The Banking laws (amendment) Bill, 2024, introduced in the Lok Sabha on 3rd December, 2024, marks a pivotal moment in the evolution of India’s banking regulations. With the financial environment evolving at an accelerated pace, the amendments aim to modernize India’s banking laws, enhance governance, streamline operations, and introduce customer-centric reforms. While the Bill is yet to be enacted into law, it underscores the government’s commitment to strengthening the nation’s financial infrastructure and addressing the emerging challenges in the banking domain.
India’s banking system, have long been based on a framework of laws that’s were designed in an era with significantly different economic realities. In particular, provisions related to reporting, governance, and asset management were established when the financial system was less dynamic. With rapid technological advancements, a more diversified customer base, and growing concerns about unclaimed assets, the need for regulatory reforms has never been more pressing. Several factors necessitate these reforms were-
- Governance Gap- Public sector banks and cooperative banks have faced criticism over the years for inefficiencies in governance and operations. A reimagined approach to director tenures and governance structures is necessary to enhance accountability and institutional autonomy.
- Shifting Customer needs- As India’s banking customer base becomes increasingly diverse, there is a pressing need for provisions that cater to different demographic segments. Nomination practices, asset management, and succession planning must reflect contemporary realities.
- Technological Transformation- The rise of digital banking and fintech has transformed customer expectations and operational requirements. A forward-looking regulatory framework is essential to foster innovation while maintaining security and stability.
- Unclaimed Assets- The increasing volume of unclaimed dividends, shares, and bonds has prompted calls for more effective asset management. Streamlining the processes around these assets is essential for safeguarding investor interests.
However, The Banking Laws (Amendment) Bill, 2024, is a response to these evolving challenges, aiming to make India’s banking system more resilient, transparent, and customer-friendly.
Key Amendments & Features of the Bill
The Bill introduces several pivotal amendments, each designed to address a specific aspect of the banking system. Below are the key provisions that define this comprehensive reform:
- Introduction of Multiple Nominees for Deposit Accounts & Lockers
Current Provision- Under the existing framework, depositors could nominate only one individual for their accounts or safe custody lockers.
Proposed Change- The Bill expands this provision, allowing depositors to nominate up to four individuals for both deposit accounts and lockers. Two nomination options are introduced like; ‘Successive Nomination’ and ‘Simultaneous Nomination’.
Objective- This change aims to streamline succession planning, reduce legal disputes, and provide greater convenience for depositors and their heirs. By enabling multiple nominees, the amendment ensures a smoother transfer of assets in case of death, particularly for families with complex inheritance structures.
2. Revised Reporting Framework
Current Practice- Banks are currently required to submit reports on alternate Fridays.
Proposed Change- the Bill mandates that banks submit reports on fixed dates; the 15th and the last day of each month which includes “Fortnightly Reports” on Cash Reserve ratio & Statutory Liquidity Ratio and quarterly & monthly returns for assets & liabilities.
Objective- The revised reporting schedule seeks to enhance consistency and reduce ambiguity, making compliance easier for banks. By shifting to fixed dates, the Bill aligns reporting practices with global standards, improving the transparency of financial disclosures.
3. Enhanced Governance in Cooperative Banks
Current Tenure Limit- The existing framework restricts the tenure of directors, other than chairpersons and whole-time directors, to a maximum of 8 years.
Proposed Change- The amendment extends this limit to 10 years. Moreover, directors of central cooperative banks will now be permitted to serve on the boards of state cooperative banks simultaneously.
Objective- These changes aim to improve governance and coordination within cooperative banking institutions. By increasing director tenures and allowing cross-board membership, the Bill ensures greater stability and facilitates better decision-making across cooperative banks, which play a vital role in India’s financial ecosystem.
4. Redefinition of ‘Substantial Interest’
Current definition- The current threshold for “substantial interest” is defined as holding shares worth ₹5 lakh or 10% of a company’s paid-up capital.
Proposed Change- The threshold has been significantly increased to ₹2 crore, adjusting for inflation and the evolving economic environment.
Objective- By raising the threshold, the Bill reduces the compliance burden on smaller investors, who will no longer be classified as holding substantial interest. This change reflects the reality that smaller shareholders are less likely to exert significant influence over company operations, thus streamlining regulatory compliance.
5. Transfer of Unclaimed Assets to the investors Education & Protection Fund (IEPF)
Current Practice- Under current regulations, only unclaimed dividends are transferred to the Investor Education and Protection Fund (IEPF).
Proposed Change- The Bill expands this provision to include share with unpaid dividends for seven years and unpaid bond interest or redemption amounts. As these unclaimed assets will be transferred to the IEPF, where claimants can recover them
Objective- This amendment aims to address the growing issue of unclaimed assets by streamlining their management. It ensures that investors’ dormant funds are not left unaccounted for, while providing a clear mechanism for claimants to recover their assets.
6. Discretion in Auditor Remuneration
Current Provision- Auditor fees for banks, including public sector banks (PSBs) and the State Bank of India (SBI), were determined by the Reserve Bank of India (RBI).
Proposed Change- The Bill grants banks the autonomy to determine auditor remuneration, thereby offering greater flexibility in the selection of auditors.
Objective- By giving banks control over auditor fees, the Bill empowers institutions to engage auditors who are well-suited to their specific needs, enhancing financial oversight and transparency in banking operations.
Implication for Stakeholders
The Banking Laws (Amendment) Bill, 2024, carries far-reaching implications for a wide range of stakeholders, including banks, depositors, investors, and cooperative banking institutions. The reforms are designed to improve operational efficiency, enhance customer service, and promote a more robust regulatory environment.
For Banks:
By granting banks greater flexibility in setting auditor fees, the amendments allow for better financial oversight and the ability to attract high-quality auditors. Also, the revised reporting framework will reduce ambiguity in regulatory compliance, ensuring more predictable and efficient operations.
For Depositors:
The ability to nominate multiple individuals streamlines succession and reduces the potential for disputes over assets. There is an improved protection for unclaimed assets, like the new provisions for the transfer of unclaimed assets to the IEPF will ensure that dormant funds are safeguarded and can be easily claimed by rightful owners.
For Cooperative banks:
The extension of director tenures and allowance for cross-board membership will contribute to more stable and effective leadership in cooperative banks. Which will enhance governance mechanism making central & state cooperative bank collaboration more effective
For Investors:
The increase in the threshold for substantial interest reduces the compliance burden on smaller investors, making it easier for them to navigate regulatory requirements. As well as the asset management ensure that dormant investments are handled responsibly, benefiting investors who may have been unaware of their unclaimed funds.
Challenges
While the amendments present a significant step forwards, several challenges could arise during their implication:
- Banks will need to update their internal systems to accommodate new reporting requirements, nomination formats, and the management of unclaimed assets.
- The introduction of multiple nominees may lead to disputes over the division of assets, especially in cases where the nomination is not clear or valid.
- The success of these amendments depends on effective communication with banks and customers. Awareness campaigns will be essential to ensure smooth adoption and understanding of the new provisions.
A Way Forward
The Banking Laws (Amendment) Bill, 2024, represents a progressive overhaul of India’s banking regulatory framework. With its emphasis on improving governance, enhancing customer convenience, and modernizing financial practices, the Bill paves the way for a more transparent and resilient banking system. While the path to implementation will require careful planning and collaboration among all stakeholders, the amendments hold the potential to significantly enhance the operational efficiency of the banking sector and improve the customer experience.
As the Bill advances toward becoming law, it sets the stage for a more inclusive, dynamic, and forward-looking financial ecosystem in India. By addressing longstanding challenges and introducing forward-thinking reforms, the Banking Laws (Amendment) Bill, 2024, promises to be a transformative milestone for the country’s banking sector.