Another brick in the wall against banking frauds
| 18 Aug 2020
By Monika Halan | 18 Aug 2020
Indian private sector and foreign banks are miffed with the Reserve Bank of India (RBI) for taking away the lucrative current account business from them. In the policy statement on 6 August 2020 , a five-page document titled Opening of Current Accounts by Banks—Need for Discipline (read here) became the focus of dark mutterings in the plush boardrooms of private and foreign banks. Very simply put, RBI has put restrictions on who can open a current account with which bank. 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 it is encouraged to use the cash credit and overdraft facilities under which it has borrowed (read here). 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.
Why would the regulator do something that is restricting choice and nudging firms towards PSU banks and what is the link with more discipline? A quick story is needed: the Indian banking system has been used and misused by rich promoters of poor firms, by wilful defaulters and by seasoned players.
Armed with lawyers and with the capacity to run rings around the system, they have perfected the art of siphoning off bank borrowings.
India’s PSU banks’ non-performing assets (NPAs) were over ₹7 trillion in September 2019. In financial year 2018-19, bank recapitalization cost the country ₹2.7 trillion, with just the top 50 wilful defaulters owing almost ₹70,000 crore. In just the first half of the current financial year, over ₹1 trillion of frauds in the banking and financial sector have been reported.
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