How a central bank move to slap down fund diversion split private, public sector banks

The Reserve Bank of India (RBI) last month proposed that multiple banks cannot open current accounts for a borrower who owes ₹10 crore or more to the banking system. The regulator said only two banks, that account for at least 10% of the banking system’s exposure to the borrower, can open these accounts. The idea is to prevent a borrower from keeping his bank in the dark about the cash flows he receives in a current account maintained with another bank.

Private banks fear the RBI move will benefit their public sector rivals as they are typically the largest lenders in any consortium, four bankers aware of the matter said, adding this will also deprive choice for customers.

“This regulation would invariably benefit the public sector banks, especially the larger ones with strong presence in corporate lending," one of the bankers said on the condition of anonymity. The private banks worry that the RBI move will cut off a key source of cheap funds, since banks do not pay any interest on current accounts.

Divisions at IBA

In FY25, banks in India had ₹22.8 trillion in current account deposits, 38% of which was parked in state-owned banks, as per RBI data. Private banks and foreign banks had 44.7% and 16.2%, respectively.

Though the issue was discussed at the IBA, private banks are unlikely to find support from state-owned banks, the banker cited above said. He said private sector banks may reach out separately to the central bank to seek some relaxation if their concerns do not find support at IBA. As an industry body, IBA typically lobbies with the regulator to voice issues raised by member banks.

“We are not fully convinced with the proposal," said a second banker with private sector lender. “As a bank, I must also get cash flow. If I am not allowed to hold current accounts for my borrowers, it affects my liquidity and fee income. We have represented this to the IBA and are hoping for some relaxation."

Queries emailed to the RBI and IBA on the matter remained unanswered.

That said, the RBI proposed that banks—whether they have loans to that borrower or not—can open collection accounts, which receive the customer's cash inflows. However, RBI said money credited into these accounts will need to be remitted within two working days to a designated transaction account like a current account.

‘Far-reaching implications’

The proposal may have far-reaching implications for banks’ deposit and fee income structures.

“Suppose bank A has lent ₹90 crore and bank B has lent ₹10 crore to a company with ₹100 crore total borrowing. Currently, if the corporate’s collections come into B’s account, bank A could demand 90% of those funds, and it will be transferred to its current account. This would reduce bank B’s current account balances," a banking expert said on the condition of anonymity.

Such a change could alter the dynamics of banks’ CASA (current account, savings account) deposits. Private banks, known for their strong transaction banking and digital collection services, may see their low-cost deposits shrink.

“Private banks could lose part of their current account base, while PSU banks may gain. However, private banks could start charging corporates for cash management and collection services, boosting their fee income even as their margins fall," the expert added.

Past moves

The new RBI proposals come five years after the central bank said that lenders with little or no loan exposure cannot open a current account for borrowers, and existing non-compliant accounts had to be frozen. Back then, 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. RBI had then said banks with less than 10% of the banking system exposure to a particular borrower cannot open a current account.

Bankers said the earlier framework had challenges as well. Smaller banks often lacked digital infrastructure to process large volumes of tax and statutory payments efficiently. Similarly, businesses operating in remote locations sometimes found that their primary lending bank did not have a nearby branch, forcing them to rely on other banks for cash collections.

To address such cases, RBI later allowed borrowers to open additional current accounts with a no-objection certificate (NOC) from the lead lender.

“Now, the regulator has again tightened the rules, citing concerns over fund diversion. But this time, customers are again facing problems," said a third banker, who is a senior executive at a public sector lender. “Private banks had made business easier for corporates, especially in terms of digital payments, internet banking, and cash management services. If this rule is implemented strictly, private lenders will lose out," the banker added.

Analysts, however, said the RBI move was a necessary step for risk management. “It cannot be that you take a loan from one bank and maintain your current account elsewhere," said Asutosh Mishra, head of research - institutional equity at Ashika Stock Broking Ltd. “The intent is to ensure transparency and prevent misuse of funds. While private banks may lose some current account business, this move ensures better credit discipline," Mishra said.