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RBI policy on current accounts will bring much-needed discipline.


Date: 21-08-2020
Subject: RBI policy on current accounts will bring much-needed discipline
Upon reading the Reserve Bank of India (RBI) circular which introduces safeguards to prevent misuse of current accounts, I was transported back in time to 1986, when I was posted as a branch manager of State Bank of India in a project area branch. Every day I was flooded with requests for overdrafts in current accounts.

I had a choice to make — either take a risk or lose lucrative business for my bank. I chose to take the risk, but also took measures that reduced it to a bare minimum. The first thing I did was to ensure that any customer wanting to avail an overdraft could not have an account in any other bank. Back in the day, this was almost impossible to ensure, yet it was made possible by monitoring and controlling cash inflow from its origin.

An overdraft was given on the condition that the borrower writes to the client for whom they were executing the project to issue cheques drawn only at my branch. This would ensure that there would be no diversion of funds. Even if a customer tried to play smart, the branch would know as the cheque would come to the branch for collection.

Fast forward to 2020. Ensuring such financial discipline in the digital age is almost child’s play. The question is: Why didn’t the RBI think of it before? While it could be a lack of will or lack of appreciation or any other reason, all one can say is that it is better late than never.

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The rules could be a game changer for the banking industry and its health. They would reduce cases of fund diversion, cheating and wilful default, provided they are implemented seriously. The present digital ecosystem certainly enables creating such a system where a common identifier could be PAN number/ TIN No/ GST Number/ Date of Birth or incorporation or CIN.

What more can RBI do?

Well, firstly, it could take some inspiration from the National Securities Depository Limited (NSDL) which periodically sends each demat account holder a statement which has details of all accounts held by that account holder.

The RBI must think of creating such a system to begin with for all borrower accounts and then move on to all accounts: savings, current, fixed, etc. This will be helpful not only to banks, but also for all stakeholders. For purpose of this article, we can call it RBI CAS (consolidated account statement).

This information must be shared with account holders only, so that there is no breach of confidentiality. It can also be shared with any statutory authority as and when required.

Any banker, when approached with a request to open a current account (or any account) must ask the prospective customer for a copy of their latest RBI CAS. Information of new accounts opened can be automatically sent to all the banks where the customer has an existing account(s). This will ensure that even if an account is opened without permission of the existing banker, the latter would immediately know.

At present, the NeSL (National E Governance Services Ltd.) has all the data of all borrowers in its system. The same can be extended to include all accounts in a phased and time-bound manner.


Contracts and Invoices & GST system: It must be mandated that all contracts and invoices must mention the bank account details, and it must be obligated to the payer of invoices that the payment must be made to only the account mentioned in the invoice. Unless there are valid reasons, the payment made to any other account shall not qualify as expenses. The GST system has stabilised now, and there must be a full integration of the GST system with bank accounts. This will enable matching unpaid items at both ends.

Audit: Integration of bank accounts with the GST system and the RBI CAS will act as a boon for audit professionals, who are under pressure to detect and report frauds, especially after they have been burdened (and rightly so) with responsibilities under the Companies Act and the SEBI LODR. The integrated system and the RBI CAS will surely prevent a Satyam-like fraud. It will also enable auditors to carry out reconciliation of bank accounts, debtors and creditors (using the GST system). This will improve audit reliability and quality of audit as well.

Transaction tracking: As all bank accounts get linked, it would be easy to trace the final destination of funds. A bank or an investigative agency or regulator will be able to download a statement of account and establish transaction history, funds movement journey, its final destination and end use. It will be able to trace the circular movement/round tripping of funds using data analytics. It will ensure that recent cases of fund diversion such as the ones involving DHFL, PMC Bank, Nirav Modi, HDIL, Mcleod Russel and CG power are caught much before they become a pain point.

Securities Market Integration: In the next stage, the system must be integrated with the security markets as well. A demat account and securities trading account, which are already linked with bank accounts, can be easily linked.

Real Estate Registration: Registration offices all over India must also be linked, and all registration must get reported in the system.

Counter Arguments

Any change in the existing system, be it in India or anywhere in the world, draws opposition from the affected parties. The most vociferous are those whose businesses prosper due to lack of transparency and lack of audit trail. Such a system will draw flak using loss of privacy as an argument.

The general public has had enough from motivated litigations, and opposition under the guise of loss of privacy. Today any regulator or any agency can collect all the data proposed to be centralised from different sources. All I am proposing is integration and ease of analysis.

The RBI has made a good start. Now it should put its foot down and work for an integrated system where dodging banks, regulators and the tax department becomes impossible. India has enough talent to put such a system in no time. Needless to say, such an integrated system should have proper safeguards to prevent data theft or misuse.

Source:- moneycontrol.com

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