The Reserve Bank of India (RBI) has directed banks to ‘urgently’ reduce the number of inoperative or frozen accounts.

Concerned over the rising sums of money lying in such accounts, the RBI has asked banks to take necessary steps and also report their numbers quarterly. 

An analysis by the RBI’s department of supervision has revealed that the number of inoperative accounts and unclaimed deposits in several banks was higher than their total deposits as well as in absolute terms. 

The RBI’s supervisory inspections have revealed a slew of problems due to which accounts are becoming inoperative or get frozen.

A bank account is classified as inoperative when there are no customer-initiated transactions for over two years.

"The banks are ...advised to take necessary steps urgently to bring down the number of inoperative/frozen accounts and make the process of activation of such accounts smoother and hassle free," a notification to chiefs of all the banks said.

Banks may look at enabling seamless updation of KYC (know your customer) through mobile/internet banking, non-home branches and Video Customer Identification Process, it suggested.

The notification said it has observed instances where the accounts of underprivileged beneficiaries of state-run cash transfer schemes have been frozen due to other factors such as pending updation/ periodic updation of KYC, even though such beneficiary accounts are required to be segregated to facilitate uninterrupted credit of scheme funds.

Asking banks to take an "empathetic view" in such cases, the notification said banks may also organise special campaigns for facilitating activation of inoperative/frozen accounts.

Apart from this, the banks may also facilitate Aadhaar updation for customers through branches providing Aadhaar related services, it said, adding that instructions have been issued to state level banking committees to proactively monitor the situation in their respective jurisdictions with a view to minimise customer inconvenience.

The RBI analysis revealed that accounts were getting inoperative with deposit accounts being unclaimed due to variety of reasons including inactivity for a long time or pending updation/periodic updation of KYC.

"Reportedly, there were instances of customers facing inconvenience when they approached the bank branches for activation of inoperative accounts including inadvertent errors in customer details such as mismatch in name, etc," it said.

It was also observed that a few banks have a large pendency of accounts that are due for updation/ periodic updation of KYC, resulting in such accounts getting frozen for further transactions as per bank's internal policies, the central bank said.

The notification said progress in reduction of inoperative/frozen accounts and the special efforts made by the banks in this regard may be monitored by the Customer Service Committee (CSC) of a bank's board and asked banks to report the same quarterly to the respective Senior Supervisory Manager (SSM) through DAKSH portal, starting from the quarter ending 31 December 2024.

Banks are required to place the notification on inoperative accounts before the CSC of the Board at their next meeting along with a monitorable action plan for compliance, it said.

Incidentally, on Saturday State Bank of India (SBI) announced a nationwide campaign to promote the activation of inoperative bank accounts.

In a related development earlier this year, the RBI directed banks to annually review accounts without customer activity for over a year. It also barred banks from imposing penalties for maintaining a minimum balance or reactivating dormant accounts.

“To reduce the risk of fraud, banks must monitor recently reactivated accounts for at least six months, ensuring unauthorised transactions are detected early,” the RBI said in its guidelines.

Inactive accounts are vulnerable to fraud. They can serve as potential mule accounts in money laundering schemes. It could also be misused for unauthorised transactions, even by internal bank employees who have access to such accounts.