The Reserve Bank of India has notified the Local Area Banks – Credit Risk Management (Amendment) Directions, 2025, introducing a new regulatory framework for operating cash credit (CC), current accounts and overdraft (OD) accounts. The amendment inserts formal definitions of CC and current accounts and introduces a new Chapter VIIA to strengthen credit discipline and ensure better monitoring of fund flows. While CC accounts may continue without restriction due to their working-capital nature, current and OD accounts are now regulated based on the borrower’s aggregate exposure to the banking system. Banks may freely maintain these accounts where exposure is below ₹10 crore. For exposures of ₹10 crore or more, only banks with at least 10% share in aggregate or fund-based exposure may operate current or OD accounts; others may operate only collection accounts, from which funds must be transferred to a designated account within two working days. Statutory, FEMA-related and other regulator-mandated accounts are exempt subject to permitted usage.
The amendments also enhance compliance oversight for Local Area Banks, requiring half-yearly monitoring, CBS-level account flagging and timely conversion or closure of ineligible accounts. Banks must ensure accounts are not misused for unauthorised third-party transactions, unregulated deposit-taking, or payment services unless specifically authorised. Systems must be established to detect suspicious patterns such as high pass-through activity or inconsistencies with the customer’s stated business. Further, term loan disbursements should preferably be made directly to identified beneficiaries to prevent fund diversion. These amendments will come into effect from April 1, 2026, though banks may opt for early implementation.
Link – https://rbidocs.rbi.org.in/rdocs/notification/PDFs/NT14469AAA2658D834F56B8AA1CFBD3E56E46.PDF
