RBI circular agonized small businesses as banks shut current accounts

The Reserve Bank of India's (RBI) circular to banks for the ‘need for discipline’ led to closure of a large number of current accounts when the deadline for compliance ended July 31. Micro, small and medium enterprises (MSME) are the worst hit due to the account freeze, bankers and industry officials said about the circular issued on August 6 last year.

The step has created a rift between the public and private sector banks: the first lot welcomed the move and the second said they would lose customers. The circular said that a bank cannot open a current account if their exposure is less than 10 per cent of the borrowers’ total exposure to the banking system.

It said, “No bank shall open current accounts for customers who have availed credit facilities in the form of cash credit (CC)/ overdraft (OD) from the banking system and all transactions shall be routed through the CC/OD account.”

While the initial deadline to comply with the norms was three months, it was extended to July 31 this year.

The circular essentially meant, according to bankers, to stop the practice of borrowers drawing credit facilities from public sector banks and then transferring the funds to private lenders, for which accounts are opened. Four private banks and a foreign bank are hurt due the norms, bankers said.