RBI’s Current Account Circular Leads Small Businesses To Shut Bank Account

In mid-2020, the RBI had come up with the circular that specified which bank can open a current account for borrowings in order to check any misuse through multiple current accounts. The central bank aims to clamp down on people opening multiple accounts to borrow money and also prohibited banks from opening a current account if their exposure was less than 10% of the borrowers’ total exposure to the banking system. The Reserve Bank of India has allowed time to banks till October 31 to implement changes in terms of managing current accounts, following reports of small businesses being hit with account freezing in the last few days.

The Reserve Bank of India’s insistence on companies opening current accounts with banks is among the factors that have helped large lenders such as HDFC Bank, ICICI Bank, and SBI raise their shares of the competitive corporate banking market in 2020, according to a report. Also, the new directives by the RBI on opening and operating corporate current accounts meant that SBI and other large private sector banks are winning corporate relationships at the expense of foreign banks.

Cyber security-related incidents have seen a general rise in the past year, aided by the burgeoning use cases of remote working tools. According to the report, a whopping 27 million Indian adults were victims of identity theft in the past 12 months, and 52% of adults in the country do not know how to protect themselves from cybercrime. “In a year of lockdowns and restrictions, cybercriminals have not been deterred. More Indian adults fell victim to identity theft in the past 12 months and most are concerned about data privacy,” said Ritesh Chopra, director of sales and field marketing, India & SAARC Countries, NortonLifeLock. Security firm, Checkpoint Security, had recorded about 192,000 such attacks per week by May 12, 2020, alone. The tightening of policies may have an impact on decreasing the cybercrime cases witnessed by the country. 

“MSMEs are facing huge problems. This is not a very well thought out decision. There are practical problems. Sometimes it is necessary for them [MSME] to keep accounts in another bank, else the borrower is at the mercy of one bank,” FISME Secretary General Anil Bhardwaj told Business Standard. 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. 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. Interestingly, this move has also created a rift between the public and private sector banks, the first lot welcomed the move and the second said they would lose customers.

While it is still early days to assess the medium to the long-term impact of the RBI’s norms, it is evident that garnering current account deposits will become challenging for new banks. The new norms will either nudge smaller banks to build larger relationships with the customer (greater than 10 percent share in credit) or borrowers to consolidate their multiple accounts. Leading banks offering comprehensive services can gain market share. For some other banks, the going can get quite tough in the short to medium-term.