If you don’t know how an account becomes a dormant account, this blog is for you. Read on and explore common causes behind this, understand associated risks, and learn some strategies to prevent this. Let’s begin by taking up what is a dormant account.
Definition of a dormant account
A dormant account is a credit, saving or checking account that a holder has left inactive for long periods. When the banking system detects inactivity over extended periods, it flags the account as frozen or ‘dormant.’ Banks will also notify the account holder about the possibility of their account slipping into dormancy. With digitally advanced platforms like Kotak811, a dormant account can be reactivated online after an authentication process. Users are usually encouraged to dissolve their dormant accounts as good financial practice.
Users are also encouraged to maintain a minimum activity level in their account to keep it active. In case an account becomes dormant and the holder wishes to re-activate it, they can contact their bank and make a request.
Common causes of account dormancy
There can be many reasons why an account holder allows their accounts to go dormant. What’s common about most of those reasons is that they could have been avoided. Usually, negligence and ignorance lead to an account becoming dormant, meaning that it can be prevented. Here are the most common causes of dormancy:
Life Events and Negligence: Major life changes like moving, changing jobs, or financial difficulties can distract account holders from certain accounts, resulting in dormancy.
Lack of Communication with the bank: Failure to update the individual’s contact information with the bank can result in missed notifications about account activity. This lack of communication contributes to dormancy. It can also keep banks from notifying a user before labelling their funds as 'unclaimed funds.'
Taking proactive measures to prevent an account from becoming dormant is important. Regularly monitoring accounts, conducting occasional transactions, and updating contact details also keep accounts active.
Effects and implications of dormant accounts
All risks associated with dormant accounts are 100% avoidable, with a little attention. Here are some potential downsides of dormant accounts:
Restricted Access to the Account: Once an account is labelled dormant, the account holder may be restricted in accessing their funds. This can be inconvenient if the account has money in it. Even more so during emergencies.
Wasteful maintenance expenses: Just because an account has entered the dormant zone doesn’t mean it is inactive. Banks usually charge a certain fee for maintaining an account. In the long run, a dormant account will eat up its own deposits, paying its maintenance for nothing.
Losing money as unclaimed funds: When a bank account is dormant for a long time, banks may classify it under 'unclaimed funds.' Banks may then transfer this money to a separate account to be dealt with as per their procedure. Account holders are usually notified of the undertakings if they are within the reach of banks.
Dormant accounts also pose a higher threat of identity thefts, security scams and unauthorised account usage.
Identifying and reactivating dormant accounts
Identifying dormant accounts involves a few steps. Banks and financial institutions often send notifications regarding dormancy. Account holders can make transactions, update account details, and contact the bank. Regular monitoring and proactive engagement help prevent dormancy.
In most cases, dormancy can be re-activated simply by contacting the banks. If an individual does that before the account is classified as ‘unclaimed,’ the process will be quick and simple.
Preventing account dormancy
To prevent account dormancy, individuals should take proactive measures. They can use the account for small transactions, review statements, update contact information, and look at important notifications. Even setting up automatic payments or making direct deposits will do the trick. If multiple accounts exist, individuals should consider consolidating or closing the ones that are no longer needed. By actively participating and staying engaged, account holders can prevent their accounts from slipping into dormancy.
Unclaimed funds and escheatment
When account holders of dormant accounts are not within the reach of banks, the account is classified as unclaimed funds. To ensure compliance with regulatory requirements and protect the account holder's interests, Indian banks follow the escheatment process. During this, unclaimed funds are transferred to the respective authority. Typically, unclaimed funds are handled by the state government or the Depositor Education and Awareness Fund (DEAF), established by the Reserve Bank of India (RBI).
Escheatment aims to protect unclaimed funds and make them available once claimed. Account holders should at least keep their contact information updated with the banks. Periodically engaging with their accounts can help to avoid their funds being classified as unclaimed.
While a free account opening online is indeed useful, using the account matters as well. Please take note of the risks associated with leaving an account dormant. By staying actively engaged with one’s account, making regular transactions, and updating contact information, you can prevent this.
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This Article is for information purposes only. The views expressed in this Article do not necessarily constitute the views of Kotak Mahindra Bank Ltd. (“Bank”) or its employees. Bank makes no warranty of any kind with respect to the completeness or accuracy of the material and articles contained in this Newsletter. The information contained in this Article is sourced from empanelled external experts for the benefit of the customers and it does not constitute legal advice from Kotak. Kotak, its directors, employees, and contributors shall not be responsible or liable for any damage or loss resulting from or arising due to reliance on or use of any information contained herein.