RBI’s new guidelines regarding Current Account of borrowers

Ever thought of how such big industrial giants and companies, who do businesses worth thousands of crores of rupees on a regular basis, manage their banking? Major big industrial giants and companies in the Indian market have several bank accounts, through which all the transactions happen.

These accounts are mostly current accounts which are opened with several private banks, due to the numerous services and facilities they provide. However, companies rarely have one single current account.

Companies also take up several loans from different banks in order to increase their leverage and expand their business operations. Usually, companies take up loans from the public sector banks because of their low-interest rates and open up current accounts with private banks because of the numerous facilitates and services they offer. Sounds pretty convenient, doesn't it?

However, this little bubble of convenience that was being enjoyed by many companies was recently burst open by the RBI. This month, the Reserve Bank of India announced a new set of guidelines for banks on the opening of current accounts by their borrowers. This move has been taken to ensure a sense of discipline and conduct among the borrowers.

How you ask? Well, according to the latest guideline, companies are allowed to open current accounts or cash-credit/overdraft accounts only with the banks that they have borrowed loans or credit facilities from. This was to ensure that banks that provide loans and credit facilities have an idea of the company's cash flows.

Why did it Happen?

Now let us understand what moved RBI to take this decision. As I mentioned earlier, corporates and individuals, generally opt for public sector banks to borrow loans and avail credit facilities because of their cheap interest rates. What sometimes happens is that these corporates or individuals take loans from PSUs and then deposit them into the current accounts of a different current account of a private sector bank.

This results in an undue advantage for the private sector banks as they get easy funds in their current accounts and thus avail the benefits of those transactions, which include transaction charges. However, for the public sector banks, this becomes a greater risk, as they are the ones that have lent money in the first place, without receiving any returns out of it.

Usually, international and private sector banks don't lend money to small or mid-sized corporates. Due to this loan transfer pattern, these banks used to get easy current accounts, which are cheap sources of funds.

These common practices often led to an increase in the illegal transfer of funds among corporates and individuals. Private Banks are usually more lenient in such situations than public sector banks. This new rule will enable public sector banks to have a tighter grip on its lenders if they open current accounts with them.

PSUs can now practice more vigilance, and thus, they can curb any possible illegal fund transfer activities. Major control of transactions can now be in the hands of these government banks.

The Bottom Line

The effect of this new rule on corporates and individuals is a subjective matter. Those with honest and transparent activities should not have big trouble in having current accounts with public sector banks, but for those involved in any malpractices, this might be a warning bell. PSUs might immediately freeze accounts that show any sort of suspicious activity.

An overall impact of this new guideline on private as well public sector banks cannot be predicted yet. It might happen that private banks might lose a big share of their current accounts to the public sector banks. However, one sure result will be that there will be better regulation of the banking sector, credit discipline among the lenders can be ensured, and bad loans can be avoided, which can prove to be beneficial for the system and economy.