Essentially, the RBI’s norms are trying to ensure that a borrower routes payments to and from current accounts maintained with banks which have the highest loan exposure to them. This was done as a number of cases of siphoning-off of loan funds were detected via current accounts held with banks other than the main lenders. Bankers, in conversations with the regulator, had said that monitoring funds once they move to accounts of other banks is difficult.
In response, the RBI put in place the following rules:
The bank cannot open a current account for the borrower and all transactions have to be routed through the cash credit or overdraft account.
Banks can open a current account if the total exposure to the borrower is less than Rs 5 crore. As and when the exposure goes beyond Rs 5 crore, the borrower has to inform the bank and, thereafter, it will be governed differently.
Any lender can open a current account, while non-lending banks can only open a collection account.
Banks have been mandated to create an escrow mechanism and only the escrow-managing lender or agent can open the current account for the borrower. The balances in such accounts cannot be used as a margin for availing any non-fund based credit facilities.
While there is no prohibition on the amount or the number of credits in ‘collection accounts’, any debits will be limited to the purpose of remitting the proceeds to the escrow account.
The banks should not route any withdrawal transaction from term loans availed by the borrower through current accounts and, instead, funds from term loans 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 the cash credit/overdraft account, if the borrower has one; else, it should be routed through a current account.
Further, the RBI laid down rules for availing cash credit and overdraft facilities.
The CC and OD facility can be availed but it can only be used for credits.
Any debit transaction can only be to remit funds to the borrower’s CC or OD account held with a bank which has an exposure of 10% or more of the banking system’s total exposure to the borrower.
Banks can provide the borrower with a CC/OD facility. If the borrower has availed loans from more than one bank and more than one bank has an exposure of 10%, the bank to which the funds are to be remitted may be decided mutually between the borrower and the banks.
All large borrowers that have a working capital facility bifurcated between a loan component and a cash credit component need to maintain the balances at individual banks in all cases, including consortium lending.