The Reserve Bank of India has given banks time until end of October to implement new rules on current accounts issued last year. The regulator had previously set a deadline of July 31.
This, after thousands of small businesses saw their current accounts frozen temporarily as lenders rushed to meet new rules prescribed by the regulator a year ago.
In a notification, the regulator laid down Oct. 31 as the new deadline and added:
Banks must engage with their borrowers to arrive at mutually satisfactory resolutions within the ambit of the circular.
Banks shall ensure that the contents of the circular are implemented in letter and spirit without causing undue inconvenience to their borrowers.
Cash-in-transit and cash replenishment agencies to be exempt from the circular.
The new rules, issued in August 2020, were to be implemented within three months at first. However, the regulators had permitted more time for banks to comply. With banks continuing to drag their feet, the RBI had communicated a hard deadline of July-end to lenders last month, BloombergQuint reported.
Following that lenders started sending notices to their account holders to shut all excess current accounts and move all their balances to one lender. However, according to industry estimates, only 25-30% of the account holders responded to notices sent by banks and have taken necessary action to be compliant with the RBI guidelines. Those that did not saw their current accounts being frozen.
The number of accounts which would need to be shut down across the banking system is “mind-boggling”, a banker told BloombergQuint.
The extension provided by the Reserve Bank of India will ease some of disruption caused by the rules.
The RBI’s norms were essentially trying to ensure that a borrower routes payments to and from current accounts maintained with banks which have the highest loan exposure to them. This was done as a number of cases of siphoning-off of loan funds were detected via current accounts held with banks other than the main lenders. Bankers, in conversations with the regulator, had said that monitoring funds once they move to accounts of other banks is difficult.
To make monitoring of funds easier, the RBI had said that for accounts with credit facilities between Rs 5-50 crore, any lender can open a current account, while non-lending banks can only open a collection account.
For accounts with credit facilities more than Rs 50 crore, banks were asked to create an escrow mechanism and only the escrow-managing lender or agent can open the current account for the borrower.
These requirements remain unchanged.