Impact of RBI’s new rules on overdraft, cash credit and current accounts

Business owners and holders of current accounts need to be aware of the changes that the RBI introduces from time to time so that they can plan and manage their funds and operations smoothly. This year too, the RBI has come up with some strict rules to regulate and incorporate discipline in current accounts. The new circular came into effect on August 6, 2020.

So, take a look at the updated conditions and guidelines for account holders who avail cash credit or overdraft facilities:

Customers who already have an existing CC or OD facility

Banks are not allowed to open a current account for those customers and all transactions are required to be directed through these CC or OD facilities only.

If a bank’s exposure to a borrower is less than 10% of the exposure of the banking system to that borrower, debits have to be routed through the bank that has more than 10% exposure.

Customers who have not availed a CC or OD facility from the bank and

1. Have been exposed to banking facility of Rs. 50 crore or more

1. Banks will be required to put in place an escrow mechanism.
2. Current account of such a party can be managed by the escrow managing bank only.
3. Other lenders are allowed to open collection accounts.
4. Balances in such accounts will not be allowed to be used as margin for availing any non-fund based credit facilities.
5. Debits to these accounts are limited to remitting the proceeds to the said escrow account.
6. Non-lending banks are not allowed to open bank account for such borrowers.

2. Have been exposed to a banking facility of more than Rs. 5 crores but less than Rs. 50 crore

1. No restriction on the opening of current accounts.
2. Non-lending banks are allowed to open collection accounts only as mentioned in point 1 above.

3. Have been exposed to banking facility of less than Rs.5 crore

Banks are allowed to open current accounts for such customers, however, they have to obtain an undertaking specifying that the customer is liable to inform the bank(s), whenever the credit facilities availed from the banking system becomes Rs. 5 crores or more, after which they will be subject to regulations mentioned in point 1 and 2 above.

How new guidelines will impact corporate customers as well as banks?

Most of these regulations are intended to discipline credit facilities across the nation and those accounts that do not follow these norms will be closed. Till date, usage of multiple accounts across various banks has been observed, which makes it difficult to keep checks in place. Instead, routing payments through a bank that has maximum exposure to a borrower, will help maintain discipline.

However, while this will be helpful in regulating current accounts, many bankers fear that it may impact small and medium-size banks the most. They may experience a reduction in the number of current and savings accounts. Even non-banking financial institutions are skeptical about this move as routing expenses through one bank account may affect flexibility, resulting in operational difficulties.

Additionally, it may impact foreign banks as most of them manage current accounts without offering any lending facility. However, the RBI circular requires that any bank which offers a current account with more than 50 crores in debt, must have at least 10% exposure in that entity.

To ensure compliance, the RBI has directed banks to monitor client accounts on a quarterly basis, with respect to their exposure to the banking system. For existing current and CC/OD accounts, banks have to ensure compliance within three months of the circular date. For more information, you may refer the RBI circular.

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