[Inika is a student at Rajiv Gandhi National University of Law.]
Almost 90% (p. A69) of the Indian adult population now owns a bank account associated with a formal financial institution, placing banking laws on the central stage for key economic decision-making in the country. The recent development in Indian banking laws came with the passing of the Banking Laws (Amendment) Bill 2024 (Bill) in the Lok Sabha on 3 December 2024. The Bill primarily aims to modernize India's banking framework by enhancing governance and promoting depositor convenience to match global standards.
The key amendments introduced in the banking sector by the Bill include allowing up to four nominees for bank accounts with flexible succession options, increasing the threshold for "substantial interest" in bank governance from INR 5 lakhs to INR 2 crores, and redefining “fortnight” in context to cash reserve calculation and reporting dates for compliance. It also proposes extending director tenure in cooperative banks from eight to ten years, permitting directors of Central Cooperative Banks to serve on State Cooperative Bank boards, and empowering banks to determine auditor remuneration. The Bill additionally broadens the scope of unclaimed financial assets transferred to the Investor Education and Protection Fund (IEPF), enhancing depositor protection and financial accountability.
The Bill has its fair share of praises and criticisms, outlined and analyzed in this blog. The article outlines the key differences between the present law and the amendments proposed in the Bill and analyses their impact on the banking operations in the country in light of the Finance Ministry’s intention. It then discusses the major lacunae of the Bill by critically evaluating the prospective changes. Lastly, the article maps a way forward for the banking laws in India to match the global banking standard and explores ways to enhance the provisions.
Comparative Analysis of the Existing Law and the Proposed Amendments
The Law Affected | Existing Law | Proposed Amendments in the Bill |
Section 42 of the Reserve Bank of India (RBI) Act 1934 (Definition of Fortnight for Cash Reserves) | Under the RBI Act 1934 and Banking Regulation Act 1949, a fortnight is defined from Saturday to the second following Friday. | The definition of fortnight changes to the period from: (i) the 1st to the 15th of each month, and (ii) the 16th to the last day of the month. |
Section 10A of the Banking Regulation Act 1949 (Tenure of Directors in Cooperative Banks) | Under the Banking Regulation Act 1949, a director (except the chairman or whole-time director) could hold office for a maximum of 8 years consecutively. | The tenure is increased to 10 years for directors in cooperative banks, aligning with the Constitution (Ninety-Seventh Amendment) Act 2011. |
Section 16 of the Banking Regulation Act 1949 (Prohibition on Common Directors in Cooperative Banks) | The Banking Regulation Act, 1949 prohibits a director from serving on the board of another bank, except for those appointed by the RBI. | The Bill extends the exemption to include directors of central cooperative banks who may serve on the board of a state cooperative bank in which they are members. |
Section 5 of the Banking Regulation Act 1949 (Substantial Interest in a Company) | The threshold for substantial interest, as defined under the Banking Regulation Act 1949, is shares worth over INR 5 lakhs or 10% of paid-up capital, whichever is less. | The threshold for substantial interest is increased to INR 2 crores, and the central government has the power to alter the threshold via notification. |
Section 45ZA of the Banking Regulation Act 1949 (Nomination for Bank Accounts and Other Assets) | The Banking Regulation Act 1949 allowed a single or joint deposit holder to appoint a nominee for their deposits and articles held in custody of the bank. | The Bill allows up to four nominees for deposits and other bank assets. Nominees can be appointed successively or simultaneously, with the nomination effective in a declared proportion for simultaneous nominations. Successive nominations will prioritize the first nominee. |
Section 38A of the State Bank of India Act 1955 (Settlement of Unclaimed Amounts) | Under the State Bank of India Act 1955, and the Banking Companies (Acquisition and Transfer of Undertakings) Acts of 1970 and 1980, unclaimed dividends are transferred to the Unpaid Dividend Account and then to the IEPF after 7 years. | The Bill expands the scope of unclaimed amounts transferred to the IEPF to include: (i) unpaid dividends for shares unclaimed for 7 years, and (ii) unpaid interest or redemption amounts on bonds for 7 years. |
Section 41 of the State Bank of India Act 1955 (Remuneration of Auditors) | Under the Banking Regulation Act 1949, the RBI, in consultation with the central government, fixed the remuneration of bank auditors. | The Bill allows banks to independently decide the remuneration of their auditors, providing greater autonomy. |
The Bill will affect the definition of a “fortnight.” From the standard Saturday-to-Friday period to now more organised monthly periods, the amendment could result in more regular and predictable cash reserve maintenance for scheduled and non-scheduled banks, aligning the banking sector’s operational timeline with the monthly calendar and reducing system-related administrative complexities. Furthermore, the cooperative bank directors’ tenure extension from eight to ten years is expected to enhance continuity and stability in governance. The development is expected to harmonize governance in banking institutions with the provisions of the Constitution (Ninety-Seventh Amendment) Act 2011, further fostering stability in long-term strategies and policies.
Similarly, the flexibility introduced by allowing central cooperative bank directors to serve on the board of state cooperative banks may enhance political coordination among the states but can also lead to centralism, undermining the regional diversity and autonomy of state banks. Increasing the bar for significant interest from INR 5 lakhs to INR 2 crores would increase the number of potential candidates for bank directorship, but it finds itself inviting risks from larger shareholders exercising more influence, thus affecting corporate governance standards. The amendment should preserve the operational autonomy and governance standards in banks. This also reflects the changes in the financial sector and the concomitant need for reforms that are in tune with the present realities of economic situations like inflation. The change facilitates greater participation of experienced individuals in bank governance, promoting a more professional and diversified leadership in banking institutions.
The major change involves allowing up to four nominees per account and simultaneous or successive nominations. This radically increases the flexibility with which assets can be disposed of on the death of the account holder. Assisted by this provision, succession planning takes another leap in ensuring asset distribution remains equitable and efficient. Not only does this align with the right to property as guaranteed under Article 300A of the Constitution of India, but it also assures financial security for heirs without any procedural delays. This would, however, complicate the legal proceedings in inheritance cases as it would need a lot of documentation, formalities and regulations to avoid disputes among nominees and legal heirs. The amendment to Section 38A of the State Bank of India Act 1955, relates to the unpaid interest and amounts of redeemed bonds being transferred as unclaimed funds to the IEPF that simply ensure a greater supply of available money for consumer protection but complicate their tracking and administration. This underscores the kind of emphasis that the government has laid on consumer education and consumer rights.
Lastly, the promotion of operational flexibility is further boosted by allowing banks to decide their auditor remuneration by amending section 41 of the abovementioned statute. This is likely to encourage banks to outsource auditing by highly qualified auditing firms, thereby allowing comprehensive financial scrutiny. The provision, thus, underpins the commitment of the legislature to encourage accountability and transparency in the system, as founded in Mr Harish Kumar TK v. National Financial Reporting Authority (2023) (¶85), which emphasizes the need for audits to be independent for financial integrity. The direct linkages of the financial institutions they audit with the remuneration raise serious issues regarding auditor independence and objectivity, as contemplated by this Bill.
The Bill amends several key areas of banking law, inter alia, the nomination processes and reporting requirements. These changes attempt to put the Indian banking sector at par with international standards for future expectations. Changes suggested by the Bill, like simultaneous nominations and simplification and acceleration of the process of succession, are all depositor-centric. Such developments serve “customer convenience” and express the intent of the government, as stated by Finance Minister Nirmala Sitharaman.
While collectively aiming to modernize the banking laws, these amendments introduce certain risks and operational complexities that warrant careful regulatory oversight and clear implementation guidelines to meet its objectives. A critical analysis of the latest proposals in the next part elucidates the lacunae better.
Critical Analysis of the Bill
Although the Bill attempts to better India’s banking framework and enhance governance, it raises several concerns that merit critical legal and operational examination.
Under the new definition of a fortnight, which has changed the cash reserve maintenance period from Saturday to Friday to two bi-monthly segments (1st-15th and 16th-end of the month), banks could incur inflexibility on their dynamic liquidity needs in events such as the end of a fiscal year and during festive seasons (p. 78-79) where cash flows can be much more volatile. While the amendment aligns the banking sector’s reporting timelines with the calendar, this lack of flexibility could impose undue operational challenges, especially for smaller banks with limited resources.
The cooperative banks’ directors’ tenure extension from eight to ten years presents another problem of risking fostering entrenchment and diminishing the infusion of fresh perspectives in bank governance by exacerbating issues of complacency. Contrasting its broader objectives of ensuring transparent governance in cooperative banking, this change may lead to a lack of accountability and monotony in the system.
On the principles of conflict of interest and decentralization, the provision of a common directorship between central and state cooperative banks will weaken such principle or worse demolish it. The desire for commonality will be construed to promote coordination that would endanger the independence and diversity of state-level institutions by consolidating control in fewer hands. This would, in effect, restrict the independence of state-level cooperative institutions by likely lowering the regional representation and deterring the unique objectives of state cooperatives, creating openings for undue influence and thereby compromising independent banking. Adding to the issue of centralisation, increasing the threshold for substantial interest in a company from INR 5 lakhs to INR 2 crores may dilute safeguards against concentration of power. People with greater financial stakes will directly be put into board directorships, which would take the balance of governance power toward the interest groups and eventually impair the objectivity required for sound decision-making in banks. The lack of strong oversight and control frameworks only makes this worse.
Broadening the nomination regime, on the one hand, will facilitate flexibility while raising an intelligible complicated situation for inheritance cases on the other. Having, say, 4 nominees with simultaneous or successive nominations would further blur the distinction between claims among legal heirs and nominees, especially where there are no formal documents or procedural clarity- whereas the Bill also raises the question of whether or not these nominees act purely as custodians or on behalf of the account funds as beneficiaries as the increase is bound to add on the number of cases in the judiciary on inheritance matters.
Additionally, the empowerment of banks to determine the remuneration payable to auditors would indeed enable banks to thereby hazard the neutrality and independence of statutory audits. This being the case, the setting of remuneration whereby banks hold themselves free to determine the amount of fee payable to the auditors endangers the objectivity of an audit, which stands very crucial to the accountability and financial integrity of the sector. The provision threatens auditor independence, bringing situations where auditors give in to client relationships rather than thorough scrutiny.
Therefore, it is fair to say that the Bill seeks urgent reform; however, it does carry forward some considerable gaps in terms of checks and balances against misuses as well as operational complexities. These gaps, of course, need careful recalibration to strike a balance between innovation and responsibility and ensure periodic stability, transparency, and equity for all its stakeholders.
Recommendations to Enhance the Bill
Introduce comprehensive cybersecurity provisions
The legislation should impose stringent cybersecurity regulations on banks concerning defence mechanisms against data piracy and financial fraud for clients. Given the widening scope of digital banking, developments inspired by laws like the General Data Protection Regulation would be a relief to the country concerning stringent statutory data protection. Additionally, the Supreme Court stressed the importance of transparency in banking in the context of the unlawful hoarding of confidential information in Reserve Bank of India v. Jayantilal N Mistry (2015) (¶77). The amendment should be coupled with the provision of periodic cyber audits and penalties for lapse under this head.
Strengthen oversight on auditor independence
Giving banks the power to decide the remuneration of auditors would undermine the independence of auditors. Therefore, the enabling statutory provisions of prior external approvals by the RBI or any other statutory authority in such matters may be required related to appointments and remuneration. The Supreme Court laid much stress, as per Sahara India Real Estate Corporation v. Securities and Exchange Board of India (2012) (¶103), on the need for an independent audit to maintain financial integrity. Such legislation could also be demanding disclosures of any financial or personal relationships between banks and auditors for further scrutiny.
Increase accountability in substantial interest provisions
The increased high threshold of "substantial interest" should be satisfied by strong disclosure requirements for individual holders of such interests. The law should seek to ensure transparency by expressly requiring public declarations for the purposes of reviewing conflicts of interest, thereby serving to curtail collusion or corruption.
Conclusion
The Banking Laws (Amendment) Bill 2024 is a defining juncture in shaping India's banking landscape in global terms. The Bill amends the operational efficiency and convenience-to-depositors ends it seeks to achieve through several reforms in governance, multiple nominations and reporting requirements, and the depositors' protection structure. Notably, however, while the rights of depositors are further enhanced, the Bill raises concerns about nurturing avenues for serious threats, like dilution of governance safeguards, conflicts, and the reduced independence of statutory auditors. Such amendments, particularly increases of tenure, minimum thresholds for substantial interests, and increased powers in director nominations, necessitate a strong innovation accountability and transparency counterpart.
Additional provisions should also be included in the bill, which should talk about improved cybersecurity, independence of auditors, and greater disclosures for holders of significant interests to cure the Bill's deficiencies. These provisions, when included in the laws with good regulatory oversight, will effectively avoid operational and legal hitches which naturally accompany reforms. Result— reforms that build a banking ecosystem effective and efficient in accountability and equity without fracturing interests. Thus, with simple target recalibrations, this Bill can make the Indian banking sector a resilient and competitive one on the global front in setting precedents for sustainable financial reforms.
I am a 12th grader and for me this report was simple it was so perfectly portrayed and the use of language was clear leaving no ambiguity. A good article I must say.