Tag: mnc

RBI communicated this in a letter to banks a fortnight ago, two senior bankers told ET.

The move, initiated more than a year ago, could trigger a migration of many lucrative current accounts – which lower a bank’s fund cost and cash management business – from MNC banks to public sector lenders and some of the large private sector Indian banks.

According to the new rule, 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 – to a company is barred from having the client’s current account.

“RBI is probably upset that banks are taking a long time to shift the accounts. But the delay may also be because several PSU banks may not be ready with the technology. Now, RBI can’t direct companies which have been doing business with a bank for years to move to another bank. At one point many MNC banks and companies had opposed it, but they have realised that it’s fait accompli,” said a banker.

Notified in August 2020, the regulation after a review was expected to be implemented by January 31, 2021.

Backed by a former chairman of the country’s largest lender State Bank of India and some of the PSU bankers, the regulation stems from the belief that errant corporate borrowers will find it tougher to divert funds if their current and collection accounts lie with lending banks.

Regulation doesn’t cover MFs, insurers
It’s aimed at curbing the practice of companies who run current accounts to collect sale proceeds and other receivables with banks outside the lending consortium to delay loan servicing.

Over the years, some of the MNC banks, without being large lenders, had put in place technology to integrate fund flows between a large company and its customers, vendors and associates. Besides enjoying the float, the relationship with the corporate opened an opportunity to cross-sell products to group companies. Significantly, it was a strategy to earn fees without committing larger capital for loans, and the risk of some turning into NPAs.

However, the present rule, said another banker, could also impact a few smaller Indian banks, including state-owned lenders. Some large private banks, who are in favour of the rule, have been raising their exposure above the 10% threshold to retain the current accounts. As per the rule, a bank having a current account with less than 10% exposure will be required to move funds to another bank which meets the exposure rule. The 10% rule does not pertain to regulated entities like mutual funds and insurers.