Current Account: Rights & Responsibilities

It is not mandatory for a business, but an obvious choice for business transactions
Current Account: Rights & Responsibilities
Representational PictureFile/ GK

Some time back a reader narrated his ‘bad experience’ with a bank. His Savings Bank (SB) account was abruptly disabled for transactions by the bank.

Even as he raised his voice against the ‘arbitrary’ move, the bank asked him to reveal the source of a series of transactions conducted in the account.

The transactions in question were picked as business transactions by the bank and the accountholder admitted that he was using the Savings Bank account for business transactions.

To be precise, a Savings Bank Account cannot be used for business purposes. RBI rules don’t permit it. In other words, this type of account is exclusively to be used for transactions of only non-business / non-commercial nature.

In the event of occurrence of such transactions or any other such transactions that may be construed as dubious or undesirable, the bank reserves the right to unilaterally freeze operations in such accounts. However, one can open a Business Savings Account for the purpose of building some cash reserves for emergencies etc.

But, one has to open a Current Account for business purposes. This account entitles the account holder to a lot of facilities which can really add value to his business operations.

So, if you are wondering whether to open a savings bank account or a current account for your business, big or small, the only choice with you is to go for a current account.

A current account is the most popular account which is designed especially for businesses to conduct seamless daily transactions with no limit on the number of transactions.

The account is also loaded with the facility of an overdraft service, which the account holder can avail at the time of need. Precisely, a current account is an obvious choice to conduct hassle free regular business transactions.

Meanwhile, it has been observed that current accounts have been rampantly misused to commit frauds. On many occasions, the Reserve Bank of India (RBI) flagged concerns over the misuse of multiple operating current accounts.

In fact, the RBI in 2000 had advised banks that at the time of opening of current accounts, they should obtain a declaration from the account-holder that he is not enjoying any credit facility with any other bank.

If he is, then he has to give particulars of the credit facilities. The regulator observed that the banks were lazy in following these guidelines, which paved the way for diversion of funds by borrowers. Banks were also instructed not to open current accounts of entities which enjoy credit facilities, without obtaining a No-Objection Certificate from the lending bank(s).

Of course, many banks only relied on declarations given by the customers and failed to do the necessary due diligence while opening of current accounts - failure to use information available with the credit bureaus or obtaining NOCs from existing lending banks. In many cases, borrowers went out of the consortium (of lenders) which made it difficult for the banks to track and monitor the cash flows.

Precisely, multiple directions were given to the banks on various occasions regarding the discipline while opening current accounts. But there were banks which failed to observe the necessary protocols while opening such accounts.

This indiscipline encouraged unscrupulous elements to misuse current accounts to commit financial frauds. Notably, the current accounts are mainly misused for diversion of funds by the borrowers.

What is the scenario around the RBI guidelines regarding Current Accounts?

The new norms were put in place from December 15, 2020, which among other things envisaged that no bank can open current accounts for customers who have availed credit facilities from the banking system. All transactions were to be routed through the CC/OD account.

But the RBI eased the rules last year on October 29 while taking into account feedback received from Indian Banks’ Association (IBA). The regulator tweaked its current account guidelines for bank exposures less than Rs.5 crore.

Under the changed guidelines, for borrowers, where the exposure of the banking system is less than Rs 5 crore, there is no restriction on opening of current accounts or on provision of CC/OD facility by banks, subject to obtaining an undertaking from such borrowers that they shall inform the bank(s), as and when the credit facilities availed by them from the banking system reaches Rs 5 crore or more.

The RBI guidelines further state t: “In respect of borrowers where exposure of the banking system is Rs.5 crore or more, such borrower can maintain current accounts with any one of the banks with which it has CC/OD facility, provided that the bank has at least 10 per cent of the exposure of the banking system to that borrower.

What are the benefits for businesses in a Current Account?

Even as a Current Account is not mandatory for a business, it’s inevitable as this type of account is an efficient way of carrying out financial transactions related to the business.

In fact, business owners can operate their business with ease through a Current Account and help them not to mingle their personal assets with business assets.

Besides, there are many other benefits which a Current Account holder enjoys. It empowers them to conduct unlimited transactions at the account holders will. Over a period of, Current Account provides useful financial data pertaining to the business in an easy-to-read format.

To be precise, it provides smart insights of the business with instant access to the financial reports, which can prove helpful for the businesses to make superior business decisions. The account adds to the legitimacy of the business.

One of the major benefits to the account holder is “Overdraft facilities”. An overdraft is a way of borrowing money from the bank through the current account. This means the account holder can spend more than he has in the account. Don’t forget that an overdraft is a type of loan. So, the bank will charge interest on the amount of overdraft.

What is a Business Savings Account?

Businesses, big or small, have no other alternative but to open a Current Account for business transactions. However, that doesn’t debar them from having a Savings Bank Account. They can have a Business Savings Account wherein they can park their money to build and maintain a cash reserve.

The amount saved over a period of time in the account can be used in multiple ways. You can pump more capital in the business, use the cash reserve in emergencies, or to meet any other essential or unforeseen expenses.

Business owners can dip into the Business Savings Account to finance future business projects instead of going for borrowing, which is expensive due to the interest payable.

Precisely, a Business Savings Account is a liquid asset and will prove a cornerstone of any business as it would provide a safety net for not only businesses, but for an emergency situation.

For instance, the Covid-19 pandemic hurt business’s revenue generation and hindered their ability to make regular payments such as rent and payroll. In this kind of situation, a Business Savings Account can prove a game changer.

So, businesses, big or small, should strongly consider maintaining a business savings account as a part of their larger financial plan.

Disclaimer: The views and opinions expressed in this article are the personal opinions of the author.

The facts, analysis, assumptions and perspective appearing in the article do not reflect the views of GK

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