Opening of Current Accounts by Banks – Need for Discipline

The RBI had, on August 6, 2020 (‘Original Circular’), issued revised instructions to scheduled commercial banks and payment banks for opening of current bank accounts with a view to improve credit discipline. For our summary of the Original Circular, please click here. The RBI, on November 2, 2020, extended the timeline for compliance with the Original Circular with reference to existing current, cash credit (‘CC’) and overdraft (‘OD’) accounts from November 05, 2020 to December 15, 2020. The RBI, on December 14, 2020, also issued FAQs on operational issues regarding the maintenance of existing current accounts by the banks.

Reversing the restriction placed under the Original Circular, the RBI has now permitted opening of specific accounts required under statute or the instructions of regulatory authorities, without requiring compliance with the Original Circular, on the condition that such accounts must be used for permitted and specified transactions only. An indicative list of such accounts has been provided which includes RERA accounts (for maintaining 70% of advance payments collected from the home buyers), accounts permitted under FEMA, and accounts for the purposes of initial public offerings, new fund offers, follow on public offers, dividend payments, allotment of debentures or issuance of commercial papers.

Additionally, the FAQs also clarify the following:

i.      Banks must monitor all current and CC/OD accounts on a half-yearly basis;

ii.    Only fund and non-fund based credit facilities sanctioned by scheduled commercial banks and payments banks will be included for the purpose of computing aggregate exposure of the banking system to a borrower;

iii.   Banks may open a current account in relation to a specific project, if the borrower has not availed any CC/OD facilities for that project and the cash flows in the current account are from that specific project only. For borrowers with multiple projects / multiple business units, banks may open multiple escrow accounts for the monitoring of project-wise / unit-wise cash flows, subject to the above;

iv.    Where term loans are for purposes other than supply of goods or services and the payment destination is unidentifiable, banks may route such term loans through CC/OD or current accounts of the borrower opened in accordance with the Original Circular. Where the payment destination is identifiable, banks may make disbursement of the term loan directly without routing it through CC/OD accounts;

v.     Where there are multiple lending banks, borrowers are free to choose their escrow managing banks but all such lending banks must be a part of the escrow agreement, the terms and conditions of which may be decided mutually by the lending banks and the borrower; and

vi.     Banks may only debit collection accounts for transferring funds into the escrow account of borrower.