The Reserve Bank of India (RBI) on August 6 announced new rules and restrictions on the opening of current accounts by borrowing companies. The rules require companies to open current accounts or cash-credit/overdraft accounts only with banks who have lent substantial loans to them.
The intention is to ensure that banks, which give loans have an idea of the cash flows of the company. RBI has also directed lending banks to not use current accounts to route loans. Instead, since term loans are for specific purposes, banks must directly debit the funds to suppliers of goods and services to the borrower.
The intention clearly is to prevent siphoning of funds by borrowers. Thus far, many borrowers take loans from public sector banks but use foreign and private banks for their daily operational current accounts, ostensibly because these banks offer good cash management services and products.
Foreign and private banks usually don’t lend much to mid-sized corporates. But all banks like current accounts because they are a cheap source of funds.
It is still to early to say who will be the winners and losers of the new rules. Will private banks like HDFC Bank, ICICI Bank and Axis Bank lose some accounts to PSU banks or will they instead attract some accounts from foreign banks? It is too early to tell.
But first the new rules:
1. Henceforth, banks can’t open current accounts for borrowers who have a cash credit account with any other bank.
2. If borrowers don’t have any cash-credit account with any bank, they fall under 3 categories:
a. Borrowers having less Rs 5 crore loans from banks: For companies, any bank can open a current account
b. For borrowers with Rs 5-50 crore loans from banking system, only lending banks may open current account; non-lending banks may only open collection accounts i.e. these accounts can receive money, which have to be paid into the cash-credit account of the lending bank. Since these have to be done usually on the same day, the collection accounts don’t offer any gains for the collecting bank
c. For borrowers with over 50 crore loans from the banking system, one lender bank has to open an escrow account and only this bank can open current account. Other banks can open collection accounts, but no non-fund based facility can be given on the balances in these accounts; non-lending banks can’t open current accounts.
3. For cash-credit and overdraft (CC/OD) facility, banks with over 10 percent exposure can open CC/OD accounts; other lenders can have collection accounts; but have to debit money only to CC/OD accounts of banks that have more than 10 percent exposure to the borrower.
Bankers told CNBC-TV18 they are still unclear of how these will be operationalised and await an FAQ from RBI on how and when the database on lenders will be put together by drawing from RBI’s CRILC and other credit bureaus’ data.
There will also be questions on how these rules will be monitored. Also when a borrower’s loans from the banking system cross the Rs 5 crore mark and then the Rs 50 crore mark, how will the changes be effected?
On the face of it, the biggest gainers of the new rules are public sector banks who will have more than 10 percent exposure to most mid-sized corporates.
Why are mid-sized corporates attractive? Bankers say, large companies like Reliance have excellent treasury operations and they never let money lie idle in a current account. The best clients for banks hankering after cheap current account floats are mid-sized corporates who allow money to lie idle in current accounts.
But then private banks don’t usually lend much to mid-corporates. Foreign banks lend even less. It’s possible some current accounts flow from foreign banks to private banks, and some flow from private banks to PSU banks. Alternately, if a client is offering a large float, private banks can top up their loans to reach the 10 percent exposure mark.
The grapevine says the original ask of the large lending banks was that only the leader of the consortium should operate the current and CC/OD account of a borrower.
Private banks have been able to wrangle a major concession by ensuring that banks with up to 10 percent exposure can offer current accounts to a borrower.
The jury is still out on how it will play between banks. But for the system and the economy, it will hopefully bring more credit discipline and fewer bad loans, since banks should be able to monitor their borrowers’ accounts better.