SIPHONING OFF funds

SIPHONING OFF funds

• SIPHONING OFF funds from term loans of banks through current accounts in other banks by corporates and big borrowers is set to come down. In a bid to prevent the misuse of bank funds, the Reserve Bank of India (RBI) has banned banks from routing funds from term loans taken by borrowers through their current accounts, a common practice among borrowers to divert funds
• It has also banned a bank from opening current accounts for customers who have availed credit facilities in the form of a cash credit (CC) overdraft (OD)from other banks and stipulated that all transactions should be routed through the CC or OD account. This effectively means banks mostly PSU banks which have given loans will now handle the current accounts of borrowers who, in turn, can’t divert money for other purposes through the current accounts of other banks, mainly private and foreign banks
• Since term loans are meant for specific purposes, the funds should be remitted directly to the supplier of goods and services
• Expenses incurred by the borrower for day to day operations should be routed through CC/OD account if the borrower has a CC/OD account, else through a current account,” it said in a notification to banks. Analysts said the RBI move is to prevent misuse of funds by promoters and corporates in the wake of the proposed one-time loan recast scheme.
• For most corporates, while loans are given by public sector banks' current accounts are managed by private banks. This will stop now. PSU banks which have given credit and overdraft will now manage current accounts as well 
• TheRBI said the use of multiple operating accounts by borrowers, both current accounts as well as cash credit(CC)and overdraft accounts, has been observed to be prone to vitiating credit discipline

Term Loans: 

• These are basically long terms loans for specific projects/purposes. And if a term loan has been given for a specific project, legally it should not be used for other purposes

Cash credit and overdraft

• Cash credit and overdraft are two types of short-term financing which financial institutions provide to their customers. Both are used to prevent checks from bouncing or debit cards from being declined when there are insufficient funds in the account. Both are similar but there are few differences:
• Cash credit is commonly offered to businesses rather than to individual consumers and generally involves some form of collateral.
• Overdraft is generally offered to retail customers and is attached to a bank savings account. If a customer doesn't have enough funds in their account to complete a transaction, the overdraft covers the difference, allowing the account to go into a negative balance. Overdrafts may not require collateral. But it can be attached to current accounts for businesses also. 

Earlier Corporates used to term loans from PSU banks and then they used to transfer this borrowed money into a current account maintained with private banks. There were restrictions earlier also not to use this money other than for that project but still, they used to siphon funds for other activities. 

• NOW, RBI has said that the companies borrowing funds (term loans) from a bank should maintain a current account with that bank only and can't transfer that money to a current account with other banks. So, the bank which will give loan will handle all payments related to the purchase of goods and services for the company.
• It has also said that, if a customer has availed short term credit facilities (borrowed money) in the form of cash credit or overdraft from a bank then other banks cannot open/provide a current account to that customer. This means that short-term financing like cash credit and overdraft can also not be transferred in another bank's current account and hence will prevent siphoning/diverting of funds.
• This move of RBI is to prevent misuse of funds by promoters and corporates in the wake of the proposed one-time restructuring scheme. In the restructuring, additional loans are also given.

Source: Indian Express