The Confederation of Indian Industry (CII) has written to the RBI seeking changes to the central bank’s recent circular on current accounts. The rules, in their current form, may not only lead to a manifold increase in operational workflows, inefficiencies, delays, and costs for delivery of products, but also threaten the survival of smaller banks, CII said.
The RBI in its August 6 circular mandated that no bank should open new current accounts for customers who had availed of cash credit (CC) or overdraft (OD) from the banking system.
The RBI also said that for borrowers for whom the exposure was ₹50 crore or more, banks would be required to put in place an escrow mechanism, among other restrictions. The CII has pitched that the thresholds limits be increased from ₹50 crore to ₹100 crore, given the impact on MSMEs and to ensure minimal impact on the banking sector. “Similarly, decrease the banking exposure limit from 10% to 5% for clients availing CC/OD, or make limits consistent with Tier 1 Capital base to 15% of the bank’s capital to provide for a wider lender consortium,” the industry body urged.
Further, it said certain categories of borrowers such as MFs, insurance companies, exchange brokers and NBFCs should be excluded from credit worthiness in terms of external ratings, given their high level of risk management and governance standards.
The industry body has also sought time till April 1, 2021 to implement this circular given “client readiness, operational challenges and to allow for a measured and smooth transition” as against the current deadline of November 6, 2020.
It also noted that banks had evolved specialised services like forex management and cash management by focusing on niche segments and investing heavily in technology to provide superior and customized services to the customers. “The circular would mandate the corporates to enter fresh arrangements with their lending banks irrespective of their ability to offer similar service and systems, which could significantly disrupt their business and profitability,” it said.
Further, it added that concentration of funding and the concomitant pricing power would remain with a handful of banks which would create unfair pricing differentials. “The banks may move to fee-based model to offset costs of development and servicing. This will further make the corporate sector uncompetitive and increase the inefficiencies in the banking system, the cost of which would be borne by the corporate sector.”
The circular would lead to denying the freedom to the corporate sector to decide on the Bank on merit of the service provided and be forced to choose from the banks providing CC/OD facilities.
CII said that the current arrangement avoided over-dependency of clients on a single bank and multiple accounts were used for different functions / verticals within the business for smooth day-to-day operations. “Clients have their own liquidity and risk management frameworks to manage operational funds / investments through more than one bank. Having all CA balances concentrated in a single bank will lead to high risk and a lack of backup options under a business, operational or system failure of the lead bank,” it said.
The industry body has recommended that the circular be restricted to corporates rated lower than BBB by local credit rating agencies. “As the intent of the circular is to mitigate intentional defaults, this approach will ensure that good corporates with a track record are not inconvenienced due to this guideline,” it said.
