Bombay High Court Rules in Favor of HDFC Bank: Refuses to Interfere with RBI Circular on Opening of Current Accounts and CC/OD Accounts by Banks

Bombay High Court Rules in Favor of HDFC Bank: Refuses to Interfere with RBI Circular on Opening of Current Accounts and CC/OD Accounts by Banks

The Bombay High Court has dismissed VJ Jindal’s petition to recall HDFC’s action on the ground that it was exempted from the relevant RBI circular since its current accounts with other banks pre-dated the HDFC account.

The division bench of Justices Gautam Patel and Neela Gokhale approved the actions of the Respondent- HDFC Bank’s email that led to the freezing of current accounts held by cocoa manufacturer VJ Jindal Cocoa- Petitioner in various banks observing that since its “exposure” was over Rs. 50 crore it wasn’t permitted multiple active current accounts.

The expression ‘exposure’ is defined to mean the sum of sanctioned fund-based and non-fund-based credit facilities availed by a borrower.

In the present case the Reserve Bank of India (RBI) had issued the Consolidated Circular on Opening of Current Accounts and Cash Credit /Over Draft Accounts by Banks dated 19 August, 2022 to protect private banks as current accounts in other banks were being used to divert funds and to commit fraud.

HDFC Bank, Jindal’s primary lender wrote to three other banks – Punjab National Bank, Jammu & Kashmir and Canara Bank- in February 2023 that according to RBI’s circular a banking customer cannot have other current accounts with other banks if that customer already had credit facilities in the form of Cash Credit/Export Packing Credit (“CC/EPC”) in the banking system. All transactions had to be routed through HDFC as it was its principal lending bank.

According to Jindal Cocoa, it had receieved two emails from CanBank and J&K Bank saying that they had blocked Jindal Cocoa’s accounts and directed Jindal Cocoa not to issue further cheques. The banks demanded a no-objection certificate (“NOC”) from HDFC Bank to resume operations of Jindal Cocoa’s account. The company argued that the other accounts were opened much before the HDFC account therefore conditions in the circular were inapplicable.

Senior Advocate Navroz Seervai was representing the bank, pointed out that certain safeguards under the circular were not in place. Both, Senior Advocate Ashish Kamat for RBI and Senior Counsel Ravi Kadam supported HDFC’s action. They pointed out the petition was not maintainable.

Referin to the facts, the counsel submitted that, Jindal Cocoa had begun routing export proceedings through one or more of the other Banks, i.e., PNB Bank, J&K Bank and CanBank.

The bench on pursual of the circular noted that the RBI circular in question divides a borrower’s aggregate exposure as less than Rs. 5 crore, Rs 5-15 crore and Rs. 50 crore with different rules for every type of borrower.

The bench noted that, “RBI found that non-lending banks were opening current accounts of borrowers from other banks without following the guidelines. Business proceeds were not being routed through accounts maintained with the lender banks. There was a mushrooming of current accounts by unscrupulous borrowers, especially with nonlender banks, and funds were being diverted for unauthorised purposes. Lending banks were unable to monitor cash flows or to efficiently recover their dues. There was a systematic increase, consequently in NPAs.”

The Court pertinently clarified that, the circular demands what is best thought of as a funnelling or channelling mechanism: once there is a lending account with an exposure of over Rs 50 crores, all inflows must be routed into that lending account. Inflow and outflow transactions in other current accounts are not permitted. If there are other current accounts, then these are carefully calibrated to be only collection accounts. Therefore, the restrictions of the circular cannot apply.

The Court stated that the first threshold test when a borrower approaches a bank to open a current account is to see whether the borrower has a CC/OD facility from the banking system. The Court answered in the present case, it would be no.

The second test would be what would be the aggregate exposure of the banking system to the borrower? Would it be more than Rs 50 crores or less? The Court accepted Mr. Kadam’s submission that, if this scheme was to be restricted to only the “opening of” “new” current accounts then the entire purpose of monitoring that the RBI has said on Affidavit would be jeopardized and rendered nugatory.

“What the RBI has in fact in his submission the circular in question is not restricted merely to the opening of a current account but extends as a natural corollary to pre-existing current accounts and to their active use or, in the words of the circular to these being “maintained”. If those current accounts were dormant and were not active or were not being used, there would be no call for action because those accounts were redundant. But if those other current accounts outside of the principal bank are being used to receive funds which are meant to be routed into the EPC account, then that is clearly prohibited,” the bench opined.

Further, the Court accepted the argument of Mr Kadam that RBI and HDFC’s interpretation of the circular might not necessarily be binding on the court but it was accepted to be one one of significant persuasive value.

Moreover, the Court accepted the contention raised by Mr. Kadam for HDFC Bank that the question of any disputes between HDFC Bank and Jindal Cocoa cannot possibly be the subject matter of a writ proceeding. The Court opined that those are contractual disputes and the remedies of one party against the other clearly lie elsewhere.

Lastly, the bench conlcuded that was unable to see how application of the circular could be called erroneous in the facts and circumstances of the case. On the contrary, it was of the view that granting the Petitioner relief would in effect not only run directly contrary to the circular but would possibly permit the continuance or growth of the very mischief that is sought to be addressed.