A handful of banks have written to the Reserve Bank of India (RBI) seeking more time to implement the regulator’s August 6 circular on opening of current accounts (CA).
The circular mandates that 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. The central bank has given a three-month period to comply with the circular, which banks believe is too little time to comply with the new rules.
In addition, bankers expect a number of challenges to crop up while implementing the new rules. As things stand, there is no way for a lender to know the exposures other lenders have to a particular borrower or to get a full view of the latter’s cash flows. Therefore, a centralised database of such information may need to set up, multiple bankers told FE.
The central bank said that if a bank’s exposure to a borrower happens to be less than 10% of the total exposure of the banking system to that borrower, the bank will only be allowed to open a collection account for that borrower. Banks will have to comply with these norms on an ongoing basis, and review exposures at least on a quarterly basis. That could prove to be a challenge, given that there is at present no technological framework in place to monitor these details.
“It is going to require quite a bit of rejig at the borrower’s end and also at the bank’s end because there are multiple implications of the circular,” said a senior executive with a large private bank. For example, a borrower may have loans from various banks, but the cash management activities could have been given to one or more specific banks based on their service capabilities. Where they consolidate their cash management activities could be a tricky decision and implementation could be delayed to that extent. At the bank’s end, there will have to be a lot of discussions with borrowers, accompanied by tweaks to technology and systems. “Three months for all this is too little,” the banker said.
The clarifications being sought pertain to the treatment of current accounts opened for specific purposes, such as to distribute dividends or to raise capital. Banks have also asked the RBI whether exposures for the purpose of compliance should include non-fund-based exposures as well, whether sanctioned limits should be taken into account or actual drawdowns,
“One key issue that the system is going to face is that there is no single place or database where you can go and check out the exposure that the banking system has to a particular corporate, and how it correlates to my exposure,” the banker said. Another banker with a large public sector bank (PSB) said that it will be impractical for large borrowers to set up multiple CC/OD accounts with all their lending banks. “If it is a borrower like the biggest refiner-telecom provider-retailer, to which everybody has an exposure, how can they manage? The best way to do this is to set up a centralised database, where you can see all of the borrower’s banking relationships,” he said.
As compared to their 65% share in bank credit, PSBs have a relatively lower share of 52% in the CA deposits of the banking system, as private banks enjoy a better float of CA balances from their customers, rating agency Icra said in a recent report. “A relatively higher share of CA balances of private banks is also driven by their better service levels such as doorstep cash management services, better tapping of the entire value chain in customer’s ecosystem, better interface of internet banking systems etc,” Icra said.
It is not clear yet whether the circular will end up benefiting PSBs more by fetching them a better view of their borrowers’ cash flows or whether it will only consolidate private banks’ growing share in the credit business. Most PSBs have invested little in setting up cash management facilities for their customers, with State Bank of India (SBI) and Bank of Baroda (BoB) being the exceptions. So borrowers will have the choice of either moving their cash management businesses to their biggest lenders or of moving their loans to the books of their cash managers.