The Opening of Current Accounts by Banks – Need for Discipline

Sonal Pruthi

22 Dec, 2020

The system of Current Account opening in India has been under the ambit of the Reserve Bank of India. The RBI has been the governing body for all the banks in India. The RBI regulates and controls the other banks of India.

Features of RBI are as follows;

1. Banker to the Government
   It acts as a banker, agent, and adviser to the government of India.
2. Banker’s bank
   The RBI performs the functions for the other banks, which the commercial have been doing for their customers.
3. Controller of Credit
   The RBI has the responsibility of controlling credit, which has been created by the commercial bank.
4. Custodian of Foreign Exchange
   The RBI maintains and regulates the foreign exchange rates. It keeps the rates stable; for this, the RBI sells the foreign currency from time to time.

What is the current account transaction?

A current account opening is called the Demand Deposits Account. An existing account is the one that is opened by the public companies, enterprises, firms, business houses, who generally deal in the large volume of regular transactions, which includes deposits, withdrawals, and other contra transactions. It is a zero account. It carries no interest. It usually has no limit on the number of transactions.

Advantages:

1. Allows handling a large number of receipts or payments.
2. No restriction on deposits
3. Overdraft facilities are available to the current account holders.
4. Limitless withdrawals are allowed in terms of cash transactions
5. The Free inward remittances, deposits, and withdrawals at any location, multi-location transfer.
6. People in business can withdraw up to any amount subject to a cash transaction tax
7. Helps in the industrial progress of the country
8. Provides internet and mobile banking facility

Discipline for Current Account Opening- RBI regulations

1. Notification No.-circular DBR.Leg.25/09.07.005/2015-16 dated July 2.2015

The opening of the current account has been revised by the RBI^[1] accordingly and new instructions have been laid down:

a. No bank shall let the current account opening for the customers/entities, which have availed the credit facilities from the bank, which is in the form of cash credit, or overdraft facilities from the banking system, and all the transactions are routed through CC/OD facility. Whether it is 10 percent or more than 10 percent of the total exposure of the banking system to the borrower, it can provide CC/OD facility to the borrower.

b. In the case where the customer has not availed of the CC/OD facility; the bank can let the current account opening of the customer on the following conditions:

• For the borrowers whose exposure with the bank is 50 Crores, banks shall be required to place an Escrow Account. The Current Account shall be maintained by the Escrow Managing Bank.

• With the borrowers whose exposure with the bank is between 5 Crores to 50 Crores, there is no difficulty opening the Current Account with the lending bank.

• In case the borrower whose exposure with the bank is less than 5 Cores, banks may open the Current Account with the undertaking of the customer, with the effect if the customer ever avails the credit facility or the banking exposure of the customer ever increases up to 5 Crores.

• The banks can let the Current Account opening of the customers who have not availed of the credit facility after conducting their due diligence.

2. Notification No.-circular

As per the review of the old notification of 2005, it has permitted the banks to open the specific accounts stipulated under various statutes and instructions of the regulators:

a. The A/c for Real Estate projects, which are mandated as per Section 4(21) 1(D) Accounts of the Real Estate (Regulation and Development) Act, 2016, which has the aim of continuing 70% of advance payments collected from the home buyers.

b. A payment aggregators/ prepaid payment instrument issuers for Nodal or escrow accounts for the specific activities which are allowed by Department of Payments and Settlement Systems (DPSS), Reserve Bank of India under Payment and Settlement Systems Act, 2007.

c. The dues settlement Accounts which are related to the issuers / acquirers of debit card/ATM card/credit card.

d. Accounts which have permitted under FEMA, 1999.

e. Accounts which are maintained for the purpose of Initial Public Offer / New Fund Offer /FPO/ share buyback /dividend payment / issuance of commercial papers/allotment of debentures/gratuity, etc. which are considered by the governing statutes or regulations and are meant for specific or for the limited transactions only.

f. Accounts opened with banks to collect for borrowers of such banks which are not authorized to collect payment of taxes, duties, statutory dues, etc. the same, for to collect such taxes, duties, statutory dues, etc.

g. The Accounts of White Label ATM Operators and their agents for sourcing of currency.

The only condition attached with these accounts is that such statements must be used for the particular and specific transactions only.

Frequently asked questions

1. Whether banks are required to obtain NOC before the Current Account Opening?

No, the banks are not required to take NOC (Non-objection certificate) as per the revised guidelines.

2. How will banks identify the aggregate exposure of the banking system to the customer in order to open the current account?

circular DOR No. -BP.BC /7/21/04.048/2020-21 dated August 6, 2020and DOR No. BP.BC 27/21.04.048/2020-21 dated November 2.2020

The banks calculate the aggregate exposure of the banking system, after the guidelines, based on the CRIL (Central Repository of information on Large Credits), CIC (Credit information companies)

3. For the purpose of computation of exposure, NBFC and NBH shall be included in the calculation of the aggregate/total exposure of the banking system?

The annexure includes only Commercial Banks, and Payment Banks; hence it will fit in the computation.

4. The previous guidelines for obtaining the NOC were applicable to the entities. Whether the revised guidelines are too appropriate to entities?

They are applicable to borrowers mow.

5. Whether current accounts can be opened by the borrowers availing agricultural credit/OD?

No, the banks cannot open the current account for any person who has availed the non-fund based credit.

6. In the case of proprietorship firms, whether the credit facilities are available by the proprietor, in his/her capacity like home loan, loan against property, etc., shall be included in the aggregate exposure. Etc.

In the computation of the aggregate exposure, the credit facilities availed by the firm in the business capacity are the only included.

7. Whether banks with less than 10% banking exposure in the banking system can offer only working capital demand?

Banks are free to increase exiting WCDL or sanction new facilities in these forms, subject to the conditions of the circular 2020 for opening current account.

8. Whether banks are allowed to open the escrow account/ current account of customers for availing the credit facilities from NBFC or other financial institutions?

Yes, banks are free to open current accounts for the customers having credit facilities from NBFC or other financial institutions.

Conclusion

Read our article:RBI Notification: Opening of Current Accounts by Banks