Customers borrow money from one bank but transact with another, often with the goal of “managing the funds,” has been an “acceptable” practice in the Indian banking market. It is now obvious that significant default debtors employed this method of syphoning funds frequently. The Reserve Bank of India has been warning banks about borrowers misusing their current accounts. Previously, such accounts could only be opened after receiving a NOC (no objection certificate) from the lending bank as well as doing due diligence.
Who can open a current account and with which bank has been restricted by the RBI. As a result, a borrower who has taken out a loan from a bank is unable to open a current account with another bank. Under certain situations, the borrower can create a current account with its lending banks; otherwise, it is encouraged to use the cash credit and overdraft facilities for which it has borrowed.
Banks are expected to implement stock audits depending on the level of exposure and evaluate all areas of fund diversion during internal audit/inspection of branches and at the time of periodic reviews as part of the exercise to monitor end-use of funds.
Furthermore, banks must get certificates from borrowers stating that the money were used for the specified reasons, and take appropriate action if the certification is wrong. The measures could include the removal of sanctioned facilities as well as legal action. The RBI stated that if the auditors of the borrowers are required to provide particular certification about diversion/siphoning of funds, they may be given a separate mission and relevant covenants placed into the loan agreements. A study by the central bank of current processes at select banks for assuring the ultimate use of money revealed that in some circumstances, the expected level of due diligence had not been undertaken, allowing borrowers to divert cash.
In order to protect a bank’s interest, effective monitoring of the end use of funds lent is vital. Furthermore, this would function as a disincentive to borrowers abusing the credit facilities granted, so contributing to the development of a good credit culture in the Indian banking sector.
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