The Reserve Bank of India (RBI) has given banks further time till 31 October 2021 to streamline their current accounts according to the new rules issued last year.

The regulator had previously set 31 July as the deadline.

This extended timeline can be utilised by banks to engage with their borrowers to arrive at mutually satisfactory resolutions within the ambit of the circular, the RBI said.

Such issues which banks are unable to resolve themselves shall be escalated to Indian Banks’ Association (IBA) for appropriate guidance.

"Residual issues, if any, requiring regulatory consideration shall be flagged by IBA to the Reserve Bank for examination by September 30, 2021," the RBI further stated.

On 6 August 2020, the RBI announced new rules and restrictions on the opening of current accounts by borrowing companies. The rules require companies to open current accounts or cash-credit/overdraft accounts only with banks who have lent substantial loans to them, the circular had stated.

In case of borrowers who have not availed of CC/OD facility from any bank, there is no restriction on opening of current accounts by any bank if exposure of the banking system to such borrowers is less than Rs 5 crore.

In case of borrowers who have not availed of CC/OD facility from any bank and the exposure of the banking system is Rs 5 crore or more but less than Rs 50 crore, there is no restriction on lending banks to such borrowers from opening a current account, the central bank said, adding that "even non-lending banks can open current accounts for such borrowers though only for collection purposes".

The RBI, however, noted that the restriction applies to borrowers in case they avail of CC/OD facility "since all operations that can be carried out from a current account can also be carried out from a CC/OD account as banks in a CBS environment follow a one-bank-one-customer model as against a one-branch-one-customer model".

The Reserve Bank of India's (RBI) circular to banks for the ‘need for discipline’ led to closure of a large number of current accounts when the deadline for compliance ended July 31.

Since a number of borrowers were availing cash credit from banks and maintaining current account with a different bank it was getting very difficult for lenders to monitor the cash flows of the corporate borrowers. Often diversion of funds from current account opened in other banks was leading to losses for a section of lenders.

In case of borrowers who have loans of Rs 5 crore to Rs 50 crore to the banking sector, there is no restriction to open current account with any lender. Majority of the public sector banks were getting impacted as result of this indiscriminate current account opening by borrowers with multiple banks.

Micro, small and medium enterprises (MSME) are the worst hit due to the account freeze, industry observers said.