RBI moves to prevent misuse of bank funds; stops routing term loans via current accounts

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August 11, 2020 4:31 PM

Reserve bank of India has restricted banks from routing funds from term loans taken by borrowers through their current accounts.

RBI, Reserve Bank of India, central bank, current account, term loansRBI has banned banks from opening current accounts for customers who have availed credit facilities in the form of cash credit or overdraft from other banks. (Image: Bloomberg)

In an effort to prevent the misuse of bank funds, the Reserve bank of India has restricted banks from routing funds from term loans taken by borrowers through their current accounts. The decision is taken to stop companies and large borrowers from transferring funds unfairly from term loans through current accounts in other banks. The RBI has also banned banks from opening current accounts for customers who have availed credit facilities in the form of cash credit (CC) or overdraft (OD) from other banks. Altogether, the lender banks – mostly PSU banks – will now handle the current accounts of borrowers who, in turn, can’t divert money for other purposes through the current accounts of other banks, mainly private and foreign banks.

Since term loans are meant for specific purposes, the funds should be remitted directly to the supplier of goods and services and expenses incurred by the borrower for day to day operations should be routed through CC/OD account if the borrower has it, else through a current account, the RBI said. According to further instructions, the banks are free to open current accounts of prospective customers who have not availed any credit facilities from the banking system. Also, the banks have been instructed to monitor all current accounts and CC/ODs regularly, at least on a quarterly basis.

Also Read: Indian banks in crying need for reforms; here’s how privatising PSU banks can help

Meanwhile, in view of the disruptions caused by the coronavirus pandemic, the RBI is working in line with the government to provide all necessary infrastructure support in boosting the demand in the economy. While the central bank has slashed 250 basis points in repo rate, it also took landmark decisions such as external benchmarking of interest rates. Given the uncertainty encompassing the inflation rates, the RBI maintained status quo on interest rates in the last MPC meeting. However, it has still maintained the stance as accommodative, which indicates that the RBI may go for another rate cut if need be. 

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