Reserve Bank of India Guidelines on Current Account dated August 6, 2020

RBI has recently issued guidelines on opening of Current accounts with the banks. Before understanding the guidelines, let’s first understand what is Current account?

Current account is such type of account which is mainly used by businessmen as this account facilitates higher number of routine business transactions.

          I.            Basic Features of Current account

·         One of the most important feature of Current account is that it is “Interest Free” which means no interest is chargeable on neither deposit nor withdrawal of any amount of money from the Current account.

·         There is no limit on number of transactions in current account.

        II.            Advantages of having current account

·         Any time withdrawal facility to meet the cash needs of the business.

· Customized Current account variants are available basis type of entity/ business/ account holder. For example, HDFC Bank has a distinct type of current account for trusts, societies, associations, clubs, etc. which offers free cash deposit of up to Rs. 50 lakh per month. This is very beneficial when associations have to collect fees from their members or students and have several deposits at a few select times during the year.

·      Bank gets free deposit money from the customer without paying any interest which is required to be paid in case of saving accounts.

      III.            Disadvantages of Current account

      ·           The disadvantage of having current account is that customer loses interest on the money which he kept money with the bank in current account. In other words, it can be said that customer losses opportunity cost of his money.

Now why the RBI has issued guidelines on current account when there is no cost at all, the main reason of these guidelines is that customer has to route its transactions in the facility account of the bank from which it has borrowed money, but for ease of business he opens current account with multiple banks which resulted in non-churning in its facility account which consequently turns facility account into Non performing Asset.

To rein the above mentioned issue Reserve Bank of India has issued some guidelines as mentioned below

Guidelines for opening of current account is divided into two parts

First Part: Whether Borrower is having a CC/OD facility : If Yes, then borrower cannot open current account with any bank other than from where he is availing CC/OD Facility subject to “IF any bank’s exposure to the borrower is 10% or more of aggregate exposure then the current account with these banks can only be used for Credits in the account and debits needs to be transferred to the CC/OD account of the borrower with the bank that has 10% or more of exposure of the banking system of the borrower.

Second Part: Whether Borrower is having a CC/OD facility: If No, then there are three further checkpoints:

1.       If the aggregate amount of credit facilities availed by the borrower is <INR 5Cr: In such scenario any bank can open a current account, subject to undertaking from the borrower.

2.       If the aggregate amount of credit facilities availed by the borrower is >=INR 5Cr but <INR 50 Cr: In   such scenario:

·         Any lender can open current account and

·         Non lender can open Only Collection accounts.

3.       If the aggregate amount of credit facilities availed by the borrower is >= INR 50 Cr: In such scenario:

·         A mandatory Escrow Mechanism is required.

·         Only the escrow managing bank/agent will open the current account.

·         Other lender can open the collection accounts

·         Non lending banks shall not open any current account.

Click on the below Link to directly reach to the RBI site for this Circular

RBICircular on opening of Current accounts dated August 6, 2020.