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Small business suffer as banks shut current accounts after RBI circular

State-owned lenders welcome 'need for discipline' but their private competitors say business is suffering Indian Economy

The Reserve Bank of India's (RBI) circular to banks for the ‘need for discipline’ led to closure of a large number of current accounts when the deadline for compliance ended July 31.

Micro, small and medium enterprises (MSME) are the worst hit due to the account freeze, bankers and industry officials said about the circular issued on August 6 last year.

Interestingly, the move has created a rift between the public and private sector banks: the first lot welcomed the move and the second said they would lose customers.

The circular said that a bank cannot open a current account if their exposure is less than 10 per cent of the borrowers’ total exposure to the banking system.

“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,” it said.

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

The circular essentially meant, according to bankers, 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.

“It [the RBI norms] is good for the system. Public sector banks welcome the norms which were aimed at bringing more discipline,” said a top official from a large public sector bank.

Four private banks and a foreign bank are hurt due the norms, bankers said.

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,” the official added.

MSMEs hit

The Federation of Indian Micro & Small and Medium Enterprises (FISME) has said that MSME are facing problems and plan to write to the RBI requesting relaxations.

“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,” FISME Secretary General Anil Bhardwaj told Business Standard.

FISME is coming out with a detailed note on what problems that are faced by MSMEs due to the norms which will be shared with the banking regulator.

According to the industry body one of the reasons why many borrowers prefer to have current accounts with banks over and above their cash credit accounts is due to cyber frauds, as they do not want to make any online transaction from their limit account as large amounts of funds are maintained in that account.

Private sector banks are not authorised for some government payments like custom duty etc, therefore, if a borrower is banking with a private bank, they need to have a current account in a public sector bank. As a result of this new circular, companies need to change their banks and it will take time, apart from involving costs for MSME, FISME said.