Nodal, Escrow and Current Account: Things You Should Know

Last Updated on December 4, 2021

In older times, business transactions used to be offline. So, businesspeople knew each other very well. With time, the invention of the internet turned the entire world upside down. Now, online business has become more successful than its offline counterpart. So, you can transact with people from other nations as well. It fastens the growth. But there is a risk due to a lack of trust. What if you can mitigate this risk as well? Well, you can. Thanks to Nodal and Escrow accounts, while a current account facilitates your business.

Want to know more about them? Here you go.

Table of Contents

Nodal Account

In simple terms, a nodal account is a unique bank account that acts as an intermediary between the customers and sellers. How do they act as an intermediary? They collect money from your customers on behalf of vendors. It doesn’t mean that they produce the products. They only resell the products.

It is a binding force between the parties involved in the transaction process. They ensure that payments get transferred on a timely basis. So, it creates trust in the entire process. And it safeguards the interests of all the parties.

How to Open a Nodal Account?

Did the concept of nodal accounts fascinate you? Want to open one for yourself? Well, the process is no rocket science. You can open a nodal account in any bank regulated by the Reserve Bank of India, provided it offers a nodal account (that’s obvious).

Each bank has its criteria to determine whether you are eligible for the same or not. Generally, the bank considers the capital invested and the reputation of the business. Which bank will refuse Reliance Industries for the same?

Anyways, you have to submit the KYC documents and comply with all the RBI regulations as mentioned in the applicable laws. If you fail to do so, you may have to pay hefty penalties. So, it is in your best interest to appoint a legal consultant instead of paying heavy fines.

Escrow Account

After knowing about an escrow account, you may consider it similar to a nodal account. But it is not the same. Let’s leave it for later.

An escrow account is a third-party account. Here funds are held before they get transferred to the seller on completion of all the conditions. Both the parties believe the third party. So, it establishes trust between them. Generally, it is suitable in the following situations:

  • When the buyer and seller haven’t transacted before, they may not trust each other. But escrow accounts help in developing trust in the transaction.
  • If the contract is long-term and complex, one party may default after some time. So, an escrow account keeps the amount secured.
  • In the case of a high-value contract, there is more risk. So, escrow accounts help to mitigate the high risk prevailing in the transaction.
  • If the payment depends on the work completed, the seller becomes assured about receiving his payment.

An escrow account is widely used in construction contracts, as they are long-term and involve high value.

A real estate builder requires a heavy investment. But the buyer may not trust him. Thanks to the housing scams in recent years. Instead of paying it directly to the developer, he can deposit his funds in escrow accounts based on the percentage of work completed.

This way, the buyer can ensure the safety of his hard-earned money. If the house does not fulfil his expectations, he can request a third party to stop the payments. Also, the seller will become sure that there won’t be any default from the buyer.

The main difference is that you can use escrow accounts for everything. But a nodal account only acts as an intermediary.

Current Account

Before knowing about a current account, remember that it is entirely different from the nodal and escrow accounts. While they ensure trust in the transaction, it has a different purpose altogether.

A current account needs no introduction. Are you even doing business if you don’t have current accounts? It is so because current accounts are the right hand of companies.

They provide more facilities than a savings account concerning the number of transactions, cash deposits, and withdrawals. But everything comes at a cost. As they provide a lot of facilities, they don’t offer any interest on the bank balance. And the minimum balance requirement is generally high in current accounts.

But we are living in the era of consumerism. Here, the consumer is no less than a king. So, the sellers try their best to meet the demands. And the case with banks is no different. To attract more business customers, especially startups, they have started offering zero-balance current accounts.

Other Services

Besides the removal of minimum balance requirements, some banks also offer exclusive services. They include:

  • Payment gateway and other facilities to collect payments easily.
  • Forex services for international businesses
  • Virtual Account for Cash Management services to facilitate the growth of the business. After all, the bigger the clients are, the higher the revenue earned by banks.
  • Customized ERP and reconciliation facilities.
  • It also offers net banking and mobile banking facilities to promote digital transactions.
  • Overdraft facilities.

Some banks also offer the facility of auto-sweep. Here, the excess funds in your current account get deposited in a fixed deposit. So, you can earn higher returns on your idle funds. And there is no possibility of dishonouring the cheques or violating the minimum balance requirements.

But it doesn’t mean that there are no drawbacks to them. If it is so, all of us would have opened a current account. The major disadvantage is the loss of interest, as they don’t offer any interest on the available balance. What’s more, they impose charges for the above facilities. And the regulatory requirements are a bit cumbersome.

Still, its benefits outweigh its drawbacks. That is why most businesses use a current account for managing their digital transactions.

The Bottom Line

A current account is essential for doing a business, owing to its unique features. But it doesn’t mean that you also have to use a nodal or an escrow account. They are preferred if you lack trust in the other party. Or you want to maximize the security of the transaction.

We hope you would have understood all of them. In the end, choose the apt account to get the most out of it.

By Prasuk Jain

I am an inquisitive and tenacious person with a mix of enthusiasm and a positive attitude, currently pursuing CA.

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