Mumbai, Nov. 11 -- A valiant effort by the central bank to clamp down on fund diversion has pitted India's private sector banks against their public peers, opening up a rift in the Indian Banks' Association (IBA). The Reserve Bank of India (RBI) last month proposed that multiple banks cannot open current accounts for a borrower who owes Rs.10 crore or more to the banking system. The regulator said only two banks, that account for at least 10% of the banking system's exposure to the borrower, can open these accounts. The idea is to prevent a borrower from keeping his bank in the dark about the cash flows he receives in a current account maintained with the another bank. Private banks fear the that proposal, if implemented, will benefit their public sector rivals as they are typically the largest lenders in any consortium, four bankers aware of the matter said, adding this will also deprive choice for customers. "This regulation would invariably benefit the public sector banks, especially the larger ones with strong presence in corporate lending," one of the bankers cited above said on the condition of anonymity. The private banks worry that the RBI move will cut off a key source of cheap funds, since banks do not pay any interest on current accounts. In FY25, banks in India had Rs.22.8 trillion in current account deposits, 38% of which was parked in state-owned banks, centrtal bank data showed. Private banks and foreign banks had 44.7% and 16.2% of this, respectively. Though the issue was discussed at the IBA, private banks are unlikely to find support from state-owned banks, the banker cited above said. He said private sector banks may reach out separately to the central bank to seek some relaxation if their concerns do not find support at IBA. As an industry body, IBA typically lobbies with the regulator to voice issues raised by member banks. "We are not fully convinced with the proposal," said a second banker with private sector lender. "As a bank, I must also get cash flow. If I am not allowed to hold current accounts for my borrowers, it affects my liquidity and fee income. We have represented this to the IBA and are hoping for some relaxation." Queries emailed to the RBI and IBA on the matter remained unanswered. That said, the RBI proposed that banks-whether they have loans to that borrower or not-can open collection accounts, which receive the customer's cash inflows. However, RBI said money credited into these accounts will need to be remitted within two working days to a designated transaction account like a current account. The proposal may have far-reaching implications for banks' deposit and fee income structures. "Suppose bank A has lent Rs.90 crore and bank B has lent Rs.10 crore to a company with Rs.100 crore total borrowing. Currently, if the corporate's collections come into B's account, bank A could demand 90% of those funds, and this will be transferred to its current account. This would reduce bank B's current account balances," a banking expert said on the condition of anonymity. Such a change could alter the dynamics of banks' Casa (current account, savings account) deposits. Private banks, known for their strong transaction banking and digital collection services, may see their low-cost deposits shrink....