Restrictions for opening current accounts should not apply across the board

The Reserve Bank of India has reviewed the guidelines for opening current accounts by banks and revised the instructions. Broadly, they can be grouped under four categories.

If an individual or entity is having any overdraft or cash credit account with any bank, the individual/entity cannot open any current account with that financing bank or with any other bank.

If an individual or entity is not having any overdraft or cash credit but having credit facility of ₹50 crore and above, the escrow mechanism is to be followed. Mandatory escrow account has to be opened by the escrow-managing (financing) bank. Other financing banks can open current account for collection purposes. Non-financing banks cannot open any current account.

If a customer is not having any overdraft or cash credit but having credit facility of ₹5 crore and above but below ₹50 crore, only lending banks can open a current account.

If a customer is not having any overdraft or cash credit but having credit facility below ₹5 crore, any bank can open current account.

As regards existing current and CC/OD accounts, banks have been directed to ensure compliance with the above instructions before December 15, 2020.

The circular containing the instructions has been structured in a confusing way. But the flow-chart provided along with the circular makes it easier to understand the revised guidelines.

According to earlier guidelines, banks were directed to open current accounts only after obtaining a No-Objection-Certificate from the lending banks. The revised guideline seems to be to avoid diversion of bank-financed funds.

Business entities generally have current account only with the financing bank and sometimes, due to specific requirement, they open current account in other banks. The purpose may be for collection of various dues at different locations. Sometimes, salary disbursement of employees is serviced by other than the financing bank, and for such an eventuality they open current account with the other bank.

When employees are financed for their various requirements — housing loans, personal loans, etc. — by a different bank as part of a tie-up with the company, the bank will insist on a current account with it.

The RBI may have to address this issue as the revised guideline will make it difficult for the bank which is financing the employees to effect recovery while disbursing salary.

Cash credit, overdraft accounts

Cash credit and overdraft facilities are provided as part of working capital finance. The overdraft may or may not be a secured one. The cash credit, which is part of working capital finance, is secured against the stocks the entity is holding.

According to the arrangement, stock statement is provided to the banks and based on the va[lue of stocks, the drawing limit for cash credit is decided periodically. It is expected that all the sales proceeds as well as purchase transactions of the entity should be routed through the cash credit account, so that the debit balance will automatically reflect the value of the stock.

If sales proceeds are not deposited in the cash credit account, it means that it is diversion of (bank financed) funds. Sales proceeds cannot be allowed to be credited in a current account when there is a cash credit account. Hence there is merit in restricting the opening of current account for cash credit customers.

But this is not applicable for an overdraft account. Wherever there is secured overdraft, it is generally against some securities (other than stock) like property, life insurance policies, shares, bonds, etc., and the value does not change like a stock.

Hence this restriction of opening a current account should not be made applicable for overdraft facility. Making the restriction applicable for all facilities is like throwing the baby out with the bathwater.

The writer is a retired banker

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