Fund diversion has always been a major problem in our banking system. It has been observed in all major cases of wilful default or fraud that the funds borrowed from banks have been diverted elsewhere and the banks had no control over utilization of funds. This situation is caused due to the fact that there is no discipline in our banking system on the opening and running of current and CC/OD accounts. Borrowers have simultaneous current and CC/OD accounts with many banks.
To check this loophole, the RBI has vide a notification dated 6th August, issued fresh guidelines in respect of opening and operating CC/OD/Current accounts of borrowers which are mandatory to be followed by all branches. The main provisions of the notification are given below:
1. No bank can open a current account for a customer who has availed a CC/OD facility from any bank and all transactions of that customer should necessarily be routed through such CC/OD account. Even the bank who has granted CC/OD, can not open a current account for that borrower. It means if you observe in the balance sheet of a customer both CC/OD as well as current account, it will be a violation of these guidelines from now onwards.
2. If the customer has all credit facilities including CC/OD facility from a single bank, he can operate the said account as usual. The only thing the bank in such cases shall keep in mind is that it shall not open a current account for that borrower.
3. If the customer has credit facilities from more than one lenders, the lenders are to be divided into two categories- (i) those having aggregate exposure of 10% or more; and (ii) those having aggregate exposure of less than 10%
Aggregate exposure means sum total of all credit facilities (fund as well as non-fund based) enjoyed by a borrower from entire banking system.
(i) Those banks who have aggregate exposure of 10% or more can permit operations in their CC/OD account as usual.
(ii) Those banks who have aggregate exposure of less than 10% can allow only credits in their CC/OD account. No debit allowed in such CC/OD account except that funds available in such CC/OD accounts are to be transferred to CC/OD account of that borrower in another bank who has 10% or more exposure to that borrower. Clearly, only credits, no debits. Further, balance available in CC/OD accounts with such banks can not be used as margin for availing non-fund based facilities.
Example 1:
To a borrower- PNB has exposure of 100 crores
BOB: 60 crores
Canara: 19 crores
Union: 15 crores
Aggregate exposure: 194 crores
The aggregate exposure here consists of both term loan as well as working capital limit. Suppose the borrower has CC/OD account with all four banks.
Now, PNB and BOB have exposure of more than 10%. So, they can permit transactions in their CC/OD accounts as usual without any restriction.
But Canara and Union have exposure less than 10%. So, they can not permit debits in their CC/OD accounts. They shall transfer available balance in their CC/OD accounts to either PNB or BOB (as mutually agreed between the banks and the borrower) at such intervals as mutually agreed between the bank and the borrower.
Now, there may be a situation like this:
Example 2:
HDFC Bank: term loan of Rs. 200 crores
Central Bank: CC of Rs. 20 crores
Aggregate exposure: Rs. 220 crores
Since aggregate exposure of Central Bank is less than 10%, it can not permit debits in its CC account. But the borrower does not have a CC/OD account with HDFC Bank. What to do?
In my view, the two banks shall re-arrange the credit facilities between them, the borrower shall have to open a CC/OD account with HDFC Bank and Central Bank shall transfer its account balance periodically to HDFC Bank.
There may be another problem like this:
Example 3:
In respect of a borrower, 11 banks have exposure to the borrower but share of each of them is less than 10% i.e. none of the lenders has exposure of 10% or more to that borrower.
In my view, the banks shall have to sit together and re-arrange the credit facilities among them so that at least one bank's share crosses the limit of 10% and that bank shall also open a CC/OD account (if it is not already there) and all the transactions of the borrower shall be routed through CC/OD account of only that bank and all other banks shall periodically remit their balance to that bank.
4. The borrowers who have exposure to the banking system but don't have any CC/OD account with any bank, shall be divided into three categories:
(i) those borrowers having aggregate exposure of 50 crores or more from the banking system- an escrow mechanism shall have to be implemented among the lenders. Only the escrow managing bank shall open a current account. All other lenders can open collection accounts but can not permit any debit in such accounts and shall transfer available balance to the escrow managing bank periodically. Those other lenders can not even utilize the balance available with them as margin money for non-fund based credit facility. Non-lender banks can not open any current account for such entity.
(ii) those borrowers having aggregate exposure of 5 crores or more but less than 50 crores from the banking system- all lender banks can open current accounts and freely permit operations therein. But non-lender banks can open only collection accounts for credit purposes only and debits can not be permitted. They have to remit available balance to any of the lender banks periodically.
(iii) those borrowers having aggregate exposure of less than 5 crores from the banking system- any bank (even non lenders also) can open current account and freely permit transactions therein without any restriction. But any bank desirous to open a current account shall take an undertaking from such customer to the effect that the customer shall inform to the bank whenever its aggregate credit facilities from the banking system crosses Rs. 5 crores. Whenever the aggregate exposure to such borrowers crosses Rs. 5 crores, all such current accounts opened by non-lenders shall be converted into collection accounts for remittance to lender banks.
4. The entities which have not availed any credit facility from any bank, can freely open current accounts with any bank.
5. All banks shall monitor all their CC/OD and current accounts on a regular basis and at least on a quarterly basis to ensure compliance with these guidelines.
6. In respect of all existing CC/OD and current accounts, all banks shall ensure compliance with these guidelines within three months from the date of issue of these guidelines. It means if there are any current accounts in violations of these guidelines, all such accounts need to be closed within 3 months.
7. These obligations on the banks are of continuing nature. Whenever, there is any change in circumstances or the aggregate exposure of a borrower exceeds any of the thresholds, the banks shall act promptly to ensure compliance with the relevant part of these guidelines.
8. These guidelines, if implemented properly and diligently in spirit, shall go a long way in safeguarding the interests of our banking system and the economy as well.
The author can also be reached at ca.mahesh1985@yahoo.com.
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