Current Account Deposits and the Regulatory Landscape According to RBI Guidelines

Current Account Deposits and the Regulatory Landscape According to RBI Guidelines
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The Reserve Bank of India (RBI), responsible for regulating the Indian banking system, has laid down new guidelines regarding Current Account for better compliance.

The RBI has recently introduced updates on account opening procedures, including KYC and its requirements, and account transaction rules to ensure safe and transparent banking, responsible practices, and accountability, which are particularly crucial for individuals and organizations involved in financial activities such as IPOs (Initial Public Offerings) – the IPO full form.

What Are the Latest RBI Guidelines?

Opening of Current Accounts by Banks – The Need for Discipline

Referring to the instructions on opening Current Accounts by Banks have been reviewed, and the revised instructions are as follows:

  • No bank shall open Current Accounts for customers who have availed credit facilities in the form of cash credit (CC)/overdraft (OD) from the banking system, and all transactions shall be routed through the CC/OD account.
  • Where a bank’s exposure to a borrower is less than 10% of the banking system’s exposure to that borrower, while credits are freely permitted with a bank that has 10 per cent or more of the banking system’s exposure to that borrower. Funds will be remitted from these accounts to the said transferee CC/OD account at the frequency agreed between the bank and the borrower. 

Further, the credit balances in such accounts shall not be used as a margin for availing any non-fund-based credit facilities. In case more than one bank has 10 per cent or more of the banking system’s exposure to that borrower, the bank to which the funds are to be remitted may be decided mutually between the borrower and the banks. Banks with less than 10 per cent of the banking system’s exposure to the borrower can offer a working capital demand loan (WCDL) / working capital term loan (WCTL) facility to the borrower.

Where a bank has a share of 10 per cent or more in the total exposure of the banking system to the borrower, it can provide CC/OD facility as hitherto.

D.In case borrowers are covered under guidelines on the loan system for delivery of bank credit issued video https://www.rbi.org.in/Scripts/NotificationUser.aspx, 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.

In case of customers who have not availed CC/OD facility from any bank, banks may open current accounts as follows:

  1. In the case of borrowers where exposure to the banking system is Rs 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. There is no restriction on opening ‘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 upon between the bank and the borrower. Further, the balances in such accounts shall not be used as a margin for availing any non-fund-based credit facilities. While there is no prohibition on the amount or number of credits in ‘collection accounts’, debits in these accounts shall be limited to remitting the proceeds to the said escrow account. Non-lending banks shall not open any current account for such borrowers.
  2. In the case of borrowers where exposure to the banking system is Rs 5 crore or more but less than Rs 50 crore, there is no restriction on the opening of current accounts by the lending banks. Non-lending banks may only open collection accounts as defined above (E) (1).
  3. In the case of borrowers where exposure to the banking system is less than Rs 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 Rs 5 crore or more. The current account of such customers, as and when the exposure of the banking system becomes Rs 5 crore or more and Rs 50 crore or more, will be governed by the provisions of para (E) (2) and (E) (1), respectively.
  4. 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.
  5. Banks shall monitor all current accounts and CC/ODs regularly, at least every quarter, specifically concerning the banking system’s exposure to the borrower, to ensure compliance with these instructions.
  6. Banks should not route withdrawal from term loans through current accounts. Since term loans are meant for specific purposes, the funds should be remitted directly to the supplier of goods and services. Expenses incurred by the borrower for day-to-day operations should be routed through CC/OD accounts (if the borrower has a CC/OD account) or else through a current account.

Regarding existing current and CC/OD accounts, banks shall ensure compliance with the above instructions within three months from the date of this circular, ensuring adherence to regulatory requirements, particularly for entities such as limited liability partnerships.

CONCLUSION

Current Account Openings, Deposits, all function under RBI Circular Guidelines. There have been several new updates about opening a Current Account. Banks and potential customers must operate within the parameters provided by the RBI to remain in compliance. If customers do not meet the requirements or conditions, they cannot open a Current Account with any bank. Not complying with the regulations can result in penalties, disruptions, and regulatory actions. 

Always stay up to date with the latest guidelines. Remember that seeking expert financial advice is a good idea in this situation.

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Dulquer X Margin

Dulquer X Margin is a passionate writer contributing insightful content on the Mirror Eternally website. His current focus explores the captivating world of interesting articles, ensuring every event leaves a lasting impression.