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RBI sets new conditions for current accounts to improve credit discipline

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The Reserve Bank of India has set new conditions for banks to open checking accounts for large borrowers to tighten credit discipline.

Borrowers’ use of multiple operating accounts – both current and cash / overdraft accounts – has been found to undermine credit discipline, the RBI said in its development policy statement on Thursday. and regulatory. “The checks and balances put in place in the existing framework for the opening of current accounts are considered insufficient,” he said, adding that the central bank had revised its guidelines to put in place appropriate guarantees.

The revised standards are also expected to introduce the requisite discipline into creditors ‘collective actions for faster resolution of tensions in borrowers’ accounts, he said.

The aim of the revised guidelines is to ensure that borrowers route their payments to and from a checking account with a bank that has the greatest exposure to the borrower, instead of having multiple checking accounts at multiple banks.

Here are the revised guidelines:

Opening of current accounts

  • For a borrower with an existing CC or OD installation

The bank cannot open a checking account for the borrower and all transactions must be routed through the credit or overdraft account.

  • For a borrower without an existing CC or OD installation

Banks can open a checking account if the total exposure to the borrower is less than Rs 5 crore. As the exposure exceeds Rs 5 crore, the borrower should notify the bank and thereafter it will be governed differently.

  • Credit facilities from Rs 5 Crore to Rs 50 Crore

Any lender can open a checking account, while non-lending banks can only open a collection account.

  • Credit facilities over Rs 50 Crore

Banks have been given the mandate to create an escrow mechanism and only the lender or the agent who manages the escrow can open the borrower’s checking account. The balances in these accounts cannot be used as a margin to benefit from credit facilities not based on funds.

While there is no prohibition on the amount or number of credits in “collection accounts”, any debit will be limited to the purpose of returning the proceeds to the escrow account.

Banks should not channel term loan withdrawal transactions that the borrower has received through current accounts and, instead, term loan funds should flow directly to the provider of goods and services.

Expenses incurred by the borrower for current operations should be channeled through the credit / overdraft account, if the borrower has one; otherwise, it must be routed through a checking account.

Conditions to benefit from the CC or OD installation

  • When a bank’s exposure to a borrower is less than 10% of the overall exposure of the banking system

Both CC and OD facilities can be used, but they can only be used for credits.

Any debit transaction can only consist of depositing funds into the borrower’s CC or OD account held with a bank that has an exposure of 10% or more of the total banking system exposure to the borrower. .

  • When a bank’s exposure to a borrower is greater than 10% of the overall exposure of the banking system

Banks can provide the borrower with a CC / OD facility. If the borrower has received loans from more than one bank and more than one bank has 10% exposure, the bank to which the funds are to be remitted can be decided by mutual agreement between the borrower and the banks.

All large borrowers who have a working capital facility split between a loan component and a cash credit component must maintain balances in each bank in all cases, including syndicated loans.

According to Ajay Shaw, partner of DSK Legal, the new terms are intended to ensure that large borrowers do not use multiple accounts and funnel money to and from them. “The RBI insists that all checking accounts be unified and for large borrowers there should be an escrow or trust and retention mechanism, with a cascade, to ensure cash flow control.”

In an extreme case, if a borrower had an escrow account in a syndicated loan and another lender is engaged, then the borrower would route all payments to the new lender and not to others, he said. declared. The RBI, according to Shaw, tries to avoid these situations.

“Banks will have to review all of their checking accounts and they have already started advising their customers to close accounts and keep only one,” he said.

An unintended consequence of the RBI’s move could be that smaller banks have a harder time collecting current account deposits, Kotak Institutional Equities said in a report.

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