Foreign banks set to dial diplomatic missions over RBI directive

Curbs on multiple current accounts seen as unfair trade practice

Foreign banks are set to move their diplomatic missions against the Reserve Bank of India’s (RBI’s) directive that bars borrowers from opening multiple current accounts, with the lenders alleging that this amounts to an “unfair trade practice”.

The banking regulator’s decision, taken in August to curb the rampant fund diversion among borrowers, severely hampers the lucrative cash management business of foreign banks in particular.

A clutch of leading multinational companies (MNCs) and domestic firms are currently engaged with their legal advisors on the recourse available to them. This is only to get a sense of the options on the table, and the diplomatic route is the priority as the verdict after a legal battle may be for the status quo. 

India Inc also raised the matter with RBI Governor Shaktikanta Das during his interaction with the Federation of Indian Chambers of Commerce & Industry (Ficci) last month. According to sources, a joint strategy is now sought to be worked out with diplomatic missions, the Indian Banks’ Association, Ficci, and the Confederation of Indian Industry.

The central bank on August 6 linked the opening of current accounts to a lending relationship following prolonged discussions with the Central Vigilance Commission and the Central Bureau of Investigation on fund diversion.

The circular said “where a bank’s exposure to a borrower is less than 10 per cent of the exposure of the banking system to that borrower, while credits are freely permitted, debits to the cash credit (CC) and overdraft account (OD) can only be for credit to the CC/OD account of that borrower with a bank that has 10 per cent or more of the exposure of the banking system to that borrower”. It further added that in the case of exposures more than Rs 50 crore, there has to be an escrow mechanism and only banks managing the same can open current accounts.

While “exposure” for the purpose of these instructions has been defined “as the sum of both the sanctioned fund-based and non-fund based credit facilities”, no foreign bank in the country has local capital which will enable it take on exposure of 10 per cent to a borrower. 

And linking the same to the opening of current accounts hits their cash management business significantly.

“Large corporates – be it Indian or MNCs – need sophisticated cash management solutions from banks. In the case of MNCs, they operate through us as we are their global bankers,” said a top foreign banker. 

He also pointed out that capital market regulators in foreign jurisdictions explicitly stated that MNCs were to present a clear picture of their cash flows cutting across geographies within 15 days of a quarter ending.