RBI Circular – Opening of Current Account by Banks – Need for discipline

15 September 2020

The implementation of the stipulations outlined in RBI’s circular RBI/2020-21/20 DOR.No.BP.BC/7/21.04.048/2020-21 dated August 6, 2020 regarding opening of Current Accounts by banks was expected to lead to operational issues for NBFCs and HFCs.

ICEMA, in this context, submitted its recommendations to the RBI Governor stating that NBFCs and HFCs maintain multiple current accounts with banks depending on which of the customer’s bank have NACH / ECS mandates. These banks may or may not have extended a CC or OD facility to the NBFC / HFC in question. Pursuant to the Circular, these current accounts would have to be closed. The mandate to route every transaction through a CC/OD Account would mean that all the monies disbursed to and collected from its borrowers would have to be routed through the CC/OD account. This change would make it difficult for financial institutions to track business-wise disbursals and collections.

Further, as part of the lending process, NBFCs / HFCs often have a charge over receivables or the receivables in the account of its borrowers are earmarked to them as a sanction term for repayment of the loan granted. As per the circular, the cash flow from such accounts will be monitored by the bank that has more than 10% exposure to such customer. This could render the NBFC / HFC’s charge over such receivables ineffective, thereby diluting their ability to recover the loans.

ICEMA also submitted that if all transactions were to be routed only through a particular bank, an entity would have no flexibility or back up available in case of any unforeseen issues or freeze on transactions with a particular bank; this would automatically result in a freeze of all transactions of that particular entity with that bank. Also, the bank to which the transactions of an entity need to be routed would be able to utilise the credits to set off its debits to the prejudice of other banks and other entities such as investors holding an exposure to the entity.