Stricter Guidelines for Opening of Current Accounts by Banks – Step towards curtailing Diversion of Funds

Issuing Authority: Reserve Bank of India.

Notification Number: RBI/2020-21/20.

Applicable to: Banking sector.

Date of issue: 6^th August 2020.

Summary:

The digital revolution occurring in financial services – with more and more people using cashless (EMV) payments and online banking – has created a situation where new account fraud is emerging as one of the biggest concerns for retail banks. This is because fraudsters are constantly adjusting their operations in order to exploit new weaknesses and boost their profits.

In order to reduce such happenings, RBI has issued or revised the guidelines for account opening for banks.

Borrowers with credit facilities – CC and OD accounts:

1. No bank shall open current accounts for customers who have availed cash credit (CC)/ overdraft (OD) from any bank and all transactions shall be routed only through the CC/OD account.
2. Where credit facilities (Fund and Non-Fund based facilities) extended by a bank to a borrower is less than 10% of the total credit facilities extended by the banking system as a whole-
   1. Credits are freely permitted.
   1. Debits to the CC/OD account can only be for credit to the other CC/OD account with 10 per cent or more of the exposure of the borrower. Further, these remittances can be made only at a frequency as mutually agreed upon 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.

For example: Mr A, a business man holds a CC account with X bank and Y bank for an amount of 9 crores and 91 crores correspondingly.
As per the revised guidelines Mr A can deposit any amount in X bank(where credit facilities extended is less than 10%) but can transfer amounts only to his account in Y bank at frequent intervals.

• 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.

• Borrowers without credit facilities:
  • In case of borrowers where exposure of the banking system is ₹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.
  • In case of borrowers where exposure of the banking system is ₹5 crore or more but less than ₹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 (v) (a) above.
  • In case of borrowers where exposure of the banking system is less than ₹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 ₹5 crore or more. The current account of such customers, as and when the exposure of the banking system becomes ₹5 crore or more and ₹50 crore or more, will be governed by the provisions of para (v) (b) and (v) (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.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. 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.

Prepared by: Subramanian G, Subasree N, Vijay Bhardwaj – Audit Executives of R V K S And Associates