RBI directive on overdraft accounts hit small businesses

Even though small businesses are yet to settle down after the first and second phase of COVID and lockdowns thereafter, many small business current accounts are being frozen as the deadline to implement the RBI directive on closing multiple current and overdraft accounts of businesses nears.

The RBI deadline to close multiple current accounts of small businesses is on July 31 of 2021 and by then small businesses must have only one current account and all other such accounts will be frozen.

Businesses generally have more than one current account to facilitate easy payments and receivables.

“It is only a bid to enforce credit discipline and check diversion of funds, the Reserve Bank of India has put in place certain safeguards for the opening of current accounts by banks,” said a senior RBI officer.

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With the earlier framework found to be inadequate, RBI moved to tighten the norms to streamline the use of multiple accounts by borrowers.

“Under the new guidelines, no bank can open current accounts for customers who have availed of credit facilities from the banking system. All transactions should be routed through the CC/OD account only,” said the official.

In case customers have not availed of a current account or overdraft facility from any bank, banks may open current accounts, but with certain conditions.

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RBI has flagged concerns over the misuse of multiple operating accounts from 2000 onwards. But despite repeated notifications, many banks failed to follow necessary protocols.

A business may choose to have multiple accounts to facilitate transactions across entities and areas. Some businesses may look for specialised or focused services (forex related for instance) for which they may be required to open multiple accounts.

“I have an overdraft account with a public sector bank but for importing I use an account with a private banker as I get better online banking services. After July 31, I need to deal with the PSU bank,” said a businessman based in Chennai.

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Some businessmen have taken to social media to oppose the RBI decision on current and OD accounts.

The RBI placing restrictions on the opening of current accounts and debits to certain accounts can hence cause operational issues to businesses. But the key question is whether such over-regulation will serve the intended purpose of plugging diversion of funds. While some bankers believe that the new norms can bring in financial discipline, others are sceptical given the weak implementation and monitoring of the earlier norms.