In a bid to implement credit score self-discipline and verify diversion of funds, the Reserve Bank of India in its August coverage final yr, put in place sure safeguards for opening of current accounts by banks. With the sooner framework discovered to be insufficient, in response to the RBI, it moved to tighten the norms to streamline the usage of a number of accounts by debtors.

But the brand new norms which got here into impact from December 15, 2020 (earlier deadline of November 5 was prolonged) have offered banks and companies with close to time period operational challenges. While the transfer has been hailed by many bankers as a constructive one, whether or not it succeeds in curbing diversion of funds in the long run, stays to be seen.

What the brand new guidelines say

Flagging issues over the usage of a number of working accounts by debtors, each current accounts in addition to money credit score (CC)/overdraft (OD) accounts, the RBI has put in place a number of safeguards.

Under the brand new tips, no financial institution can open current accounts for patrons who’ve availed credit score services from the banking system. All transactions must be routed by way of the CC/OD account.

Two, if a financial institution has lower than 10 per cent of the debtors credit score publicity, then debits to the CC/OD account can solely be for credit score to the CC/OD account with a financial institution that has 10 per cent or extra of the credit score publicity. By inserting restrictions on debits from smaller accounts (by worth of publicity), the RBI intends to verify the diversion of funds and preserve the banking exercise inside the important thing consortium lenders to the debtors.

Further, in case of shoppers who haven’t availed CC/OD facility from any financial institution, banks could open current accounts, however with sure circumstances in case of debtors with greater than 50 crore publicity to the banking system. Here, current accounts of debtors can solely be opened/maintained by the escrow managing financial institution.

The must tighten norms

This just isn’t the primary time that the RBI has flagged issues over the misuse of a number of working accounts. In reality, over twenty years in the past in its 2000 round, the RBI had suggested banks that on the time of opening of current accounts, they need to get hold of a declaration from the account-holder that he’s not having fun with any credit score facility with every other financial institution. If he’s then he has to present particulars of the credit score services.

In its 2004 round, the RBI had famous that the mentioned procedures, have been reportedly not being adopted by some banks, facilitating diversion of funds by debtors. Banks have been instructed to not open current accounts of entities which take pleasure in credit score services, with out acquiring a No-Objection Certificate from the lending financial institution(s).

The central financial institution had as soon as once more flagged issues in 2015, advising banks to make use of the Central Repository of Information on Large Credits (CRILC) to confirm whether or not the client was availing credit score from one other financial institution.

But regardless of repeated notifications, some banks didn’t observe needed protocols, which lastly led the RBI to usher in extra stringent norms in August final yr.

Plugging gaps

In the previous, many banks solely relied on declarations given by the shoppers and didn’t do the required due diligence whereas opening of current accounts – failure to make use of info out there with the credit score bureaus or acquiring NOCs from current lending banks.

Bankers additionally say that in lots of circumstances, debtors went out of the consortium (of lenders) which made it tough to trace and monitor the money flows. The new norms can assist arrest diversion of funds by containing banking throughout the consortium lenders.

Also whereas credit score info bureau was out there to verify whether or not the borrower had availed credit score from one other financial institution, information was restricted in case of outdated, small ticket sized accounts, say bankers.

By banning opening of current accounts for patrons who’ve already availed credit score services, the RBI intends to nip the difficulty within the bud.

The 10 per cent publicity threshold for debits from CC/OD accounts can be meant to make sure that exercise is restricted to banks with notable publicity to the borrower. This means banks with larger share of credit score with a borrower can have higher management over money flows. Bankers say that usually debtors open new current accounts exterior the consortium of lenders, notably when they’re below stress after which divert money flows. The new norms will make sure that debtors don’t cover their monetary state of affairs from consortium of lenders.

But such over-regulation additionally comes with its personal set of challenges and points, some opine.

Near time period ache

What about companies opening a number of accounts for real causes?

A producing enterprise could select to have a number of accounts to facilitate ease of transactions throughout entities and geographies. Some companies could search for specialised or focussed providers (foreign exchange associated for example) for which they might be required to open a number of accounts. The RBI inserting restrictions on opening of current accounts and debits to sure accounts can therefore trigger operational points to companies within the brief time period. These hitches may nonetheless iron out in the long run in response to a number of bankers.

But the important thing query is whether or not such over-regulation will serve the meant function of plugging diversion of funds. While some bankers consider that the brand new norms can usher in monetary self-discipline, others are sceptical given the weak implementation and monitoring of the sooner norms.

While the brand new norms are far stringent, how will the central financial institution guarantee compliance and minimise violations? The new guidelines may in reality improve the price of monitoring for banks and have an effect on banking exercise adversely in an already danger averse atmosphere.

While it’s nonetheless early days to evaluate the medium to long-term influence of the RBIs norms, it’s evident that garnering current account deposits will turn into difficult for brand spanking new banks. The new norms will both nudge smaller banks to construct bigger relationships with the client (higher than 10 per cent share in credit score) or debtors to consolidate their a number of accounts. Leading banks providing complete providers can acquire market share. For another banks, the going can get fairly powerful within the brief – to medium-term.