Siphoning off funds from term loans of banks through current accounts in other banks by corporates and big borrowers is set to come down. In a bid to prevent the misuse of bank funds, the Reserve Bank of India (RBI) has banned banks from routing funds from term loans taken by borrowers through their current accounts, a common practice among borrowers to divert funds.
It has also banned a bank from opening current accounts for customers who have availed credit facilities in the form of cash credit (CC) or overdraft (OD) from other banks and stipulated that all transactions should be routed through the CC or OD account. This effectively means banks — mostly PSU banks — which have given loans will now handle the current accounts of borrowers who, in turn, can’t divert money for other purposes through the current accounts of other banks, mainly private and foreign banks.
“Since term loans are meant for specific purposes, the funds should be remitted directly to the supplier of goods and services,” the RBI said. “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,” it said in a notification to banks. Analysts said the RBI move is to prevent misuse of funds by promoters and corporates in the wake of the proposed one-time loan recast scheme.
In a notification issued last week, the RBI has directed that debit (withdrawal) to the CC/OD account of a borrower can only be for credit (deposit) to the CC/OD account of that borrower with a bank that has 10 per cent or more of the exposure (loans) of the banking system to that borrower. This means the bank which have given 10 per cent or more of loans to a borrower or corporate will handle the current account transactions. “For most corporates, while loans are given by public sector banks current accounts are managed by private banks. This will stop now. PSU banks which have given credit and overdraft will now manage current accounts as well. Usually current accounts interest rates are low,” said a source.
Enforcing credit discipline
The RBI said the use of multiple operating accounts by borrowers, current accounts as well as cash credit (CC) and overdraft accounts, has been observed to be prone to vitiating credit discipline.
The RBI said the use of multiple operating accounts by borrowers, both current accounts as well as cash credit (CC) and overdraft accounts, has been observed to be prone to vitiating credit discipline. “The checks and balances put in place in the extant framework, for opening of current accounts, are found to be inadequate,” it said.
“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,” the RBI said.
The RBI has said the credit balances in such accounts should 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,” the RBI said. In the case of customers who have not availed CC/OD facility from any bank, the RBI has set three parameters for opening current accounts. In the case of borrowers where exposure of the banking system is Rs 50 crore or more, banks will be required to put in place an escrow mechanism.
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