Executive Summary:
This circular, issued by the Reserve Bank of India, outlines revised instructions regarding the opening of current accounts by banks. The aim is to enforce discipline in the banking system concerning borrowers with credit facilities. Banks must adhere to these new guidelines immediately, with compliance for existing accounts required within three months of the circular date (August 6, 2020).
Key Points / Main Content:
* **Current Accounts for Borrowers with Credit Facilities:**
* Banks cannot open current accounts for customers with Cash Credit (CC) or Overdraft (OD) facilities; all transactions must go through the CC/OD account.
* If a bank's exposure to a borrower is less than 10% of the banking system's total exposure, debits from the CC/OD account are restricted to transfers to a CC/OD account with a bank holding 10% or more of the total exposure.
* Banks with less than 10% exposure can offer Working Capital Demand Loans (WCDL) or Working Capital Term Loans (WCTL).
* Banks with 10% or more exposure can provide CC/OD facilities as before.
* Under the loan system for bank credit delivery, the working capital facility must be bifurcated into loan and cash credit components at each bank level.
* **Current Accounts for Borrowers without CC/OD Facilities:**
* For borrowers with banking system exposure of ₹50 crore or more, an escrow mechanism is mandatory; only the escrow managing bank can open/maintain current accounts. Lending banks can open collection accounts with remittances to the escrow account. Non-lending banks cannot open current accounts.
* For borrowers with exposure between ₹5 crore and ₹50 crore, lending banks can open current accounts without restriction. Non-lending banks can only open collection accounts.
* For borrowers with exposure less than ₹5 crore, banks can open current accounts with an undertaking from the customer to inform the bank if their credit facilities reach ₹5 crore or more.
* **General Guidelines:**
* Banks must monitor all current accounts and CC/ODs quarterly to ensure compliance.
* Drawals from term loans should not be routed through current accounts; funds should be directly remitted to suppliers. Day-to-day expenses should be routed through CC/OD or current account, if no CC/OD exists.
Impact Analysis:
* **Scheduled Commercial Banks and Payments Banks:**
* *Impact:* Must revise their current account opening procedures and monitoring mechanisms to comply with the new RBI guidelines. This includes assessing existing accounts and ensuring adherence to exposure limits and escrow requirements.
* *Action Required:* Update internal policies, train staff on the new regulations, and implement systems for monitoring current accounts and CC/OD accounts regularly. Banks need to identify and reclassify existing accounts to meet the new requirements within three months.
* **Borrowers:**
* *Impact:* Borrowers may need to adjust their banking relationships and account structures to align with the new rules, especially those with multiple lenders or high levels of banking system exposure.
* *Action Required:* Borrowers should review their credit facilities and banking arrangements to understand how they are affected by the new guidelines. They may need to coordinate with their banks to establish escrow accounts or consolidate their banking relationships to comply with the exposure limits. Borrowers with exposure less than ₹5 crore need to provide an undertaking to their banks.
Key Entities Referenced
Reserve Bank of India: The central bank of India, often referred to as RBI.
All Scheduled Commercial Banks: Refers to all banks in India that are listed in the Second Schedule of the Reserve Bank of India Act, 1934.
All Payments Banks: Refers to a type of bank allowed in India to collect deposits, offer payments and remittance services.
Cash Credit (CC): A type of short-term loan facility provided by banks in India, allowing businesses to withdraw funds up to a certain limit.
Overdraft (OD): A credit facility offered by banks in India that allows account holders to withdraw money even when they have no funds in their account, up to a certain limit.
Working Capital Demand Loan (WCDL): A type of loan provided by banks to businesses for meeting their short-term working capital requirements.
Working Capital Term Loan (WCTL): A type of loan provided by banks to businesses for financing their working capital needs over a longer term.
Escrow Mechanism: A financial arrangement where a third party holds and regulates payment of the funds required for two parties involved in a transaction.
RBI/2020-21/20
DOR.No.BP.BC/7/21.04.048/2020-21 August 6, 2020
All Scheduled Commercial Banks
All Payments Banks
Madam/Dear Sir,
Opening of Current Accounts by Banks - Need for Discipline
Please refer to the circular DBR.Leg.BC.25./09.07.005/2015-16 dated July 2, 2015 on the
subject. The instructions on opening of current accounts by banks have been reviewed
and the revised instructions are as under:
i. No bank shall open current accounts for customers who have availed credit
facilities in the form of cash credit (CC)/ overdraft (OD) from the banking
system and all transactions shall be routed through the CC/OD account.
ii. Where a bank’s exposure1 to a borrower is less than 10 per cent of the
exposure of the banking system to that borrower, while credits are freely
permitted, debits to the CC/OD account can only be for credit to the CC/OD
account of that borrower with a bank that has 10 per cent or more of the
exposure of the banking system to that borrower. Funds will be remitted from
these accounts to the said transferee CC/OD account at the frequency agreed
between the bank and the borrower. Further, the credit balances in such
accounts shall not be used as margin for availing any non-fund based credit
facilities. In case there is more than one bank having 10 per cent or more of
the exposure of the banking system to that borrower, the bank to which the
funds are to be remitted may be decided mutually between the borrower and
the banks. It may be noted that banks with exposure to the borrower of less
than 10 per cent of the exposure of the banking system can offer working
capital demand loan (WCDL) / working capital term loan (WCTL) facility to the
borrower.
1 ‘Exposure’ for the purpose of these instructions shall mean sum of sanctioned fund based and non-fund based
credit facilities2
iii. Where a bank has a share of 10 per cent or more in the total exposure of the
banking system to the borrower, it can provide CC/OD facility as hitherto.
iv. In case of borrowers covered under guidelines on loan system for delivery of
bank credit issued vide circular DBR.BP.BC.No.12/21.04.048/2018-19 dated
December 5, 2018, bifurcation of working capital facility into loan component
and cash credit component shall henceforth be maintained at individual bank
level in all cases, including consortium lending.
v. In case of customers who have not availed CC/OD facility from any bank,
banks may open current accounts as under:
a) In case of borrowers where exposure of the banking system is ₹50 crore or
more, banks shall be required to put in place an escrow mechanism.
Accordingly, current accounts of such borrowers can only be
opened/maintained by the escrow managing bank. However, there is no
restriction on opening of ‘collection accounts’ by lending banks subject to
the condition that funds will be remitted from these accounts to the said
escrow account at the frequency agreed between the bank and the
borrower. Further, the balances in such accounts shall not be used as
margin for availing any non-fund based credit facilities. While there is no
prohibition on amount or number of credits in ‘collection accounts’, debits
in these accounts shall be limited to the purpose of remitting the proceeds
to the said escrow account. Non-lending banks shall not open any current
account for such borrowers.
b) In case of borrowers where exposure of the banking system is ₹5 crore or
more but less than ₹50 crore, there is no restriction on opening of current
accounts by the lending banks. However, non-lending banks may open
only collection accounts as defined at (v) (a) above.
c) In case of borrowers where exposure of the banking system is less than ₹5
crore, banks may open current accounts subject to obtaining an
undertaking from such customers to the effect that customers shall inform
the bank(s), if and when the credit facilities availed by them from the
banking system becomes ₹5 crore or more. The current account of such
customers, as and when the exposure of the banking system becomes ₹5
crore or more and ₹50 crore or more, will be governed by the provisions of
para (v) (b) and (v) (a) respectively.3
d) Banks are free to open current accounts of prospective customers who
have not availed any credit facilities from the banking system, subject to
necessary due diligence as per their Board approved policies.
2. Banks shall monitor all current accounts and CC/ODs regularly, at least on a
quarterly basis, specifically with respect to the exposure of the banking system to
the borrower, to ensure compliance with these instructions.
3. Banks should not route drawal from term loans through current accounts. Since
term loans are meant for specific purposes, the funds should be remitted directly
to the supplier of goods and services. Expenses incurred by the borrower for day
to day operations should be routed through CC/OD account, if the borrower has a
CC/OD account, else through a current account.
4. As regards existing current and CC/OD accounts, banks shall ensure compliance
with the above instructions within a period of three months from the date of this
circular.
Yours faithfully,
(Saurav Sinha)
Chief General Manager-in-Charge
Encl: Flowcharts5