The article explains the salience of the RBI’s recent restriction on the opening of current accounts by the companies.

Context

• RBI has put restrictions on who can open a current account with which bank.

What are the restrictions and why it matters

• A company that has borrowed from a bank cannot open a current account with another bank.
• It can open a current account with its lending banks under some circumstances.
• Otherwise such company is encouraged to use the cash credit and overdraft facilities under which it has borrowed.

Let’s understand why it matters

• Firms borrow from PSU banks, but open current accounts with private or foreign banks.
• When transactions move to current account of banks other than the lending bank, it loses visibility on end use of the funds.
• Basically the PSU bank has no idea where the money has gone.
• For example, when a firm gets money from its customers, instead of parking it with the lending bank it puts it in the current account with another bank.
• The lending bank has no way of knowing if the loan is going bad wilfully or otherwise.

Why private banks may oppose the move

• Easy revenue source has got blocked.
• They can, of course, start lending to firms to retain this business but that would mean taking risk.
• It would be far safer to be with retail customers who have neither power nor lawyers to defend them against sharp banking practices.

Why it matters to bank customers

• Vanishing money raises the cost of funds to the bank and results in higher lending rates and lower deposit rates for us.
• For taxpayers, it means regular use of our funds to recapitalize the banking system that periodically goes bankrupt due to loans gone bad.
• So, an overall tightening of the system is great news.

Conclusion

For too long have the citizens been punished with greater scrutiny, tighter rules, higher costs and fewer benefits as compared to the suits. We should let the banks hand-wring, but celebrate the closure of each loophole as it happens.

Back2Basics: What is the current account?

• A current account is like a savings bank account, but with many facilities for swift and multiple transactions, overdraft facilities and it carries no interest.
• Banks like to sell these accounts as they enjoy huge floats, or money that just sits with the bank waiting to be used by the depositing firms.

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