As if the pains caused by the coronavirus (COVID) pandemic were not enough for businesses, banks from across the country are either freezing or closing current accounts of customers.
Banks are citing a circular issued by the Reserve Bank of India (RBI) in August 2020 titled 'Opening of Current Accounts by Banks - Need for Discipline'. More shockingly, many banks are freezing or closing current accounts stating that the customer has availed cash credit (CC) or overdraft (OD) facilities from some other bank and, hence, it needs to close the account.
Many businesses and organisations have been raising the issue with the RBI since August last year; but, so far, there is no respite. For example, the All-India Transporters Welfare Association (AITWA) sent a letter to RBI on 15 December 2020 and followed it up with an email on 15 July 2021, highlighting the issues being faced by truckers from across the country.
AITWA says road transport is a geographically spread business and has offices and personnel stationed in many locations for operations. All such branch offices have bank accounts to manage the day-to-day expenses of the branch such as advances to truck drivers for food, labour expenses, minor repairs and fuel.
"But with the RBI circular to close current accounts if a business has a cash credit (CC) or overdraft (OD) facilities, this is leading to the abrupt closure of bank accounts across all public and private sector banks. Businesses are stranded as suddenly their incoming payments get delayed and there is no way to pay their branches," says Abhishek Gupta, joint secretary of AITWA.
Mr Gupta from Prakash Parcel Services Ltd is also chairman of the banking & GST (goods and services tax) committee at the Bombay Goods Transport Association (BGTA).
We also came across a communication sent by Yes Bank to one of its customers that asks the customer to either avail CC or OD facility from the bank or else it would impose restrictions.
The communication from Yes Bank states, "...we have reviewed the status of all our customer relationships and during that exercise, we noticed that although you are not availing any credit facilities from YES Bank in the form of CC/OD or otherwise, you are availing credit facilities from other banks. Your account status with the bank, therefore, does not strictly fall under the stipulated criteria, as mentioned in the RBI guidelines..."
Many people are venting their anger on social media. One Praveen Malik says, "I being a reputed current account holder, Axis Bank put a freeze on my account stating the norms of central government that a company can operate only one account, either current or limit account."
There are many posts highlighting issues being faced by customers who have current accounts in banks.
In August 2020, RBI issued a circular
asking the banks to follow its revised instructions for current accounts. The circular states, "No bank shall open current accounts for customers who have availed credit facilities in the form of CC/ OD from the banking system and all transactions shall be routed through the CC/OD account."
RBI had mentioned four important points in this circular for opening a current account for customers, who have not availed of any CC or OD facilities.
For customers, who have an exposure of Rs50 crore and more, current accounts can only be opened or maintained by the escrow managing bank. "...there is no restriction on the 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 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 the purpose of remitting the proceeds to the said escrow account. Non-lending banks shall not open any current account for such borrowers," RBI says.
In the case of borrowers where exposure (sum of sanctioned fund-based and non-fund-based credit facilities) of the banking system is Rs5 crore or more but less than Rs50 crore, there is no restriction on the opening of current accounts by the lending banks. However, RBI says, non-lending banks may open only collection accounts for such customers.
In case of borrowers where exposure of the banking system is less than Rs5 crore, RBI says, banks may open current accounts subject to obtaining an undertaking from such customers to the effect that customers will inform the bank/s when the credit facilities availed by them from the banking system becomes Rs5 crore or more.
"The current account of such customers, as and when the exposure of the banking system becomes Rs5 crore or more and Rs50 crore or more, will be governed by provisions under para (v) (b) and (v) (a) respectively," the circular says.
RBI says banks should 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.
Further, banks are asked not to route withdrawal from term loans through current accounts. RBI says, "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 account if the borrower has a CC/OD account, else through a current account."
From the plain reading of the RBI circular, it appears that the central bank wants to regulate and keep track of all CC and OD facilities availed by customers. It also wants banks to maintain records of bifurcation of the working capital facility into loan component and cash credit component.
However, while doing so, RBI ended up with increasing pains for current account-holders and, for now, there seems to be no respite.
We sent an email to RBI about the issue. However, till writing this article, we have not received any response from the banking regulator. We will update this article as and when we receive any reply from RBI.