The revised guidelines from the RBI pertaining to current accounts will lead to numerous difficulties and operational issues for the microfinance sector, industry body Sa-Dhan, said in a letter to RBI Governor Shaktikanta Das.
Sa-dhan demanded that microfinance institutions be exempted from the restrictions on the opening and operation of current accounts. In the recent circular, RBI instructed banks not to open current accounts for customers who had availed credit facilities in the form of cash credit (CC)/ overdraft (OD) from the banking system and said all transactions shall be routed through the CC/OD account.
“In the current scenario, when borrowers require urgent credit to restart their lives, implementation of the revised guidelines will result in numerous difficulties and operational issues for the microfinance sector,” P. Satish, executive director – Sa-Dhan, said.
The industry body reasoned that microfinance institutions (MFIs) have various current accounts with banks based on the location of their branches.
“Since demonetisation, all loan disbursements of MFIs are being credited to the bank accounts of their borrowers. Many MFIs also have ECS mandates for loan collections. Such banks may or may not have CC/OD facilities extended to such MFIs,” Sa-Dhan said.
It added that pursuant to the circular, these current accounts will need to be closed. The requirement to route all transactions through CC/OD Account, will mean that all amounts collected from the borrowers and all loan amounts disbursed have to be routed through the CC/OD account. This is not practical in view of the wide geographical spread of MFIs, it said.
Further it stated that though loan disbursements of MFIs are through bank accounts of borrowers, a large part of collections is still in cash and MFIs require multiple current accounts in multiple banks for their cash management requirements. This circular would result in making the cash management systems of MFIs cumbersome and costly, Sa-Dhan said.
“In case of MFIs which avail term loans from banks for on-lending, the requirement is that the lending bank will remit funds directly to the supplier of goods and services. This provision is a little inscrutable in case of MFIs as the loan availed is for further lending to the ultimate borrowers,” it said, adding that if all transactions are only to be routed through a particular bank, there would be no flexibility or back up available in case of any unforeseen issues with that particular bank or freeze on transactions with that bank.
“This would automatically result in a freeze of all the transactions of that MFI with the entire banking system,” Sa-Dhan noted.
Mr. Satish added, “It is our earnest request to the RBI Governor to review the circular and exempt all MFIs-NBFC –MFIs as well as non-NBFC-MFIs from this circular on the restriction of opening and operation of current accounts.”