Why in the news
RBI relaxed the framework for opening and running current and overdraft accounts. Firms were earlier tied to their lenders; the new rules add flexibility while guarding against fund diversion.
Key changes
| Area | Earlier | Now |
|---|
| Restriction threshold | ₹5 crore of borrowings: current account only with lender | ₹10 crore; below that, any bank with conditions |
| Cash credit | Restricted | No restrictions; banks offer it per customer need |
| Classification | Separate | CA, CC and OD together as transaction accounts |
Borrowers of ₹10 crore and above
- A bank qualifies for CA/OD if it has 10% of total exposure or 10% of fund-based exposure.
- Failing that, the top two lenders by exposure may run them.
- If only one bank lends, the borrower may add another bank with that lender’s NOC.
- Non-lending banks may keep collection accounts, sweeping funds to the main account within two working days.
Coverage and exemptions
- Applies to commercial, small finance, local area, regional rural and co-operative banks; payments banks stay out.
- Exempt: FEMA-mandated accounts, accounts required by law, and core-activity accounts of regulated financial entities.
CA vs CC vs OD
| Aspect | Current | Cash credit | Overdraft |
|---|
| Nature | Deposit account | Working capital loan | Short-term credit |
| Interest | None paid | On used amount | On overdrawn amount |
| Security | Not needed | Usually secured | Secured or unsecured |
| Cost | – | Lower than OD | Usually above CC |
Background
- August 2020 curbs were meant to stop fund diversion but effectively barred standalone current accounts for CC/OD borrowers, concentrating business in a few banks.
Exam angle
- Threshold: ₹5 crore raised to ₹10 crore.
- Collection account sweep: two working days.