Dormant Account VS. Frozen Account

The terms used for the account in which activities are stopped are dormant and frozen account. But there is difference in these terms.
Both Savings and Current Account can be made dormant and frozen.

The account which has not been used for 24 months (2 years) by its operator is termed as dormant account while the account in which all the activities have been stopped by the bank is a frozen account.

We will see separately that how and why an account becomes dormant and frozen.

Inactive account:  An account (current or a savings bank account)that hasn’t been used and have not done any transactions through it for more than 12 months (1 year), then it will be classified as an inactive account. 

Inactive to dormant: After this i.e. after 1 year, the bank contacts to the holder of account and nominee (if any) to either have close this account or make it active by doing any transaction (credit or debit of ATM transaction or through internet banking, etc.).
But if after this also, the holder of account does not reply, the account is named as dormant account by the bank after 1 further year. This means that the account becomes dormant after 2 years from the date of last transaction.  Dormant account are known as inoperative accounts
In case when the account is inactive or inoperative, the holder of account can perform transactions to make it active, can issue cheques drawn on that account. But when the account becomes dormant, the account holder will have to go by some guidelines of bank to make the account active and do any transactions from or to this account.

• According to RBI guidelines, banks cannot charge any money to make dormant or inoperative accounts as operative.
• But for maintaining the dormant account, banks can levy charges as per their policy.
• The interest on amount of money in saving accounts will be credited in account in case of inoperative account also.
• Also there no charges are to be levied in case of non-maintenance of minimum amount in the account.

Banks re-classifying accounts to inactive and dormant accounts

The main purpose of reclassifying the accounts is to reduce the risk of fraud in your account. By reclassifying the accounts, banks warn their staff about the potential risk involved and carry out due diligence before allowing any fresh transaction through them.

Why the accounts become inoperative?

Some of the reasons are:

• When people get open new bank accounts and start performing transaction in new account only.
• When people change their cities, they get open their accounts in new banks there.
• When people leave jobs and join new company, they do not perform any transactions in their old salaried accounts.

What is the need to label an account as inoperative or dormant?

For maintaining bank accounts, charges are levied. So if there are many inoperative or dormant accounts, maintaining of such accounts will be an extra burden on bank. So RBI asked banks to track dormant accounts so that the balance can either be revived, or the balance can be transferred to a new account or the legal heirs.

What activities can be performed to keep an account active?

• Any debit, any credit by cash, issue of cheque, amount credited by cheque, any ATM transaction, Internet banking performed (in case allowed by bank because net banking can’t be performed in case of dormant account), bill payments, any interest charges of fixed deposits credited (if permitted by account holder), or any other transaction that involves account holder or third party.
• However interest charges of savings account will not be treated as a transaction by customer because that involves the transaction of bank.

Freezing of account:

• Freezing of account means the transactions in such account cannot be performed until further notice.
• The payments will be stopped in such accounts and even cheques drawn before freezing are also not allowed to be encashed by anyone.
• Banks by themselves cannot freeze an account. However, they can take an active part in discovering the accounts that show any suspicious transactions.

Then who have rights to freeze an account?

RBI, SEBI, Income-tax authorities, and court.

Why an account is frozen?

• In case of tax dues,
• unpaid loans or money to any individual/organization,
• any illegal activity found like money laundering,
• any suspicious activity, like terrorist financing, etc.

The accounts named as dormant cannot be frozen.