Multinational banks to oppose current account rules, seek concessions from RBI

MUMBAI: Several multinational banks in India will use diplomatic channels, tap corporate lobbies and write to Reserve Bank of India (RBI) to oppose recent regulatory hurdle in bagging current accounts and lucrative fee business amid a deepening divide between foreign and local banks on the matter.Since there is a widely-shared perception that the regulatory directives have the blessings of the government, the MNC banks have sounded out their regional headquarters and legal counsel to formalise their reservations about the new rules—which though aimed at curbing fund diversion by errant borrowers, could eventually end up raising fund cost and reducing ease of doing business for top-rated companies as well as some of the lenders.The foreign banks are crafting their own strategy because they feel they will not receive the backing of the industry body Indian Banks’ Association (IBA), which is dominated by public sector banks—particularly State Bank of India (SBI), the country’s largest lender. “Foreign banks clearly sense this. All the more after last week’s meeting when the issue was brought up,” a senior banker told ET.According to RBI’s new regulation, a bank with less than 10% approved facility to a corporate is barred from having the company’s current account (unless it’s a collection account where the funds are regularly transferred to a pre-agreed lending bank). For the past one year, the industry has debated the possible conflict of interest between a non-lending bank keeping a current account of a customer and other lending banks. It was felt that a current account with a non-lending bank may facilitate diversion of funds to the disadvantage of lending banks (typically state-owned and large private lenders).However, for many MNC banks and some of the private banks, corporate current account is a sought after business. 77711787Over the years they have developed expertise, technology, and products in cash management, salary accounts, payments, trade finance etc. Besides lowering cost of fund, there’s benefit of float derived from large current account fund pools.“Fund diversions typically happen through over- or under-invoicing and investments through shell companies and not typically from current accounts with foreign banks, which have invested in developing cash management technologies. Also, companies, both large and small, open current account with a bank due to location, nature of the product, etc. More importantly, the question crops up whether such a rule is against competition as it denies non-lending banks the business opportunity and takes away from customers the choice to pick its service provider,” said another banker. “Such a rule will benefit SBI and some of the large PSU and private lenders. Indeed, SBI is of the view that the directive should be implemented as early as possible,” said the person.When asked about the alleged partisan stand taken by IBA on the matter, SBI chief and IBA chairman Rajnish Kumar said, “IBA is ready to examine with open mind any practical difficulties and recommendations, but lenders should have full control over cash flows for ensuring financial discipline.”LETTER TO RBIA person familiar with the issue said that foreign banks would soon send an advocacy letter to of the RBI deputy governor concerned, which could suggest confining the current account rule for corporates which have defaulted in the past, lowering the cut-off on approved facility from 10 to 5%, and postpone implementation till next financial year. This would be followed by another letter, laying out the operational difficulties. The MNC banks will ask certain current accounts related to mutual funds, insurance, broker-dealers, salaries, dividend payment to be kept out of the regulatory restriction.“We will have to fight for our own interests. We will write to RBI seeking certain concessions and clarifications. Besides some of the large foreign banks, which have been in India for more than 100 years, many small foreign banks will be badly hit,” said a person familiar with the deliberations. Many of these banks would simultaneously approach their respective home country regulators and governments to find a solution.The differences may boil over into a desi-versus-MNC issue. The way it is handled would signal whether the intention is simply to curb fund diversion or force a shift in business from foreign to local banks. On one hand, keen to plug loopholes that let borrowers game the system, the government and regulator have brought in a blunt rule; on the other hand, foreign banks, focusing on risk-adjusted return on capital and fee business, fear that a ham-fisted regulatory approach could hurt them badly.

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