Introduction
Sometime in the beginning of this year, one of my cousin who has a successful Jewellery Business showed me a circular from a private bank which he received and asked for my comments and opinion on the same, since this was new Development to me also, I just referred to the Circular Issued By RBI on August 6th 2020 to be implemented by all banks within the jurisdiction of India. From the point of a Chartered Accountant, I do understand that this move by RBI was to put a
- Cap on misuse/ pilferage of Bank Facilities
- Plug the existing Loopholes
- To bring more business for Local banks vis-a-vis Foreign Banks
- To control the end use of Funds Sanctioned Originally
- To have more control on the Borrower Finances
Let us go step by step through the RBI circular and its implications on businesses.
What does the RBI Circular Say?
1) 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.
Explanation: If you have availed Cash Credit / Over draft Facilities from a Bank which is business normal, then you cannot open a current account
2) Where a bank's exposure 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.
Explanation: This clause will make the financial independence of the business little blunted because if your borrowing exposure is < 10 % to a Particular bank amongst the list of your bankers, any money getting credited by way of Cash sales, Account receivables or any other source of income to the credit of CC/OD , this money can be transferred by a Debit Entry to any bank account of the borrower whose borrowing exposure is more than > 10 %, and any credit lying unutilized in this Account will not be used for any other purpose like Non fund based credit facilities as a source of margin based funding activities with the exception of WCDL/WCTL. If a borrower has exposure of > 10 % from multiple Banks, then an agreement between the Lender & Borrower has To be arrived at mutually, to know where the beneficial funds have to be parked based on the Treasury Departments requirements on the needs of the company for payments & to meet Short term financial obligations
3) 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.
4) In case of borrowers covered under guidelines on loan system for delivery of bank credit, 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.
Explanation: Clear distinction between Loan component & Cash Credit component as a means of working capital facilities under the guidelines of the lender at individual bank level including consortium lending.
5) In case of customers who have not availed CC/OD facility from any bank, banks may open current accounts as under:
- In case of borrowers where exposure of the banking system is Rs. 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.
Explanation: Exposure > 50 crores by an entity, the entity should have an Escrow Account in place, Current account to be maintained by the lead bank, the entity is allowed to open collection account and funds collected thereon to be transferred to the Escrow account for beneficial utilization of the funds so collected, here also there is no problem with Credit side entries in the account but the Debit side entry is strictly limited to purpose of remitting the proceed to Escrow account only, thereby avoiding possible diversion of the funds by the entity which is an excellent step considering the past experience of Indian Banks facing massive frauds due to diverting/routing of funds through interrelated/non interrelated Shell Companies who generally act as front for siphoning of funds through layers of transactions which only the promoter is aware off.
- In case of borrowers where exposure of the banking system is Rs. 5 crore or more but less than Rs. 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 (5) (a) above.
Explanation: Borrowers in the range of 5 Crores < 50 Crores ,Normally at the time of Exports, you face such a situation, you have Collection bank who is not a lender in a Different Bank and Current Account in another bank which is a lender, so it is clear that exports proceeds received / Project Related Money received At Collection Account can be transferred to Current Account.
- In case of borrowers where exposure of the banking system is less than Rs. 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 Rs. 5 crore or more. The current account of such customers, as and when the exposure of the banking system becomes Rs. 5 crore or more and Rs. 50 crore or more, will be governed by the provisions of para (5) (b) and (5) (a) respectively.
- 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.
6) 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.
Explanation: More responsibility to the Regional/ Zonal offices/Inspection Team/Concurrent Audit Teams to supervise the branches within their zone/ region to check proper utilization of funds earmarked for the borrower under Banking Facilities originally agreed upon , I would suggest the banks should supervise both Funded & Non funded facilities availed by the lender on a regular basis to avoid diversion of funds to other sources other than what it was intended for which is a common recurrence in any business.
7) 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
Explanation: Specific Term Loan Granted has to be routed for making payment to the specific purpose it was intended for and not to be utilized for any other purpose and funds for day today operations has to be expensed from CC/OD and in case if it's not available funds to be withdrawn from Current account only.
8) 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.
Explanation: The last date for implementation was July 31 st 2021.
Conclusion
I would suggest RBI to move ahead with a policy to allot a Unique Customer ID for all the businesses including Shell Companies and linked with all the Banks so that the business entity is well tracked and at the click of a button the data pertaining to the client can be tracked as they do with individual investors who can be tracked by the PAN number by NSDL, a system similar to corporate borrowers is the most desired solution in the present day scenario to curtail fraudulent transaction and Mis-utilization of Banking funds & Disbursement policies, Integration can be done because almost all the banks are computerized at present and getting the requisite information is not problematic.
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