Understanding the Latest RBI Norms & Guidelines about Current Accounts

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Reserve Bank of India (RBI) has come up with the latest norms and guidelines for current accounts. RBI’s decision to tighten the current account requirements was taken in order to streamline and enforce credit discipline among borrowers who were found using multiple accounts. But these new norms, which came into effect on December 15, 2020, have presented banks and businesses with near-term operational challenges. Many bankers have hailed this move as a positive one because it will help reduce the diversion of funds by borrowers who are juggling their finances across multiple current account facilities. If you are looking to apply for Current Account, then read on!

Latest RBI Norms & Guidelines about Current Account

Reserve Bank of India (RBI) has put in place multiple safeguards to ensure that borrowers do not misuse the practice of opening different operating accounts. The latest RBI norms and guidelines are listed below:

  1. According to the new rules, no bank can create a current account for a customer who has taken out credit from another bank. All transactions should be routed through the credit card or overdraft account. This would mean that banks will now track all loans made or taken by their customers on one single platform rather than try and keep tabs on them individually through multiple platforms, which often leads to errors and discrepancies.
  2. In order for a bank account to be eligible for debit transactions, it must have a minimum balance equivalent to 10% of the borrower’s credit exposure in that account. If a bank has less than 10% of the borrower’s credit exposure, then debits to the credit card or overdraft account can only be for credit to the credit card or overdraft account with a bank that has 10% or more of the credit exposure.
  3. Banks may create current accounts with particular restrictions for customers who have never had a credit card or an overdraft from any bank, according to the regulations. When it comes to borrowers with more than INR 50,00,00,000 exposure to the banking system, their current accounts can only be opened by the escrow managing bank. This is done in an effort to reduce systemic risks and increase customer protection against fraud.

The Necessity of enforcing more Stringent Regulations

Reserve Bank of India has already expressed concern over the abuse of numerous operational accounts many times over the past few years.

  • January 25, 2000: RBI issued circular advising banks to obtain a statement from the account holder that he or she is not currently getting credit from any other bank. If the individual has a credit facility with another bank, the lending bank should be notified so that appropriate steps can be implemented.
  • May 15, 2004: RBI issued another circular instructing banks not to create current accounts for customers receiving credit facilities from another bank unless the lending bank or banks provided a special No-Objection Certificate. Failure to follow the above procedure will be considered a clear breach of the regulations, and banks will be subject to penalties under the Banking Regulation Act of 1949.
  • July 02, 2015: RBI published a circular drawing attention to the newly established Central Repository of Information on Large Credits. Data on all borrowers’ credit exposures will be collected, stored, and distributed by CRILC. Banks and Financial Institutions were instructed to report their respective information to CRILC.

Based on the foregoing, it is obvious that RBI has been looking for ways to deal with borrowers for some time. These new standards and recommendations have been created to strengthen the process and counter banks that have failed to follow prior protocols.

Conclusion

The advantages of current accounts are huge. They are, without a doubt, a part of the everyday lives of the average man. So far, RBI has offered suggestions for improving our user experience. However, they have been attempting to address the usage of numerous accounts by borrowers for quite some time. The above-mentioned regulations are part of RBI’s ongoing efforts to combat this behavior. To know more about Current Accounts, you can check Kotak Mahindra Bank.