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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.

Banking insiders report that when the fraud and bad loan dots are connected, the story that emerges is this: 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 (which would then have visibility on the repayment potential of the client), 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. We need to look at RBI’s current account circular as just one more piece in the overall matrix of a move to reduce the misuse of the banking system so that promoters remain very rich and companies go bankrupt, bankrupting banks along with them.

Banks have always gone kicking and screaming towards more accountability and more transparency. It took over 10 years for RBI to try and change a very unfair formula to calculate the balance on which deposit interest would be calculated (read here). It was just a decade ago that your average balance was taken into account to calculate the interest due and not the minimum balance. This time will be no different and we should expect a lot of pushback from the private and foreign banks as an 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.

It seems that this move has come at the insistence of the Union government who looks determined to close the gaping holes in the Indian banking system. Banks have been resisting this for a while, but when it is the PMO calling the shots, most dissent melts away. And this is a good thing for you and me as individual bank clients and taxpaying citizens. Why this RBI move matters to you and me as salaried or non-business customers of banks and citizens is that vanishing money raises the cost of funds to the bank and results in higher lending rates and lower deposit rates for us. Worse, for taxpayers, it means regular use of our funds to recapitalize the banking system that periodically goes bankrupt due to loans gone bad—deliberately or otherwise. An overall tightening of the system is great news. 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.

Monika Halan is consulting editor at Mint and writes on household finance, policy and regulation

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