Avoid arbitrary regulation

Source : Business Standard

Relevance : Issues with the latest decision of RBI on deferment of the guidelines

Synopsis : The deferment of RBI’s guidelines on Overdrafts and current accounts, which were laid down in August last year, has been criticized as an arbitrary regulation.  The deadline for implementation of the circular has been pushed back to October 31 from July 31.

About overdraft and current account guidelines

In a bid to enforce credit discipline and check diversion of funds, the Reserve Bank of India (in its August 2020), put in place certain safeguards for opening of current accounts by banks. With the earlier framework found to be inadequate, according to the RBI, it moved to tighten the norms to streamline the use of multiple accounts by borrowers.

• Under the new guidelines, no bank can open current accounts for customers who have availed credit facilities from the banking system. All transactions should be routed through the CC (Cash Credit)/OD (Over Draft) account.
• Further, in case of customers who have not availed CC/OD facility from any bank, banks may open current accounts, but with certain conditions in case of borrowers with more than ₹50 crore exposure to the banking system.

Issues with deferment

1. Penalizing the banks that that sought to comply with the guidelines – since they had to close hundreds of accounts and lose out many customers.
2. Hurried extension – the deadline has been extended four days after the deadline has, in fact, expired causing disruption in smooth functioning
3. No clear case has been made – for explaining the advantages of guidelines indicating rush towards implementation without foresight
4. Increased cost of burden for banks – It also required banks to implement an escrow mechanism for borrowers with exposure to the banking system of over Rs 50 crore, and limited current accounts of these borrowers to the banks managing the escrow account which increased cost of burden on the banks
5. Affecting the interest of private banks – the mandate on current accounts looks like the RBI taking preferential action on behalf of state-run banks, which tend to be large lenders to the corporate sector in India
6. Penalizing banks that provide better services and companies with more efficient treasury management –  guidelines force the corporate sector to move their current accounts to public sector banks, thus penalising banks that provide better services and companies with more efficient treasury management.
7. Neglecting advanced information sharing techniques – Objectives of the guideline is to address the information asymmetry in the banking sector and reduce banking frauds however guidelines failed to look at other technologies

Conclusion

Regulatory unfairness should be avoided at all costs. When a level playing field is provided, more efficient private banks will prosper and gain market share. This is a natural and desirable process, and the RBI should not stand in its way.