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Tweaks in RBI Circular on opening of Current Accounts necessary for Ease of Doing Business : CII
Sep 26, 2020

The Confederation of Indian Industry has urged RBI to relook into the circular regarding opening of current Accounts by banks issued last month. CII has written to RBI and has submitted a detailed note with its recommendations.

RBI, on August 6, 2020, has issued revised guidelines on the “Opening of Current Accounts by banks to ensure disciplinein view of concerns emanating from the use of multiple operating accounts by borrowers, both, Current Accounts (CA) as well as Cash Credit (CC)/ Overdraft (OD) accounts.

CII has shared its suggestions on the circular and also such modifications to the circular to ensure that the intent of the RBI does not go in vain and operations of Corporates and lending institutions can continue without much hurdles. These include Increasing threshold limits from ?5 crore to ?25 crore, and ?50 crore to ?100 crore to ensure minimal impact on the banking sector without compromising the principles articulated in the circular and a decrease in the banking exposure limit from 10% to 5% for clients availing CC/OD, will ensure limits consistent with Tier 1 Capital base to 15% of the Bank’s capital to provide for a wider lender consortium.

CII has also recommended exclusion of certain categories of borrowers(other regulated entities like Mutual Funds/ PMS/ Insurance/ Exchange Brokers/ NBFCs & HFCs etc) from the scope of this circular, basis credit worthiness in terms of external ratings, risk management and governance standards.

CII has also urged the RBI to set up a Central Framework to facilitate information sharing amongst the banks for fund flows of the customer as it has done for exposures so that all lending banks are fully cognizant of the fund flow and can take timely action when required. Such a framework will address the risk of diversion of cash flows and negate the need for operational controls mentioned in the Circular.

For implementation of the circular, CII has urged RBI to consider timelines till 01 April 2020 considering the current state of readiness of corporate borrowers and operational challenges that may be faced while adopting a measured and smooth transition.

CII believes the purpose of the Circular would be best addressed by monitoring the cash flows in customers above a certain exposure size. Smaller cases are generally sole banking cases where diversion of cash flows does not arise as all accounts of the customer will be under the purview of the sole lender. Accordingly, the circular should not be applicable for borrowers having exposure of less than ?25 crore.

One of the unintended consequences of the circular, is not permitting customers of non-agency banks to complete their tax payments or, if they wish to do so, forcing them to shift their banking relationships to only agency banks. This is expected to cause unnecessary harassment to customers of such non-agency banks. To overcome this issue and to ensure that the circular is fully effective, all banks should be permitted to offer tax payments services. Alternatively, customers with borrowing in non-agency banks should be permitted to open current accounts with other banks for tax remittance purposes.

The circular also constrains the customer’s flexibility to manage transactions by mandating all transactions to be routed through CC/OD account. Such customers, who wish to open a Current Account to meet statutory requirements and to ensure effective controls on business and manage reconciliations may be permitted to open CA accounts, as per their requirement provided these accounts are opened with the lending bank only. Also, there is a need to differentiate between a role an individual plays – of a businessman and as an individual.

Banking System exposure to their borrowers must be reviewed annually instead of quarterly, as mandated in the circular, as it will entail huge cost to customers in case of any variations.

Banks’ dues such as fees, charges and maturity obligations across cross border services of LG/BG/ Derivatives/ Hedging/ FX of lenders with exposure less than 10%, should be allowed as debits to the ‘collection account’ and CC/OD account.

CII has been in continuous talks with Reserve Bank of India and has represented the concerns raised by its members cutting across sectors.

The guidelines aim to inculcate Current Account discipline to realign CA ownership with lending relationships, help monitor cash flows, reduce information asymmetries and enable early warning signals for banks. While there are fewer restrictions on opening current account with the borrowers where exposure is less than ?50 crore, an escrow mechanism is required for exposures more than ?50 crore. RBI has allowed a period of three months to ensure compliance to the circular.

On the announcement made by RBI, CII has said RBI has been extremely active since the economy was hit by the pandemic. Through its reform measures RBI has infused liquidity into the financial system. However, with uncertainties still looming with respect to arrival of vaccine, more support will be required on an ongoing basis both from the RBI and Government to stabilise the lending sector, in turn, the economy.

26 September 2020
New Delhi

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