Central Bank's Current Account Clampdown Divides Banking Sector
The Reserve Bank of India's recent move to restrict current accounts for large borrowers has created a significant divide between private and public sector banks, exposing tensions within the Indian Banks Association. The regulatory action aims to prevent fund diversion but has sparked concerns about competitive balance in the banking industry.
Last month, the RBI proposed that multiple banks cannot open current accounts for borrowers who owe ₹10 crore or more to the banking system. The new rules state that only two banks accounting for at least 10% of the banking system's exposure to a borrower can maintain these accounts.
Private Banks Voice Concerns Over Unfair Advantage
Private sector banks have expressed strong reservations about the new regulations, fearing they will disproportionately benefit public sector banks. Four senior bankers familiar with the matter confirmed that private lenders worry about losing a crucial source of cheap funds since banks don't pay interest on current account deposits.
"This regulation would invariably benefit the public sector banks, especially the larger ones with strong presence in corporate lending," one banker stated anonymously. The concern stems from the fact that public sector banks typically serve as the largest lenders in consortium arrangements, giving them automatic eligibility under the new rules.
Private banks argue that the restrictions will not only disadvantage them competitively but also limit customer choice. They emphasize that their sophisticated digital banking services and efficient cash management systems have made business operations smoother for corporate clients.
Impact on Deposit Structures and Fee Income
The RBI's proposal could significantly alter banks' deposit and income structures. According to RBI data, Indian banks held ₹22.8 trillion in current account deposits during FY25, with state-owned banks holding 38% of this amount. Private banks and foreign banks held 44.7% and 16.2% respectively.
Banking experts explain that the new rules could reshape CASA (current account, savings account) deposit dynamics. Private banks, known for their strong transaction banking and digital collection services, might see their low-cost deposits shrink substantially.
"Private banks could lose part of their current account base, while PSU banks may gain," noted a banking expert. "However, private banks could start charging corporates for cash management and collection services, boosting their fee income even as their margins fall."
Industry Body Divided on Regulatory Approach
The issue has created divisions within the Indian Banks Association (IBA), with private banks unlikely to find support from their state-owned counterparts. The industry body typically lobbies with regulators to address concerns raised by member banks, but the conflicting interests have complicated this process.
"We are not fully convinced with the proposal," said a second banker from a 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."
Private sector banks may approach the central bank separately if their concerns don't receive adequate support at IBA forums. The regulatory proposal does allow banks to open collection accounts regardless of their loan exposure to borrowers, but funds must be transferred to designated transaction accounts within two working days.
Historical Context and Implementation Challenges
This isn't the first time RBI has addressed current account concerns. Five years ago, the central bank prohibited lenders with minimal loan exposure from opening current accounts for borrowers and required freezing of non-compliant accounts. That framework also faced implementation challenges.
Smaller banks often lacked digital infrastructure to process large volumes of tax and statutory payments efficiently. Businesses in remote locations sometimes found that their primary lending bank didn't have nearby branches, forcing reliance on other banks for cash collections.
To address these issues, RBI later permitted borrowers to open additional current accounts with no-objection certificates from lead lenders. However, the regulator has now tightened rules again, citing ongoing concerns about fund diversion.
Expert Views on Regulatory Necessity
Despite industry concerns, analysts believe the RBI's move represents a necessary step for risk management. Asutosh Mishra, head of research at Ashika Stock Broking Ltd, emphasized the importance of transparency in lending relationships.
"It cannot be that you take a loan from one bank and maintain your current account elsewhere," Mishra stated. "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."
The regulatory action underscores RBI's continued focus on strengthening the banking system's risk management framework while balancing the competing interests of different banking segments. As the November 2025 implementation date approaches, the banking sector awaits further clarity on how these rules will reshape corporate banking relationships in India.
