Micromanagement of Banks Not Current – The Economic Times

Clipped from: https://economictimes.indiatimes.com/opinion/et-editorial/micromanagement-of-banks-not-current/articleshow/85047364.cmsSynopsis

The Reserve Bank of India’s (RBI) move to defer the implementation of its rules on current account openings by banks to October 31 from July 31 is fine, but the rules call for a thorough review.

The Reserve Bank of India’s (RBI) move to defer the implementation of its rules on current account openings by banks to October 31 from July 31 is fine, but the rules call for a thorough review. It must not micromanage the operation and maintenance of current accounts by companies and banks.

The rules limit a company’s current account to lending banks that have at least 10% of the company’s total credit exposure — including loans, non-fund businesses such as guarantees, and daylight overdrafts (or intra-day) exposure. This is ostensibly meant to prevent borrowers from using multiple operating accounts (at non-lending banks) to siphon off funds. Over-regulation will hurt companies that use cash management services offered by non-lending and private banks that have invested to build these services over the years.

Effectively, it would penalise large companies with a good track record that have not missed payments of outstanding loans. Thanks to technology, private and foreign banks have developed the expertise in cash management to process the receivables and payables, helping corporates to optimally use cash that enables them to manage their own treasuries better. Switching the cash management business by fiat to State-owned banks will hurt private banks, companies and India’s reputation for fair business practices. State-owned banks should develop the expertise, and compete for custom.

The rules go into what kinds of accounts banks can open for companies with what size loan exposure. This would have been just fine, were this Communist China. But this is not. The notion that this is the only way to prevent fund diversion is flawed. The need is for early recognition of stress and better sharing of information among banks.

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