In setback for cocoa manufacturer, Bombay HC refuses to interfere with RBI circular on current accounts

In a setback to VJ Jindal Cocoa Pvt Ltd, the Bombay high court has refused to interfere with RBI circular permitting only one active current account if total credit facilities availed exceed ₹50 Crore.

HDFC had frozen current accounts of company

A division bench of Justices Gautam Patel and Neela Gokhale upheld HDFC Bank’s email that led to the freezing of current accounts held by cocoa manufacturer VJ Jindal Cocoa in various banks observing that since its “exposure” was over ₹50 crore, it wasn’t permitted multiple active current accounts. Exposure here means the total credit facilities availed by a borrower.

The HC recently dismissed a petition filed by VJ Jindal challenging the HDFC’s action contending that it was exempted from the relevant RBI circular since its current accounts with other banks pre-dated the HDFC account.

HC bats for RBI circular, says current accounts being used to divert funds

In a detailed order, the judges noted that RBI had issued the Consolidated Circular on Opening of Current Accounts and Cash Credit /Over Draft Accounts by Banks dated August 19, 2022 to protect private banks as current accounts in other banks were being used to divert funds and to commit fraud.

“There was a mushrooming of current accounts by unscrupulous borrowers, especially with non-lender 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,” said HC.

HDFC Bank, Jindal’s primary lender wrote to three other banks – Punjab National Bank, Jammu & Kashmir (J&K) 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.

After HDFC, Canara and J&K bank blocked Jindal's accounts

Following this, Canara Bank and J&K Bank blocked Jindal’s accounts and sought an NOC from HDFC Bank.

Jindal then approached the HC  seeking to de-freeze the accounts contending that it the other accounts were opened much before the HDFC account therefore conditions in the circular were inapplicable.

The RBI circular in question divides a borrower’s aggregate exposure as less than ₹5 crore, ₹5-15 crore and ₹50 crore with different rules for every type of borrower.

The high court remarked that the application of the circular could be called erroneous in the facts and circumstances of the case. “On the contrary, it is our 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,” averred the judges.