Current account

Current account

Subject: Economy

Context: The Reserve Bank of India (RBI) has allowed banks time until October-end to implement the new rules on current accounts issued in 2020 following requests from banks and borrowers.

Concept:

A current account

• A current account, also known as financial account is a type of deposit account maintained by individuals who carry out significantly higher number of transactions with banks on a regular basis. It is created by the bank on request of the applicant and is made available for frequent or immediate access.
• Current accounts relate to liquid deposits and it offers a broad range of customized options to aid financial dealings.
• Current accounts also allows to make payments to creditors through the cheque facility offered by the bank. Generally, current accounts do not provide interests and requires a higher minimum balance when compared to savings account.
• However, the greatest advantage of current bank account is that, account holders can easily avail overdraft facility up to an agreed limit

RBI Regulations

• In August 2020, the RBI had said banks with little or no loan exposure cannot open a current account for borrowers, and existing non-compliant accounts had to be frozen.
• The central bank’s directive was aimed at cracking down on attempts by borrowers using current accounts at non-lending banks to siphon off funds. The RBI had said banks with less than 10 per cent of the banking system exposure to a particular borrower cannot open a current account.
• The restriction applies to borrowers in case they avail of cash credit (CC) or overdraft (OD) facility since all operations that can be carried out from a current account can also be carried out from a CC or OD account as banks in a CBS environment follow a one-bank-one-customer model as against a one-branch-one-customer model.
• In the case of borrowers who have not availed of CC/OD facility from any bank, there is no restriction on opening of current accounts by any bank if exposure of the banking system to such borrowers is less than Rs 5 crore, it said.
• If borrowers have not availed of CC/OD facility from any bank and the exposure of the banking system is Rs 5 crore or more but less than Rs 50 crore, there is no restriction on lending banks to such borrowers from opening a current account, it said. Even non-lending banks can open current accounts for such borrowers though only for collection purposes, the RBI said.