RBI’s Current Account Curbs Stir Rift Between Private and Public Sector Banks

Context:

The Reserve Bank of India’s (RBI) new proposal to tighten current account rules for large borrowers has triggered a divide between private and public sector banks within the Indian Banks’ Association (IBA). The move, aimed at curbing fund diversion and improving credit discipline, could reshape the flow of low-cost deposits and transaction banking revenues across India’s banking system.

About the RBI’s Proposed Rule

• What’s proposed:
  • Only two banks, each holding at least 10% of the total banking exposure to a borrower with outstanding loans of ₹10 crore or more, will be allowed to open current accounts for that borrower.
• Objective:
  • To prevent fund diversion and ensure that all cash flows of a borrower are visible to its primary lenders, enhancing credit discipline and transparency.
• Effective timeline:
  • Yet to be finalized; RBI released the draft for stakeholder comments in October 2025.

Rationale Behind the Move

• Borrowers often maintain current accounts with non-lending banks, which masks their true cash flows and enables possible fund diversion.
• The rule aims to strengthen supervision over borrowers’ liquidity management and ensure that lending banks have complete visibility into fund movement.

Private Banks’ Concerns

• Loss of Low-Cost Deposits:
  Private banks fear losing a large portion of current account deposits (no interest-bearing funds), which are key to maintaining low-cost CASA ratios.
• Competitive Disadvantage:
  Since public sector banks (PSBs) are usually lead lenders in consortiums, they will likely dominate current account relationships.
• Reduced Customer Choice:
  Borrowers will have fewer options for transaction banking services, hurting competition and efficiency.
• Liquidity Impact:
  Restricting current accounts could affect cash management and fee income, particularly for banks specializing in digital collection and payment solutions.

Regulatory Perspective

• RBI maintains that multiple current accounts for the same borrower increase the risk of fund diversion.
• The framework follows earlier 2020 directives that restricted non-lending banks from maintaining current accounts for borrowers.
• The current proposal refines those norms to ensure greater lender control while permitting collection accounts (for receipts), provided funds are remitted to the main current account within two working days.