cases of siphoning-off of loan funds were detected via current accounts held with banks other than the main lenders. Bankers, in conversations with the regulator, had said that monitoring funds once they move to accounts of other banks is difficult.

In response, the RBI put in place the following rules:

• For A Borrower With An Existing CC or OD Facility

The bank cannot open a current account for the borrower and all transactions have to be routed through the cash credit or overdraft account.

• For A Borrower With No Existing CC or OD Facility

Banks can open a current account if the total exposure to the borrower is less than Rs 5 crore. As and when the exposure goes beyond Rs 5 crore, the borrower has to inform the bank and, thereafter, it will be governed differently.

• Credit Facilities Of Rs 5 Crore To Rs 50 Crore

Any lender can open a current account, while non-lending banks can only open a collection account.

• Credit Facilities Of More Than Rs 50 Crore

Banks have been mandated to create an escrow mechanism and only the escrow-managing lender or agent can open the current account for the borrower. The balances in such accounts cannot be used as a margin for availing any non-fund based credit facilities.

While there is no prohibition on the amount or the number of credits in ‘collection accounts’, any debits will be limited to the purpose of remitting the proceeds to the escrow account.

The banks should not route any withdrawal transaction from term loans availed by the borrower through current accounts and, instead, funds from term loans 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 the cash credit/overdraft account, if the borrower has one; else, it should be routed through a current account.

Further, the RBI laid down rules for availing cash credit and overdraft facilities.

• When A Bank's Exposure To A Borrower Is Less Than 10% Of Aggregate Banking System Exposure

The CC and OD facility can be availed but it can only be used for credits.

Any debit transaction can only be to remit funds to the borrower’s CC or OD account held with a bank which has an exposure of 10% or more of the banking system’s total exposure to the borrower.

• When A Bank's Exposure To A Borrower Is More Than 10% of Aggregate Banking System Exposure

Banks can provide the borrower with a CC/OD facility. If the borrower has availed loans from more than one bank and more than one bank has an exposure of 10%, the bank to which the funds are to be remitted may be decided mutually between the borrower and the banks.

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

Banks are now saying that large borrowers, who have consolidated loan exposures worth Rs 5 crore or more, must go through a check on the central repository for information on large credits, which the RBI maintains. This will help determine the largest lenders and, accordingly, where current accounts can be maintained.

For smaller borrowers, banks will have to perform a credit bureau check to see which other banks they have borrowed money from. This will help banks establish which bank has the highest exposure across the system. These lenders will then need to accommodate the customer's current account.

For customers, temporary freezing of their current account funds could be problematic for essential payments. According to the second banker quoted above, customers have been assured that while funds might be frozen for a few days due to compliance issues, they will eventually be moved to their largest lender.

While immediate disruption is being faced by businesses, banks will also see impact on deposit flows in and out of current accounts.

State Bank of India alone had current account deposits worth Rs 27.7 lakh crore as of March. Other large lenders like HDFC Bank and ICICI Bank had current account deposits worth Rs 1.85 lakh crore and Rs 2.45 lakh crore respectively, as on June 30.

According to the private sector banker quoted above, the new rules may lead to some immediate disruption in current account deposits for most banks.

Current account deposits are the cheapest source of funds for banks since it is a transactional account where the bank does not pay any interest on balances. Any disruption in the current account funds could affect the cost of deposits for banks.