The Reserve Bank of India (RBI) issued amendments to its Local Area Banks credit risk management directions, adding a new framework for maintaining cash credit, current and overdraft accounts to strengthen credit discipline and transaction monitoring. The amendments take effect from 1 April 2026, and banks may implement them earlier. Under the new Chapter VIIA, cash credit (CC) facilities remain unrestricted, while current account and overdraft (OD) account permissions depend on the borrower’s aggregate exposure across the “banking system”. Where system-wide exposure is below INR 10 crore, banks may maintain current and OD accounts without restriction. For exposures of INR 10 crore or more, current or OD accounts may be maintained only by banks with at least a 10% share of the banking system’s aggregate exposure or aggregate fund-based exposure to the borrower, with fallback arrangements where no bank, or only one bank, meets the threshold. Banks that are not eligible to maintain current or OD accounts may maintain only “collection accounts”, with funds required to be remitted to a designated CC, current or OD account within two working days, subject to debiting statutory dues and any dues to the collection-account bank. Exemptions apply for certain accounts opened under the Foreign Exchange Management Act framework, accounts or transactions mandated by statute or specific instructions from government or a financial sector regulator, and accounts of regulated entities used for regulated activities, subject to use limitations and remittance of surplus funds. Banks must monitor compliance at least half-yearly, and where eligibility to maintain an account is lost, the customer must be notified within one month and the account converted to a collection account or closed within three months. The directions also require core banking system flagging and borrower-level monitoring, prohibit use of these accounts as pass-through channels for third-party transactions except where expressly authorised by a financial sector regulator, and require controls to prevent unlicensed deposit-taking or payment services through bank accounts.
Reserve Bank of India 2025-12-11
Reserve Bank of India amends Local Area Banks credit risk rules to restrict current and overdraft accounts for borrowers with banking exposure of INR 10 crore or more
The Reserve Bank of India (RBI) amended its Local Area Banks credit risk management directions, introducing a framework for cash credit, current, and overdraft accounts to enhance credit discipline and transaction monitoring. Effective April 2026, the framework imposes restrictions based on borrower exposure, with specific conditions for maintaining current and overdraft accounts. Banks must ensure compliance through regular monitoring and implement controls to prevent unauthorized transactions.