Opening of Current Account by Banks
In the year 2000, in the interest of credit discipline, Reserve Bank of India (RBI) has already advised banks that at the time of current account they should insist account-holder to provide a declaration to the effect that:
a) no credit facility is availed by him from any other bank or
b) giving details of credit facilities enjoyed by the intending customer with any other bank(s)
However, the above procedure/advice was not followed by some of the banks which led to diversion of funds by borrowers.
Then in 2004, RBI came out with an instruction where it was mentioned that banks should ensure without fail that branches do not open current account for customers who enjoy credit facilities without obtaining No Objection Certificate (NOC) from the lending bank. However, banks may open current account of prospective customers in case no response is received from the existing banks within a period of 14 days. Further, concerned banks shall be liable to penalty in case of non-compliance.
But still RBI found instances where banks have opened current account without following the above due diligence.
Considering the importance of credit discipline and without limiting bank due diligence to obtain NOC from the borrower's lending bank, banks were also advised to use the information available in the CRILC database. As such, banks can verify whether the customer are availing any credit facilities or not from any other banks and accordingly may seek NOC from the existing lending bank.
[CRILC stands for Central Repository of Information on Large Credits which was set up to collect, store and disseminate data on all borrower's credit exposure and bank and Financial Institution also required to report data to CRILC]
On 6th August 2020, RBI in MPC meeting announced various changes made and one of them was instruction related to opening of current account which are listed below:
(I) If a customer has availed Cash Credit (CC) or Overdraft (OD) facilities from the banking system
(a) Banks are not allowed to open current accounts
(b) All the transactions shall be routed through CC/OD accounts
Even expenses incurred for daily operation should also be routed through CC/ODs account if opened otherwise through current accounts.
Similarly, in case of term loan account, fund should be remitted directly to supplier of goods or services and shall not be routed through current account as term loan is opened for specific purpose.
It means whatever account is opened whether it is CC or Current Account or Term loan, it should be used for the specific purpose for which it is opened. In other words, the account should not be used for diversion of funds.
For example: Whether Mr. Anand can open current account if he is enjoying the following facility from the following banks:
(₹ in lac)
Bank Facility Amount
A Cash Credit 400
B Overdraft 1600
C Term Loan 2200
Total 4200
Solution: As per new instruction, Mr. Anand is already availing Cash credit Facility, hence Mr. Anand cannot open Current account.
(II) If a customer has not availed Cash Credit (CC) or Overdraft (OD) facilities from the banking system:
Banks are allowed to open current account, based on borrower exposure of the banking system (EBS) as under:
(a) If EBS is less than ₹5 crore- Bank may open current account provided they need to take undertaking from the customer that he will inform the bank(s) as and when EBS become 5 crore or more.
(b) If EBS is ₹5 crore or more but less than ₹50 crore
(i) Lending bank can open current account
(ii) Non-lending bank may open only collection accounts (means deposits are allowed but not withdrawal/debit)
(c) If EBS is ₹50 crore or more- Escrow mechanism need to in place.
(i) Lending bank may open only collection accounts. However debits are allowed here but limited to the purpose of remitting the proceeds to the escrow account at the frequency agreed between bank and borrower.
(ii) Non-lending bank shall not open any current account.
The entire process whether current account can be opened or not is depicted through a diagrammatic presentation:-
(III) Instruction with respect to bank's exposure to a borrower
It means when customer has taken credit facilities from various bank then in that case RBI has issued some instruction for banks who has provided that credit facility based on the percentage exposure to that borrower. The following instruction has been given to banks based on individual bank exposure to borrower total EBS.
[Here EBS means total exposure of the borrower in the entire banking system i.e. both Fund based (Term loan/CC/OD etc.) and Non-Fund Based credit facility (Bank Guarantee/Letter of Credit )]
(a) If bank's exposure is less than 10% of the EBS to the borrower
(i) only credits are freely permitted
For example: Whether Mr. Anand can withdraw from Bank A if he is enjoying the following facility from the following banks:
Bank Facility Amount (₹ in lac) EBS (%)
A Cash Credit 400 9.5%
B Overdraft 1600 38%
C Term Loan 2200 52%
Total 4200
Solution: As per new instruction, Mr. Anand cannot withdraw from Bank A because Bank exposure to Mr. Anand is less than 10%, hence
(ii) working capital term loan (WCTL)/ working capital demand loan (WCDL) can be provided by them.
(b) If bank's exposure is 10% or more than 10% of the EBS to the borrower
(i) credits are permitted and debits to the CC/OD permitted only to the extent credits available in the CC/OD account of that borrower with the bank.
For example: Whether Mr. Anand can withdraw from Bank B and C if he is enjoying the following facility from the following banks:
Bank Facility Amount (₹ in lac) EBS(%)
A Cash Credit 400 9.5%
B Overdraft 1600 38%
C Term Loan 2200 52%
Total 4200
Solution: As per new instruction, Mr. Anand can withdraw subject to limited to credit available in Bank B and C account because Bank B and C exposure to Mr. Anand is more than 10%.
(ii) CC/OD facility can be provided by them
(iii) bank and borrower has to mutually agree upon matters related to:
- frequency of fund transfer (from these accounts to transferee account)
- to which bank funds are to be remitted in case there is more than one bank having more than 10% exposure.
The instruction related to EBS is also depicted through a diagrammatic presentation:
(V) Monitoring all current account and CC/ OD account to ensure compliance of above instruction- The above account should be monitored at least on a quarterly basis, specifically with respect to EBS to the borrower.
(VI) Compliance of above instruction with respect to existing current account and CC/ OD account- RBI has specified that banks shall ensure compliance within 3 months from the date of circular which is 6th November 2020.
Click here to know about Other Announcement made by RBI in MPC dated 6thAugust 2020
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