With this new mandate, many profitable current accounts could migrate from MNC banks to public sector lenders and some of the large private sector Indian banks.
Reserve Bank of India (RBI) has set a deadline of July 30 till which banks have to give up current accounts where exposure is below the cut off of 10%.
Contents
New Rules
As per the new rules, a bank with less than 10% of the total approved facilities — which include loans, non-fund businesses like guarantees, and daylight overdrafts (or intra-day) exposure is prohibited from having the client’s current account.
It does not apply to mutual funds and insurers.
RBI had informed banks of this in a letter 15 days ago.
The Accounts Affected
With this new mandate, many profitable current accounts could migrate from MNC banks to public sector lenders and some of the large private sector Indian banks.
These accounts are lucrative to banks since it lowers its fund cost and cash management business.
It is being speculated that RBI made the decision as it is unhappy with banks taking a long time to shift the accounts.
But this delay could be because several PSU banks are not up to date with the required technology.
Reasoning Behind Decision
The regulation was supported by the former chairman of State Bank of India and some of the PSU bankers who are of the view that errant corporate borrowers will face challenges in diverting funds if their current and collection accounts lie with lending banks.
Many banks may be holding current accounts of firms that do not have sufficient fund or non-fund exposure to these borrowers.
With the new rules, it is intended to limit the practice in which companies running current accounts to collect sale proceeds and other receivables with banks outside the lending consortium delay loan servicing.
MNC Banks’ Practices
Some MNC banks have installed technology which helps integrate fund flows between large companies and its customers, vendors and associates.
This created an opportunity for the corporate to cross-sell products to group companies.
This strategy helped them earn fees without committing larger capital for loans, and the risk of some turning into NPA.
The new rules could affect smaller Indian banks, including PSU lenders.
Large private banks in favour of the rule have been increasing their exposure to over the 10% threshold so it can retain the current accounts.
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