All You Need to Know About the New Banking Laws (Amendment) Bill, 2024

The Bill introduces amendments to the following laws: the Reserve Bank of India Act, 1934; the Banking Regulation Act, 1949; the State Bank of India Act, 1955; the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970; and the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1980.

Let's explore the key amendments to these Acts and their implications for depositors, locker holders, and investors at large.

Amendments to the RBI Act

The RBI Act mandates scheduled banks to maintain a specific average daily balance with the Reserve Bank of India (RBI) as cash reserves.

This balance is calculated based on the average of the closing balances held by banks at the end of each business day over a fortnight.

Previously, a "fortnight" spanned from Saturday to the second following Friday (inclusive of both days). The amendment alters this definition to two specific periods each month:

1. The 1st to the 15th day of each month, or

2. ​The 16th day to the last day of the month.

This change would allow the RBI to monitor and manage liquidity more effectively, contributing to overall economic stability.

For banks, the new definition would simplify calculating the Cash Reserve Ratio (CRR) as they can work within fixed timeframes rather than tracking changing schedules based on the traditional definition's start and end dates.

The reduced administrative complexity could potentially improve operational efficiency.

Amendments to the Banking Regulation Act

1. Increased in Permitted Nominees

The amendment allows bank account holder/s to designate up to 4 nominees (from 2 earlier), as per the percentage or proportion as specified by the account holder/s.

Depositor/s can choose between successive or simultaneous nominations, while locker holders are only permitted successive nominations.

The provision for up to 4 nominees shall provide more flexibility in nominating individuals who may be family members or dependents for respective accounts. This gives the account holder/s more choices to appoint nominees.

Further, to address the issue of the growing number of unclaimed deposits in the Depositor Education and Awareness (DEA) Fund, having more than one nominee shall help.

Here's what the types of nominations mean...

Successive nomination is a priority-based process where nominees are eligible in a specified order. All nominees are not eligible to receive the account proceeds at the same time.

If the first nominee is ineligible to receive the proceeds in case of the death of the account holder, the second nominee would be eligible, and so on.

A Simultaneous Nomination is where all nominees are eligible at the same time to share in the account holdings as specified by the deceased account holder.

For depositors, both nomination options offer flexibility, allowing them to provide for one or multiple individuals as nominees based on family dynamics and preferences.

In the case of lockers, on the other hand, only successive nomination is permitted. Previously only two nominees were permitted, but now up to 4 are allowed.

That said, given the complexities of successive nominations, a priority-based process could result in legal battles among the heir or loved ones for the physical valuables in the locker, making it impractical when there are multiple nominees.

2. 'Substantial Interest' In the Banking Company is Redefined

Under the Banking Regulation Act, substantial interest in a company refers to holding shares of over five lakh rupees or 10% of the paid-up capital of the company, whichever is less. This may be held by an individual, his spouse, or a minor child, either individually or collectively.

The threshold for 'substantial interest' for directorships has been increased to Rs 2 crore from Rs 5 lakh. The adjustment accounts for inflation and economic growth over time, as the original limit was set in 1968.

The revised threshold ensures that regulatory scrutiny focuses on individuals or entities with significant financial stakes in a banking company, reducing unnecessary regulatory oversight on the smaller stakeholders.

It can ultimately lead to better governance, transparency, and accountability in India's banking sector.

3. Change in Tenure of Directors in Cooperative Banks

The tenure for directors (excluding the chairperson and full-time directors) in cooperative banks has been extended from 8 to 10 years.

Additionally, a director of a Central Cooperative Bank is now permitted to serve on the board of a State Cooperative Bank.

A longer tenure can provide more stability and allow directors to spend more time implementing their long-term strategies, which can be critical for the sound management of cooperative banks.

Allowing board overlap can encourage stronger coordination and alignment of policies between the central and state levels, improving the governance framework. Since cooperative banks play a vital role in providing financial services to rural and semi-urban areas, improved governance can help serve these communities better.

Amendments to the State Bank of India and Banking Companies (1970 & 1980) Acts

Previously, any unpaid or unclaimed dividend was moved to a specific unpaid dividend account. If they remained in this account for 7 years, the money was transferred to the Investor Education and Protection Fund (IEPF). This government-established fund is designed to protect the interests of investors and promote financial literacy. It ensures unclaimed or unpaid financial assets are safeguarded from mismanagement within banks, while also supporting awareness initiatives about investments.

The new Bill expands the scope of assets that can be transferred to the IEPF:

• Shares: Any shares for which dividends have not been paid or claimed for 7 years.

• Bonds: Any interest or redemption amounts for bonds that remain unpaid or unclaimed for 7 years.

So, now any person whose shares or unclaimed/ unpaid money is transferred to IEPF can claim the transfer or refund.

This reduces the risk of asset loss and increases investor confidence. Expanding the scope also ensures that all unclaimed financial assets, not just dividends on shares, are protected and managed under the IEPF framework.

Remuneration for Statutory Auditors

Historically the RBI, in consultation with the central government, fixed the remuneration for auditors in banks. This approach was designed to maintain central oversight.

However, now with the passage of this Bill, there is a transfer of the authority for determining auditor remuneration to individual banks. In other words, the new Bill empowers banks to decide the remuneration of their auditors.

This increased autonomy shall allow banks to align audit costs. Competitive remuneration may help banks attract skilled and experienced auditors, improving the quality of audits, reporting and disclosures. This, in turn, can help banks reduce financial irregularities and make depositors and investors at large, make an informed choice.

How Has the Opposition Reacted?

"The proposed amendments will strengthen governance in the banking sector and enhance customer convenience with respect to nomination and protection of investors," said Finance Minister, Ms Nirmala Sitharaman. The Bill is now passed in the lower house of the Parliament.

However, the Bill faced criticism from opposition parties. For instance, TMC MP Kalyan Banerjee described the Bill as a "donkey passage towards privatisation of the Indian banking sector," suggesting that the amendments could reduce the government's stake in public sector banks, potentially paving the way for increased private ownership.

He also raised concerns about cybersecurity, which were seconded by Congress MP, Karti Chidambaram. A government response has been demanded on the measures being taken to address the rising cases of cyber fraud.

To Sum-up

The Banking Laws (Amendment) Bill, 2024, aims to enhance the governance, operational efficiency, and customer experience in the Indian banking system.

Depositors, locker holders, and investors potentially stand to benefit from key provisions such as increased nominee allowance and expanded scope for unclaimed assets.

In the case of unclaimed assets, however, there is a need for education and awareness to reduce unclaimed assets.

Similarly, increasing nomination does not necessarily make the transmission of financial assets and valuables in the locker automatic and easy for heirs and/or loved ones. Nominees could lock horns over their share and legal battles cannot be ruled out.

Certain changes such as increasing the tenure of directors of cooperative banks, redefining 'substantial interest', and allowing banks to decide the remuneration of auditors, are welcome moves that shall help add to the stability and robustness of the banking sector.

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MITALI DHOKE is a Research Analyst at PersonalFN. She is an MBA (Finance) and a post-graduate in commerce (M. Com). She focuses primarily on covering articles around mutual funds including NFOs, financial planning and fixed-income products. Mitali holds an overall experience of 4 years in the financial services industry.
She also actively contributes towards content creation for PersonalFN’s social media platforms in the endeavour to educate investors and enhance their financial knowledge.
 

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