Banking Laws (Amendment) Bill, 2024: A Transformative Leap in Indian Banking

Posted On - 19 December, 2024 • By - Siddartha Karnani

Introduction

On December 3, 2024, the Banking Laws (Amendment) Bill, 2024 was passed by the Lok Sabha during the winter session of Parliament. This pivotal legislation introduces significant changes to existing banking laws, aiming to strengthen governance, enhance regulatory compliance, and improve customer convenience in India’s banking sector.

Introduced by Finance Minister Nirmala Sitharaman, the Bill proposes amendments to certain key acts governing banking operations, updating long-standing provisions to reflect current economic and regulatory requirements.

Key Features of the Banking Laws (Amendment) Bill, 2024

1. Nomination Reforms: Up to Four Nominees

The Bill allows bank account holders to nominate up to four individuals for their accounts and fixed deposits, offering flexibility through:

  • Successive nominations: Applicable to lockers and safe custody articles, ensuring smooth succession when a primary nominee is unavailable.
  • Simultaneous nominations: Enables distribution among multiple nominees with specified shares, simplifying inheritance processes.

This progressive change addresses the issue of unclaimed deposits, offering depositors control and clarity in their succession planning.

2. Redefinition of Substantial Interest

To modernize governance standards, the Bill raises the threshold for “substantial interest” under the Banking Regulation Act, 1949 (BR Act):

  • The cap has been increased from ₹5 lakh to ₹2 crore, considering inflation and current market values.
  • The earlier limit, set six decades ago, no longer aligned with today’s economic realities.

This amendment strengthens accountability while fostering inclusivity in directorship roles.

3. Governance Changes in Cooperative Banks

The Bill introduces several reforms aimed at improving the functioning of cooperative banks:

  • Director Tenure: The tenure of directors, excluding chairpersons and whole-time directors, is extended from 8 years to 10 years, aligning with the Constitution (Ninety-Seventh Amendment) Act, 2011.
  • Dual Directorships: Directors of Central Cooperative Banks are now permitted to serve on the boards of State Cooperative Banks, promoting synergy and governance efficiency.

These changes aim to bolster the governance framework of cooperative banks, which play a critical role in rural and semi-urban banking.

4. Revised Reporting and Compliance Dates

The Bill redefines reporting timelines for banks to enhance regulatory compliance:

  • Banks must now report on the 15th and last day of every month, replacing the earlier practice of reporting on the second and fourth Fridays.

This adjustment ensures consistency and alignment with modern banking operations, facilitating better oversight by the Reserve Bank of India (RBI).

5. Auditor Remuneration

Granting greater operational freedom, public sector banks are now authorized to determine the remuneration of their statutory auditors. This move enhances financial autonomy and aligns with evolving corporate governance standards.

6. Investor Protection through the IEPF

To safeguard investor interests, the Bill proposes transferring unclaimed dividends, shares, and interest/redemption amounts to the Investor Education and Protection Fund (IEPF).

  • Depositors can claim refunds or transfers from the IEPF, ensuring accessibility and transparency in handling unclaimed funds.

Additional Reforms and Their Implications

  1. Locker and Safe Custody Reforms: The limitation of successive nominations for lockers and articles ensures a streamlined process, reducing legal disputes and complexities for heirs.
  2. Professionalization of Banking: Finance Minister Sitharaman emphasized that Indian banks are professionally managed and financially robust, setting a global example of stability. The Bill further entrenches these standards.
  3. Consistency in Governance: By aligning cooperative banking provisions with constitutional amendments, the Bill ensures legal uniformity and strengthens the cooperative banking ecosystem.
  4. Simplified Compliance Processes: The updated reporting standards and clearer succession frameworks reflect a regulatory shift toward simplicity and efficiency.

Challenges and Criticisms

While the Bill has been widely praised, some concerns merit attention:

  • Implementation Hurdles: Adapting to new nomination systems and reporting standards may require significant technological and procedural adjustments by banks.
  • Auditor Independence: Critics argue that granting banks discretion over auditor remuneration could undermine auditor impartiality.

Conclusion: A New Era in Indian Banking

The Banking Laws (Amendment) Bill, 2024 marks a transformative shift in India’s financial sector. By addressing key areas such as governance, reporting, customer convenience, and investor protection, the Bill positions Indian banks to navigate modern challenges effectively. As Finance Minister Sitharaman highlighted, the resilience of Indian banks compared to global counterparts is a testament to careful regulatory oversight and strategic governance. This Bill, poised to be considered in the Rajya Sabha, is not just a legislative milestone but a significant step towards aligning India’s banking framework with global best practices. Through this forward-thinking legislation, India reaffirms its commitment to fostering a robust, transparent, and inclusive banking sector capable of supporting the nation’s ambitious economic goals.

King Stubb & Kasiva,
Advocates & Attorneys

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