The Reserve Bank of India (RBI) has set a deadline of 30 July for banks to relinquish the current accounts of all companies where the banks’ exposure is below a cut-off decided by the regulator.
An RBI directive requires banks to surrender current accounts of all companies or corporate borrowers, where their loan exposure is less than 10% of the total approved facilities.
The Indian central bank has earmarked the new deadline of 30 July for compliance extending it from the earlier 31 January, 2021.
RBI has informed banks through a letter sent 15 days ago about new stricter norms becoming applicable from 31 July.
RBI’s move seeks to enforce credit discipline and bar defaulter company-borrowers from diverting funds received from/ through their banks.
The regulator intends to curb non-performing assets (NPAs) and defaults
Now such companies or corporate borrowers will need to have their current accounts and collection accounts with their lending banks.
The exposure could be in the form of loans, non-fund businesses such as guarantees, day light or intra-day overdrafts, among others. These norms do not cover mutual funds and insurers.
Banks will have to shift such funds to another bank, which meets the RBI-specified exposure rule. Banks could see a reshuffle of several coveted current accounts and cash management business of customers (companies).
Many international banks, multinational banks, public sector banks, private banks and even cooperative banks, among others, are expected to be affected.
State-owned banks do not have the technology required for compliance
Current accounts reduce a bank’s cost of funds. The regulator noticed that certain companies hold current accounts outside the purview of loan consortium banks so as to postpone servicing of loans and timely repayments.
The banking regulator had started this process by notifying the rule in August 2020 and had given a compliance deadline of January 31. But several banks did not comply or complete the process of transition.
Sources said that several multinational (MNC) banks had opposed the regulator’s move and some were not large lenders but had deployed state-of-the-art technology to integrate the flow of funds between a company and its customers, vendors and associates.
They earned on the float as well as leveraged the relationship opportunity to cross-sell products to such chains. They used such tactics to earn fee income without giving big loans. They bypassed the risk of NPAs, according to banking experts.
State-owned banks did not seem to be ready with the technology required for the process of migration.
RBI’s move coincides with the commencement of operations of NARCL, the new ‘bad bank,’ which is expected to handle stressed debt worth two trillion rupees ($27bn), as per Bloomberg.
After these safeguards, the regulatory norms will streamline the use of multiple accounts by borrowers.