Regardless of small enterprises striving to iron out the adverse effects of the first and second wave of COVID-19 and lockdown restrictions henceforth, several small-time businesses ’ current accounts are being frozen in compliance with the RBI directive.
By implementing this strict dictation by the RBI, trading operations and functioning of many small businesses are thrown into disorder and confusion as their current accounts were terminated on August 2, Monday.
The deadline was provided on July 31, 2021, by the RBI to terminate multiple current accounts of small enterprises. By that date, small firms must have a single current version, but many account holders were blind-sided despite that. However, Rajiv Poddar, President of IMC Chamber of Commerce & Industry, said that corporate borrowers and non-corporate borrowers faced closure without any intimidation from banks which is against the spirit of banking. He further questioned, “How will the companies pay salaries in August and even all other statutory dues?”
To expedite easy progress payments and receivables, small enterprises usually have multiple current accounts. Still, as stated by a senior RBI officer, “It is only a bid to enforce credit discipline and check diversion of funds, the Reserve Bank of India has put in place certain safeguards for the opening of current accounts by banks”. The RBI has pointed out concerns over dissipation and misuse of several operating accounts from the year 2000 onwards. Regardless of continual notifications and warnings, most banks were ineffectual in following appropriate concord and measures.
With the prior structure found to be incompetent, RBI moved to tighten the regulations to systematize the use of multiple accounts by borrowers.
Under the recent direction, no bank can open a current account for those clients who have utilized credit facilities through either cash credit (CC) or overdraft (OD) from the banking system. A senior RBI officer said, “All transactions should be routed through the CC/OD account only”.
On condition that clients have not availed of a current account or overdraft facility from any bank, banks may open their current account with definite terms and requirements.
A corporation may prefer to have multiple accounts to enable smooth business deals and transactions across organizations and areas. In addition to maintaining a cash credit or overdraft account with the prime bank in the federation of banks, businesses with PAN India operations also maintain relations with other banks with either a sound presence in a particular geographic area or proposing better quality products and services or both.
Few enterprises may be interested in specific or purposive services (like forex) for which they may be necessarily required to open multiple accounts.
“I have an overdraft account with a public sector bank, but for importing, I use an account with a private banker as I get better online banking services. After July 31, I need to deal with the PSU bank,” said a businessman based in Chennai.
Yet apprehensive reasons regarding the diversion of funds by borrowers through accounts outside the syndicate led to curtailment on borrowers’ opening of CC/OD accounts.
While MSMEs are exempted from the restriction and are authorized to initiate as many current accounts as possible to gain credits and advances, all debits have to occur through the bank with exposure of above 10% of the borrower.
As per Chandrakant Salunkhe, President of SME Chamber of India, many small-scale businesses face difficulties meeting their payable obligations despite holding the demanded money in their respective bank accounts since their accounts are frozen, which will be disengaged in fifteen to thirty days.
On Monday, August 2, RBI updated the abidance status and found that banks have mostly conformed with the RBI’s directive.
To moderate the hardships faced by the borrowers, Poddar has suggested a hiatus of six months for carrying out the directive in a modulated manner with proper notifications and time to clients and banks.
He further added that “Lead banks should be allowed to hold multiple shadow current accounts to meet borrower requirements such as salary, contract-specific, location-specific, purpose-specific, etc. Each shadow account shall have a unique number and a standalone bank statement”.
In the same vein, many small-scale business owners lamented about their accounts getting frozen by their banks as they executed the stack of circulars on the issue, the thereof being on December 14, 2020.
After that, on Wednesday, August 4, 2021, The RBI, on receiving numerous requests from the banks regarding additional time to address the functional issues, protracted the implementation date.
Banks will be authorized to execute the provisions of the circular till October 31, 2021. The notification said that banks should utilize this extended timeline to engage with their borrowers to arrive at mutually satisfactory resolutions within the ambit of the circular.
Suppose any issue is not able to be settled by the banks. In that case, it can be approached to the Indian Banks Association (IBA) for advice, and the remaining matter can be sought with the RBI by the industry lobby grouping for being redressed, the RBI said. The PSU bank chief also made it clear that any issue faced, operational or otherwise should be resolved at the industry level.
It also added that accounts of White Label ATM operators and their agents are exempted from the provisions of the current account circular as cash-in-transit (CIT) companies or cash replenishment agencies (CRAs) fundamentally perform similar exercises, which results in the duplicate exemption entry.
Meanwhile, the RBI has urged banks to set up a complaint mechanism both at head office and local or zonal office levels to supervise the seamless implementation of the circular and check that customers are not put to undue hardship during the execution process.
The RBI has clearly stated that banks cannot open current accounts for borrowers who have availed agricultural or personal OD or OD against deposits. It reiterated that in the case of borrowers who have not availed CC or OD facility from any bank, there is no restriction on the opening of current accounts by any bank if exposure of the banking system to such borrowers is less than Rs 5 crore. In comparison, lenders can create current accounts for those in this category who have a banking system exposure of up to Rs 50 crore.
The restriction applies to borrowers in case they avail of CC or OD facility since all operations that can be carried out from a current account can also be carried out from a CC or OD account as banks in a CBS environment follow a one-bank-one-customer model as against a one-branch-one-customer model, it said.