SMEs, Small Businesses Suffer As Banks Forced To Close Their Current Accounts: Find Out Why This Happened?

The latest reports reveal that the Reserve Bank of India’s (RBI) circular to banks for the ‘need for discipline’ led to the closure of a large number of current accounts since the deadline for compliance ended on July 31.

How Does This Affect?

This account freeze has the worst impact on the micro, small and medium enterprises (MSME), as informed by the bankers and industry officials.

The said circular was earlier issued on August 6 last year.

Now, the circular has created a rift between the public and private sector banks.

As per the sources, the public welcomed the move and while private sector banks said that they would lose customers.

According to this circular, a bank cannot open a current account if their exposure is less than 10 percent of the borrowers’ total exposure to the banking system.

The circular said, “No bank shall open current accounts for customers who have availed credit facilities in the form of cash credit (CC)/ overdraft (OD) from the banking system and all transactions shall be routed through the CC/OD account,”.

Initially, the initial deadline to comply with the norms was three months, later it was extended to July 31 this year.

How Does This Help?

The circular was meant to stop the practice of borrowers drawing credit facilities from public sector banks and then transferring the funds to private lenders, for which accounts are opened.

According to a top official from a large public sector bank, “the RBI norms are good for the system. Public sector banks welcome the norms which were aimed at bringing more discipline,”.

So far, four private banks and a foreign bank are hurt due to the norms, sources said.

Further added, “Private banks have technology-based customized products and systems. They were able to provide better services to the customer in areas like trade finance. Though the limits may have been sanctioned by the public sector, in view of the better technological convenience they give, many of the customers try to do their trade finance business with private and foreign banks,”.

Micro & Small and Medium Enterprises Facing Problems

On the other hand, the Federation of Indian Micro & Small and Medium Enterprises (FISME) mentioned that MSME is facing problems and plan to write to the RBI requesting relaxation.

The FISME Secretary-General, Anil Bhardwaj said, “MSMEs are facing huge problems. This is not a very well thought out decision. There are practical problems. Sometimes it is necessary for them [MSME] to keep accounts in another bank, else the borrower is at the mercy of one bank,”.

So now, FISME is coming out with a detailed note about the problems faced by MSMEs due to the norms which will be shared with the banking regulator.