[Yash is a student at Hidayatullah National Law University.]
The Indian Parliament recently passed the Banking Laws (Amendment) Bill 2024 (Bill), potentially a move towards modernizing India’s banking industry. The Bill aims to strengthen banks’ governance, ease the interaction between customers and institutions, and ameliorate investors’ protection. The Bill is deemed to completely overhaul the banking industry as it amends the Reserve Bank of India (RBI) Act 1934, the Banking Regulation Act 1949, the State Bank of India Act 1955, and the Banking Companies (Acquisition and Transfer of Undertakings) Act 1970 and the Banking Companies (Acquisition and Transfer of Undertakings) Act 1980. Since the Bill brings staggering and reconditioning changes, it becomes imperative to discuss this elephant in the room.
Through the means of this article, the author delves into the intricacies of the Bill. First, the article discusses the status quo of the banking industry, the major provisions of the Bill, and the changes they seek to bring. Second, it highlights the shortcomings and challenges of the Bill. The article concludes with a way forward and the author’s suggestions to resolve the roadblocks.
Breaking the Bank: Navigating the Legal Implications of the 2024 Amendment
The Bill brings with it some major changes that are forecasted to remodify the Indian banking industry.
First, the Bill has relaxed the substantial interest and has given way more leeway by raising its threshold from INR 5,00,000 to INR 2,00,00,000. Since, the definition of “substantial interest” is enshrined under Section 5(n-e) of the Banking Regulation Act 1949, the amendment has been brought in this section.
Substantial interests assist in the functioning of the bank by placing restrictions on banking companies from granting advances and loans to any individual or entity where any director holds substantial interest. It also helps regulatory bodies such as the RBI in monitoring and controlling the influence of significant shareholders in banking institutions. Substantial interests also help in the practices of regulatory compliance. Under this, the banking companies are obliged to maintain records regarding substantial interests to comply with regulatory requirements. In light of these functions of substantial interest, the Bill is anticipated to attract more manpower into the Indian banking industry. This, in turn, would increase the diversity and inclusivity within the banks’ boards.
Second, the Bill mandates that there shall be 4 nominees for a bank account. This arrangement allows the family members or nominees to access the account funds once the account holder is dead avoiding the normal legal processes that consume time. It also avails account holders the opportunity to nominate individuals in a sequence or split the money in a specified proportion to the nominees. These nominees can be appointed simultaneously or successively. However, in the case of bank lockers, nominees can only be added successively.
The amendment which requires four nominees for a bank account will expose a huge social impact on the banking scenario of India. Since it eases the methods of transferring funds and enables nominees to avail the funds without lawyers taking a long time before clearing them; it makes banking safer for families and makes families trust banking institutions. It may help spur higher utilization of banking services and lead to even improved levels of financial access. In total, this reform is greatly in the interest of the account holders but it does come with certain expectations from the banking sector regarding the structural, functional, and communication changes necessary to make these accounts work.
Third, the Bill puts forth that the auditors, having the authority to receive the remuneration fixed by the RBI in consultation with the Central Government, under Section 41(2) of the State Bank of India Act 1955, must now receive remuneration as the State Bank may fix. Thus, it delegates the duty of the RBI to the State Bank.
Delegating the authority of fixing the remuneration to the State Bank may also help increase the operational efficiency of the banks and decrease the cumbersome time taken by approvals from the regulators. This flexibility means that the State Bank can pay its auditors according to the market conditions with the view of attracting qualified auditors and thus enhancing the quality of the audit. This is because this move empowers the institution and opens up the system for decentralization meaning that the various institutions would be more responsible for their undertakings. Finally, it may lead to quicker decision-making, efficiency and improvement in the feasibility of the Indian banking sector in a competitive environment.
Fourth, the Bill expands the scope of 'unclaimed assets' transferred to the Investor Education and Protection Fund. The concerned provision here is Section 38A(3) of the State Bank of India Act, which reads as “Any money transferred to the unpaid dividend account of the State Bank, in pursuance of this section which remains unpaid or unclaimed for a period of seven years from the date of such transfer shall be transferred by the State Bank to the Investor Education and Protection Fund”. The Bill amends this provision to widen the ambit of 'unclaimed assets' to include 'unclaimed shares' and any interest or redemption amount on bonds issued by the State Bank that remains unpaid or unclaimed for a period of seven years.
Unclaimed assets are those assets that have not been operated on by the owners for some time, depending on the legal prescription. Such assets may comprise bank balances, insurance policies, fixed deposits, dividends and shares, mutual funds, or retirement benefits. Unclaimed shares, on the other hand, are equity shares of a company owned by the shareholders but are not claimed at any one time for some reason(s). This may occur when shareholders do not take the necessary measures to claim dividends, respond to rights or bonus issues, or when their contact addresses are outdated so they do not receive notices from the company. The amendment brings clarity and checks corporate governance in the Indian banking sector by providing that any unclaimed shares and unpaid bond-related amounts shall be transferred to the Investor Education and Protection Fund. This action protects the public, improves the use of funds for investor education, and prevents abuse or misuse of unclaimed assets. It also extends the list of unclaimed assets which enhances the confidence of investors, fosters credibility in the financial institutions, and enhances conformity to best practices in the management of dormant financial resources internationally.
Thus, the Bill brings myriad amendments to the Indian banking industry, out of which we have discussed a few. This move by the Parliament is deemed to be a great action towards enhancing customer satisfaction by rationalizing transactions, improving bank board management through acquiring qualified directors and auditors, decreasing compliance costs, and increasing efficiency in the delivery of basic banking services. But with great actions comes great hurdles, therefore, it is imperative for us to discuss the roadblocks and plausible solutions that inadvertently creep into the Bill.
Concluding Remarks – Behind the Banking Bill: Risks, Reforms, and Legal Safeguards
While the Bill has been largely applauded, concerns persist over potential risks such as heightened cyber threats, emphasizing the need for strong cybersecurity measures. Banks must prioritize advanced security technologies and enforce stringent data protection policies to protect customer data. Moreover, there are other concerns over the Bill which are further discussed.
First, the amendment regarding raising the bar of 'substantial interest' to INR 2,00,00,000 may pose certain risks such as conflict of interest, insider trading, or lack of transparency in decision-making. By allowing large ownership stakes, can lead to the concentration of control, which is counterproductive for corporate governance.
To solve this quandary, stricter disclosure norms must be implemented which will guarantee the preservation of clear and public ownership structures. Independent board control might prevent undue influence, and improved auditing procedures would assist in identifying such abuses. Reporting to regulators would enhance transparency and would ensure officials do not abuse their powers to exploit the financial institutions.
Second, extending the number of nominees up to four per bank account may cause confusion or disagreement with the other family members in case the account holder’s wishes are not properly recorded. The flexibility in nominating simultaneously or successively could lead to conflict in the distribution of funds. Of course, the same rule restricting the list of nominees to the next in succession can reduce the choices of the account holders in the case of lockers. To overcome these problems, it becomes imperative for banks to ask for proper legal documentation from the account holders as well as the method to solve the conflict arising from the implementation of this kind of system. Also, although the amendment aims to avoid legal concerns in the first place, disagreements between nominees over distribution or succession may still occur resulting in such matters being managed within defined and more structured legal frameworks in respect of the banks. The operational challenges in putting a system that will be able to deal with multiple nominees, distribution ratio as well, and keep data privacy laws into consideration may be a challenge to banks which may need to upgrade their system, train their employees and educate their customers more. The difference that simultaneous nominees cannot be appointed for bank lockers may cause some customers to be dissatisfied, so the banks should clarify the information.
Third, delegating the authority of decision-making power over the auditors’ remuneration issues to the State Bank may compromise independence since auditors may be forced to tow the line of the institution that hired them. This could make the organization liable for conflicts of interest and decrease accountability. One possible approach would be to impose strict procedures and controls for the remuneration process, which would mean that these procedures are fair, non-discriminatory, and subject to external examination or review to safeguard auditor independence and credibility.
Fourth, extending the definition of ‘unclaimed assets’ to include unclaimed shares and bond interests could decrease the level of recognition and accountability pressures because certain assets might be transferred without more effort being made to track down the rightful owners. This could also reduce shareholders’ confidence in the management of their assets. One would suppose that the existing tracking and notifications could be made more stringent so that certain customers do not fail to receive the alerts regarding unclaimed balances. Further, even though we do not expect any difficulties to arise, occasional audits might also be helpful to ensure that all the attempts to get in touch with the owners are being made.
Additionally, the Bill should prioritize tackling the underlying economic challenges while fostering the growth of the banking sector towards enhanced financial stability. As the Indian banking landscape evolves, it is crucial to maintain a harmonious balance between innovation and regulation. This bill marks a pivotal move in that direction, and its execution will be keenly observed by both industry stakeholders and customers.
Therefore, it can be concluded that the Bill represents a nuanced legislative intervention, strategically balancing innovation and regulatory prudence. Its transformative potential hinges on meticulous implementation, judicious oversight, and a dynamic approach to addressing emergent challenges in India’s evolving financial ecosystem.
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