The Indian Banks' Association (IBA) has asked the Reserve Bank of India (RBI) to exempt government accounts held with various banks from the current accounts circular of 6 August 2020. The request was made in response to input from IBA member banks, according to a banker familiar with the situation.
If the central bank agrees, a bank will not be required to terminate current accounts held by the government, even if the bank's exposure to the latter is less than 10% of the latter's total borrowings. The deadline for complying with the circular, which is intended to combat fraud, has been extended from 31 July 2021 to 31 October 2021.
“The purpose of the circular is to prevent bank funds from being syphoned off. That cannot be considered a risk in the case of the government. That is why we have requested a waiver,” the banker explained.
Emails made to the IBA and the RBI were unresponsive at the time of publication.
According to industry sources, the government was upset with the prospect of having to shut some of its current accounts because they were in violation of the August 6 circular's requirements. The government even threatened to put some banks on a blacklist. To reconcile the discrepancy between the regulatory mandate and the government's intentions, banks have requested that government accounts be removed from the circular's scope entirely.
While challenges like these continue to stymie the circular's implementation, bankers are comforted by the RBI's assertion that issues that banks are unable to resolve themselves would be sent to the IBA for help. “Any remaining issues requiring regulatory consideration shall be flagged by IBA to the Reserve Bank for examination by 30 September 2021,” the RBI said on 4 August when it extended the deadline for implementing the circular.
Meanwhile, a legal challenge to the circular has been filed in the Kerala High Court. The circular has been challenged in court by Muthoot Fincorp and GEO VPL Finance. The court took note of the RBI's position, which was similar to its August 4 clarification, in its most recent hearing on the subject on August 12. The next hearing, in this case, will take place on 12 October.
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