RBI Notification: Opening of Current Accounts by Banks

Ashish M. Shaji

14 Aug, 2020

Stressing on the need for discipline, the Reserve Bank of India (RBI) disallowed banks from opening current accounts for customers who availed cash or overdraft facilities. The RBI notification consisted of the revised instructions on the opening of current accounts by banks.  

Why was the RBI notification on the opening of current accounts by banks released?

The RBI had stated that the use of multiple operating accounts by borrowers, both current and cash /overdrafts, had been seen to be prone to vitiating credit discipline. It further said that the checks and balances put in place in the extant framework for opening current accounts had been found inadequate. Therefore the RBI decided to revise the guidelines that will help in bringing appropriate safeguards.

The main objective of this move by RBI is to ensure that the borrowers direct their payments to/ from a current account with the bank that has the largest exposure to the borrower rather than having more than one current accounts across banks.

RBI Notification: Guidelines for opening current accounts

Instructions on opening current accounts are as follows:

• No bank can open a current account for customers who have taken credit facilities in the form of cash credit/overdraft, and all transactions must be routed through the cash credit or overdraft account.
• In the case where the borrower doesn’t have a CC or OD facility, banks can open a current account provided that the total exposure to the borrower is less than 5 crore rupees. In case the exposure goes beyond 5 crore rupees, the borrower must inform, and then it will be governed accordingly. 
• In the case where the credit facilities are not less than 5 crore rupees and not more than 50 crore rupees, there is no restriction on lending banks for the opening of current accounts. However, it may be noted that the non-lending banks can only open a collection account. 
• In the case where the credit facilities of more than 50 crore rupees, banks are required to put in place an escrow mechanism. Only the escrow managing banks can open the current account for the borrower. Moreover, the balances in such accounts cannot be used as margin for getting any non-fund based credit facilities. 

There is no restriction on the amount or the number of credits in the collection account, but debits in these accounts will be limited to the purpose of remitting the proceeds to the escrow accounts.

The banks must not route any withdrawal transaction from term loans taken by the borrower through current accounts, and funds from term loans should be remitted directly to the goods and services supplier.

Expenses incurred by the borrower for day-to-day operations must be routed through the cash credit or overdraft account, in case the borrower has a cash credit or overdraft account, else it should be through a current account.

RBI Notification: Guidelines for conditions to avail CC or OD facility

Guidelines for conditions to avail CC or OD facility are as mentioned below:

• If a bank’s exposure to a borrower is less than 10 % of the exposure of the banking system, the cash credit and overdraft facility is permitted, but it is to be used only for credits.  Any debit transaction can be only to remit funds to the borrowers’ cash credit/overdraft account held with a bank having an exposure of 10% or more of the banking systems total exposure to the borrower.
• If a bank’s exposure to a borrower is more than 10% of the total banking system exposure, banks may provide the borrower with a cash credit/overdraft facility. In case the borrower has availed loans from more than one bank, and more than one bank has an exposure of 10% then the bank to which the funds are remitted can be decided mutually among the borrower and the banks.

All borrowers that have a working capital facility bifurcated into loan component and cash credit component must maintain balances at an individual bank in all cases, including consortium lending.

Conclusion

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