RBI moves to prevent misuse of bank funds

In an order to prevent misuse of bank funds, Reserve Bank of India has prohibited banks from routing funds into their current accounts from term loans borrowers have taken.

The decision is taken to stop firms and big borrowers from unfairly transferring funds from term loans via current accounts in other banks.

  • The RBI also banned banks from opening current accounts for clients who had used credit facilities from other banks in the form of cash credit (CC) or overdraft (OD).
  • Altogether, lender banks – mainly PSU banks – can now manage borrowers’ current accounts which, in turn, can’t redirect the money for other purposes from other banks’ current accounts, mostly private and international banks.
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Although term loans are intended for particular purposes, the funds should be transferred directly to the supplier of goods and services and expenses incurred by the borrower for day-to-day operations should be routed through a CC / OD account where the borrower has them, otherwise through a current account.The banks are free to open current accounts to prospective customers who have not taken advantage of any credit facilities from the banking system, according to the further instructions. In addition, the banks were instructed to regularly monitor all current accounts and CC / ODs, at least on a quarterly basis.

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Meanwhile, considering the disruptions caused by the coronavirus pandemic, the RBI works in line with the government to provide all necessary support for infrastructure to improve demand in the economy.Although the central bank has slashed its repo rate by 250 basis points, it also took historic decisions such as external benchmarking of interest rates

During the last MPC meeting, the RBI maintained the status quo on interest rates despite the uncertainty encompassing inflation rates. However, the position as accommodative has still been maintained, which indicates that the RBI may continue to reduce the rate if necessary.

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