Will policy on current accounts help PSBs?

Leading private banks are well ahead in technology adoption and marketing, and are good in venturing into new businesses to provide value-added services to their clients.

Many corporates prefer to avail these services and maintain current accounts (CAs) with them. A lot of CAs have moved away from the Public Sector Banks (PSBs) to the private banks. Certainly, private banks welcome CAs. While lending, they focus on retail segment and are very choosy/unwilling to lend to corporates with mid and low rating.

Over the years, a pattern has developed in banking where corporates avail loans from PSBs and also maintain CAs with private banks, mainly for availing Cash Management Services (CMS, both for collections and payments), integrating MIS from banks with their accounts, investment of surplus amount etc.

When CAs are maintained with non-lending banks, lending banks do not get full/timely information on the collections and payments that can result in lack of discipline among the borrowers and providing room for syphoning of funds.

Earlier, forensic audit of some large borrowers (Rs 50 crore and above) revealed fund diversion and consequently reporting these accounts as frauds.

On August 6, the RBI revised guidelines for opening of CAs to bring discipline among the corporates availing credit in the form of cash credit (CC)/overdraft (OD). The banking transactions need to be routed through CC/OD so that the lending bank gets holistic information for monitoring and initiating prompt corrective action, if required.

Generally, non-lending banks shall not open CAs for customers who have availed CC/OD facilities from the banking system.

Where the loans are availed from more than one bank, the disbursal/debits should be from the account with the bank having 10% or above exposure. If there are more number of such banks, borrowers and banks can mutually decide on the bank. Banks having exposure of less than 10% are permitted to accept credits for remittance, at frequency agreed between the banks, to the CC/OD account.

Where CC/OD facility is not availed from any bank, banks may open CAs. When the borrowers have Rs 50 crore and above exposure (fund and non-fund) from banking system, an escrow mechanism is to be put in place and CAs of such borrowers can only be opened/maintained by the escrow managing bank.

Other lending banks can open ‘collection accounts’ and funds are to be remitted to the escrow account at the frequency agreed between the bank and the borrower. Debits in these current accounts shall be only for remitting the proceeds to the escrow account. Non-lending banks shall not open any current account for such borrowers.

For borrowers with exposure of Rs 5 crore to less than Rs 50 crore, lending banks can open CAs and non-lending banks may open only “collection accounts”.

For borrowers with exposure of less than Rs 5 crore, banks may open CAs and the customers are required to inform the bank when the customers avail Rs 5 crore and above credit facilities.

Banks should not route disbursements of term loans through CAs - the funds are to be remitted directly to the supplier of goods/services. Similarly, expenses incurred by the borrower for day to day operations should be routed through CC/OD account or in the absence of CC/OD account, through CA.

In respect of existing accounts, banks are required to ensure compliance within three months. Consequently, full implications of the guidelines will be known only after three months. Data on borrowers using multiple banks – one for enjoying credit facilities and another for maintaining CAs is not readily available to measure the impact of the guidelines.

Trade-off

Many large corporates do maintain multiple CAs with private banks to avail value-added services. Often, there is a trade-off between fee and float, and to save charges under CMS, corporates keep reasonably good balances in CAs. Prompt transfer of balance from CAs to CC/OD can result in marginal reduction in interest amount in OD/CC. Sometimes, diversion of funds happens through these CAs and the lender banks may not have full/timely information.

The present RBI direction will result in private banks losing a small portion of their CAs. The loss of CAs may not be a gain to the lending PSBs as the borrowers will park the amount in CC/OD to save cost of borrowing.

The present move will also pressurise PSBs to invest in technology and provide better CMS (as provided by private banks). More importantly, the lending banks can have comprehensive/timely information of account transactions – especially on debits - and this can help in identifying fund diversion, if any, at early stages. Borrowers will also be kept on caution.

The revised guidelines in opening CAs may change the way business is done by large corporates. The impact may be marginal in minimising diversion of funds by borrowers, reducing borrowing cost to borrowers and bringing down the CA float of foreign and private banks.

The greater impact will be in bringing overall discipline among the borrowers having large exposure in the banking system. One can expect further tightening of guidelines once the transition period of three months are over, operational issues are resolved and banking system gets aligned to the new guidelines.

(The writer teaches banking at ICICI Manipal Academy, Bengaluru)