In a bid to enforce credit discipline and check diversion of funds, the Reserve Bank of India in its August policy last year, put in place certain safeguards for opening of current accounts by banks. With the earlier framework found to be inadequate, according to the RBI, it moved to tighten the norms to streamline the use of multiple accounts by borrowers.

But the new norms which came into effect from December 15, 2020 (earlier deadline of November 5 was extended) have presented banks and businesses with near term operational challenges. While the move has been hailed by many bankers as a positive one, whether it succeeds in curbing diversion of funds in the long term, remains to be seen.

What the new rules say

Flagging concerns over the use of multiple operating accounts by borrowers, both current accounts as well as cash credit (CC)/overdraft (OD) accounts, the RBI has put in place several safeguards.

Under the new guidelines, no bank can open current accounts for customers who have availed credit facilities from the banking system. All transactions should be routed through the CC/OD account.

Two, if a bank has less than 10 per cent of the borrower’s credit exposure, then debits to the CC/OD account can only be for credit to the CC/OD account with a bank that has 10 per cent or more of the credit exposure. By placing restrictions on debits from smaller accounts (by value of exposure), the RBI intends to check the diversion of funds and keep the banking activity within the key consortium lenders to the borrowers.

Further, in case of customers who have not availed CC/OD facility from any bank, banks may open current accounts, but with certain conditions in case of borrowers with more than ₹50 crore exposure to the banking system. Here, current accounts of borrowers can only be opened/maintained by the escrow managing bank.

The need to tighten norms

This is not the first time that the RBI has flagged concerns over the misuse of multiple operating accounts. In fact, over two decades ago in its 2000 circular, the RBI had advised banks that at the time of opening of current accounts, they should obtain a declaration from the account-holder that he is not enjoying any credit facility with any other bank. If he is then he has to give particulars of the credit facilities.

In its 2004 circular, the RBI had noted that the said procedures, were reportedly not being followed by some banks, facilitating diversion of funds by borrowers. Banks were instructed not to open current accounts of entities which enjoy credit facilities, without obtaining a No-Objection Certificate from the lending bank(s).

The central bank had once again flagged concerns in 2015, advising banks to use the Central Repository of Information on Large Credits (CRILC) to verify whether the customer was availing credit from another bank.

But despite repeated notifications, some banks failed to follow necessary protocols, which finally led the RBI to bring in more stringent norms in August last year.

Plugging gaps

In the past, many banks only relied on declarations given by the customers and failed to do the necessary due diligence while opening of current accounts - failure to use information available with the credit bureaus or obtaining NOCs from existing lending banks.

Bankers also say that in many cases, borrowers went out of the consortium (of lenders) which made it difficult to track and monitor the cash flows. The new norms can help arrest diversion of funds by containing banking within the consortium lenders.

Also while credit information bureau was available to check whether the borrower had availed credit from another bank, data was limited in case of old, small ticket sized accounts, say bankers.

By banning opening of current accounts for customers who have already availed credit facilities, the RBI intends to nip the issue in the bud.

The 10 per cent exposure threshold for debits from CC/OD accounts is also intended to ensure that activity is restricted to banks with notable exposure to the borrower. This way banks with higher share of credit with a borrower can have greater control over cash flows. Bankers say that often borrowers open new current accounts outside the consortium of lenders, particularly when they are under stress and then divert cash flows. The new norms will ensure that borrowers do not hide their financial situation from consortium of lenders.

But such over-regulation also comes with its own set of challenges and issues, some opine.

Near term pain

What about businesses opening multiple accounts for genuine reasons?

A manufacturing business may choose to have multiple accounts to facilitate ease of transactions across entities and geographies. Some businesses may look for specialised or focussed services (forex related for instance) for which they may be required to open multiple accounts. The RBI placing restrictions on opening of current accounts and debits to certain accounts can hence cause operational issues to businesses in the short term. These hitches could however iron out in the long term according to several bankers.

But the key question is whether such over-regulation will serve the intended purpose of plugging diversion of funds. While some bankers believe that the new norms can bring in financial discipline, others are sceptical given the weak implementation and monitoring of the earlier norms.

While the new norms are far stringent, how will the central bank ensure compliance and minimise violations? The new rules could in fact increase the cost of monitoring for banks and affect banking activity adversely in an already risk averse environment.

While it is still early days to assess the medium to long-term impact of the RBI’s norms, it is evident that garnering current account deposits will become challenging for new banks. The new norms will either nudge smaller banks to build larger relationships with the customer (greater than 10 per cent share in credit) or borrowers to consolidate their multiple accounts. Leading banks offering comprehensive services can gain market share. For some other banks, the going can get quite tough in the short - to medium-term.