The Banking Laws (Amendment) Bill, 2024, introduced in the Lok Sabha on August 9, 2024, proposes significant changes to modernize India’s banking framework. It aims to amend several critical banking statutes, namely:
- Reserve Bank of India (RBI) Act, 1934
- Banking Regulation Act, 1949
- State Bank of India Act, 1955
- Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970
- Banking Companies (Acquisition and Transfer of Undertakings) Act, 1980
These amendments address issues related to cash reserves, governance, shareholder interest, unclaimed funds, and auditor remuneration. Below is a comprehensive discussion of the changes proposed by the Bill.
1. Redefinition of Fortnight for Cash Reserves
Under the RBI Act, scheduled banks are required to maintain a certain level of average daily balance as cash reserves with the RBI. This balance is determined based on the average of balances held by banks at the close of business each day during a fortnight, traditionally defined as Saturday to the second following Friday (inclusive).
The Bill redefines a fortnight as:
- The first day to the fifteenth day of each month, and
- The sixteenth day to the last day of each month.
This redefinition also applies to non-scheduled banks under the Banking Regulation Act, which governs their cash reserve requirements. This change simplifies the monitoring and compliance process for both banks and regulators.
2. Extended Tenure for Directors of Co-operative Banks
The Banking Regulation Act currently limits the tenure of bank directors (excluding chairpersons and whole-time directors) to eight consecutive years. The Bill proposes extending this tenure to 10 consecutive years for directors of co-operative banks.
This change provides greater flexibility in governance while ensuring continuity in leadership for co-operative banking institutions.
3. Exemption for Common Directors in Co-operative Banks
Existing laws prohibit a director on a bank’s board from serving simultaneously on the board of another bank, except for directors appointed by the RBI. The Bill extends this exemption to directors of central co-operative banks when they are elected to the boards of state co-operative banks where they hold membership.
This amendment fosters better collaboration and governance within the co-operative banking structure by allowing experienced directors to contribute to multiple related entities.
4. Revised Definition of Substantial Interest
The Banking Regulation Act defines substantial interest in a company as owning shares exceeding ₹5 lakh or 10% of the paid-up capital, whichever is lower. This threshold has become outdated.
The Bill increases the threshold to ₹2 crore. Furthermore, it empowers the central government to revise this amount through a notification, ensuring flexibility to adjust to economic and financial trends.
5. Nomination Provisions
The current framework allows single or joint depositors to appoint a single nominee for deposits, lockers, or items in a bank’s custody. The nominee has the right to access these assets upon the death of the depositor.
The Bill enhances these provisions by allowing:
- Up to four nominees for deposits, lockers, and other custodial items.
- Deposits to have nominees appointed either simultaneously (with a declared proportion) or successively (priority determined by order of nomination).
- For lockers and custodial items, nominations can be made only successively.
This amendment adds flexibility for depositors to distribute their assets more equitably among multiple beneficiaries.
6. Settlement of Unclaimed Funds
Under the State Bank of India Act and the Banking Companies Acts of 1970 and 1980, unpaid or unclaimed dividends are transferred to an unpaid dividend account. If these remain unclaimed for seven years, they are moved to the Investor Education and Protection Fund (IEPF).
The Bill broadens the scope of funds transferable to the IEPF by including:
- Shares where dividends remain unpaid for seven consecutive years.
- Unpaid interest or redemption amounts on bonds for seven years.
This ensures that dormant or unclaimed financial assets are used for public education and investor awareness. Individuals, however, retain the right to claim refunds for their transferred shares or funds.
7. Auditor Remuneration
Currently, the RBI, in consultation with the central government, determines the remuneration of bank auditors. The Bill shifts this responsibility to banks, empowering them to decide auditor remuneration independently.
This amendment strengthens the autonomy of banks in financial decision-making while aligning auditing processes with the bank’s operational needs.
Significance of the Amendments
The Banking Laws (Amendment) Bill, 2024, reflects a concerted effort to streamline banking regulations, improve governance, and align laws with current economic realities. The changes:
- Enhance regulatory clarity and simplify compliance.
- Strengthen governance in co-operative banks.
- Modernize thresholds for shareholder interest.
- Improve asset management for unclaimed funds.
- Grant autonomy to banks in financial management.
This progressive legislation aims to address long-standing gaps in the banking sector while promoting efficiency, transparency, and stakeholder inclusivity.
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