Introduction
The Banking Laws (Amendment) Bill 2024 ('Bill') was passed in Lok Sabha on December 3, 2024. The Bill will now be tabled before the Rajya Sabha for further discussions and its approval.
The Bill aims to bring amendments across (i) Reserve Bank of India Act, 1934 (the 'RBI Act'), (ii) Banking Regulation Act, 1949 ('Banking Regulation Act'), (iii) State Bank of India Act, 1955 ('State Bank of India Act'), (iv) Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970, and (v) Banking Companies (Acquisition and Transfer of Undertakings) Act, 1980.
The key objectives of the Bill are to improve governance, ensure depositor and investor protection, simplify banking operations by, inter alia, providing consistency in reporting by banks to the Reserve Bank of India (the 'RBI'), and enhance customer convenience.
Proposed key amendments
The following are the key changes proposed in the Bill:
- Definition of 'fortnight': The RBI
Act, inter alia, provides that every scheduled bank must maintain
an average daily balance (i.e. an average of the balances held at
the close of business on each day of a fortnight) as cash
reserve with RBI.
The current definition of the term 'fortnight' under the RBI Act as well as the Banking Regulation Act, defines it as the period from Saturday to the second following Friday (inclusive of both days). The Bill now proposes, that the definition of 'fortnight' under both these statutes be amended to mean the period from: (i) the first day to the fifteenth day of each calendar month, or (ii) sixteenth day to the last day of each calendar month (both days inclusive). The simultaneous amendment of this definition under both the statutes is mandated in order to ensure the consistency of the reporting requirements.
- Prohibition on common directors: Under the existing framework as per Banking Regulation Act, a director on the board of a bank is prohibited from serving on the board of another bank. However, this rule does not apply to directors appointed by the RBI. The Bill has proposed to extend this exemption to the director of a central cooperative bank. This proposed exemption shall apply, where the director of a central cooperative bank is elected to the board of a state cooperative bank in which he is a member.
- Substantial Interest: Under the current
Banking Regulation Act, the term 'substantial interest' in
relation to a company is defined as the holding of a beneficial
interest by an individual (or spouse or minor child) in the shares
of a company, the amount paid-up on which exceeds Rupees Five Lakhs
or ten per cent of the paid-up capital of the company, whichever is
less. The Bill has proposed to re-define the term 'substantial
interest' in relation to a company by increasing the threshold
for shareholding, from Rupees five lakhs to Rupees two crores or an
amount as may be notified by the Central Government.
The threshold for shareholding of a beneficial interest by an individual, etc., of Rupees five lakhs has not been revised since 1968. Under the existing framework, a banking company is restricted to: (i) appoint a chairman on a whole-time basis or a managing director of such banking company if he has substantial interest in any other company or firm[1]; (ii) have a member of Board of Directors that has a substantial interest in any company or firm[2]. Further, a banking company shall not grant any loan or advance to, or on behalf of any company, or its subsidiary, or its holding company in which the director of such banking company holds a substantial interest[3]. Thus, the proposed amendment of increasing the threshold of substantial interest may ease the aforementioned restrictions.
- Nomination: The current regime under the
Banking Regulation Act, allows deposit holders or persons leaving
articles in safe custody with the banking company or person hiring
the safety lockers, to appoint only one nominee.
The number of nominees in case of any person(s): (i) holding deposit with a banking company; or (ii) leaving any article in safe custody with a banking company; or (iii) hiring a locker from a banking company; is proposed to be increased from one individual to four. It can be a simultaneous nominee or a successive nominee.
The detailed overview of the proposed amendments related to such nomination is as follows:- Section 45ZA of the Banking Regulation Act, provides for
nomination for payment of depositors' money. The Bill has
proposed to insert the following sub-section, to allow successive
and simultaneous nomination that may be made by the depositor:
- Where the nomination is made successively in favour of more than one person, it shall be effective in favour of only one person and in the order of priority as specified in Section 45ZG of the Banking Regulation Act.
- Where the nomination is made simultaneously in favour of more
than one person, the nomination shall be effective in favour of all
such persons and in its declared proportion on the following terms
and conditions:
- the nomination shall not be made in favour of more than four persons;
- the nomination shall explicitly state the proportion of amount of deposit in percentage in favour of each nominee;
- the nomination shall be made in respect of the whole amount of deposit; and
- if any nominee dies before receiving deposit, the nomination of
such nominee shall become ineffective and such amount of deposit
nominated in favour of deceased nominee shall be treated as if
nomination had not been made in respect of that portion of
deposit
All simultaneous nominations shall be in terms and conditions specified above. However, if not complied with, the nomination will be treated as if nomination had not been made by the depositor.
- Section 45ZC of the Banking Regulation Act provides for the nomination for return of articles kept in safe custody with the banking company. The Bill proposes to allow nomination of four persons successively.
- Section 45ZE of the Banking Regulation Act provides for the nomination in case of hiring of lockers. The Bill proposes that the locker hirer may nominate upto four persons successively.
- The Bill has proposed to insert Section 45ZG to the Banking
Regulation Act, which provides that, where the nomination is made
in favour of more than one person successively under sub-section
(1) of section 45ZA or sub-section (1) of section 45ZC or
sub-section (1) of section 45ZE, the nomination shall be effective
only in favour of one person in the following order of
priority:
- nomination of the first nominee shall be effective if that nominee survives the person who made the nomination;
- nomination of the second nominee shall become effective only after the death of the first nominee;
- nomination of any nominee lower in the order of nomination shall become effective only after the death of all the nominees whose names are higher in the order of nomination.
- Section 45ZA of the Banking Regulation Act, provides for
nomination for payment of depositors' money. The Bill has
proposed to insert the following sub-section, to allow successive
and simultaneous nomination that may be made by the depositor:
- Unclaimed amounts: The Bill has proposed to
broaden the scope of the transfer of unpaid or unclaimed dividend,
that can be transferred to the Investor Education and Protection
Fund ('IEPF').
In accordance with the current provisions of the State Bank of India Act, any money transferred to an unpaid dividend account of the State Bank, 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 IEPF.
The ambit of the above provision is proposed to be widened under the Bill. The Bill proposes that the State Bank of India shall transfer, in accordance with the rules made under section 124 of the Companies Act, 2013, to IEPF established under section 125 of the Companies Act, 2013, the following :
- Any money which remains unpaid or unclaimed for a period of seven years from the date of its transfer in the Unpaid Dividend Account of the State Bank;
- All shares in respect of which dividend has not been paid or claimed for a period of seven consecutive years, along with a statement thereof containing the details specified in the said rules;
- Any interest or redemption amount upon any bond issued by the State Bank which remains unpaid or unclaimed for a period of seven years from the date such interest or such redemption amount became due for payment.
Thus, the proposed amendment intends to protect an investor's interest by giving such investor an option to access his funds deposited with IEPF, which was earlier not available.
In addition to the above, the Bill has proposed amendment of extant norm of increasing the tenure of a bank director from eight to ten years for co-operative banks, and has provided discretion to public sector banks to decide the remuneration of their auditors, which is currently fixed by RBI in consultation with Central Government.
Our analysis
The proposed amendment to banking laws are set to bring significant benefits for businesses by improving governance, simplifying compliance, and offering greater flexibility in financial asset management.
One of the key amendments is the redefinition of 'substantial interest' in a banking company, raising the threshold from rupees five lakh to two crore. It is pertinent to note, that the threshold of rupees five lakhs has not been revised since 1968. Keeping in mind the current economic growth of India as compared to 1968, this threshold should have been revised earlier. Further, the proposed revision can be more pragmatic if this threshold is linked to the networth of the concerned lender bank, e.g. if the networth of the concerned bank is upto X, then the threshold for substantial interest of the director can be rupees two crores, and if the networth of the concerned bank is between X and Y then the threshold for substantial interest of the director can be an amount greater than rupees two crores, and so on.
Nonetheless, the current proposed revision is a welcome change from the threshold of rupees five lakhs. This change would ensure that only those with significant financial stakes face stricter regulatory scrutiny. By easing compliance requirements for smaller stakeholders, this change makes governance more practical and encourages greater investment, attracting long-term capital into the banking sector.
The Bill also extends the tenure of cooperative bank directors (excluding chairpersons and whole-time directors) from eight to ten years. This move promotes leadership stability, ensuring more consistent decision-making and long-term strategic planning. For businesses that rely on cooperative banks for financing, this translates to a more predictable and stable banking environment.
The amendment allows deposit holders, those using bank lockers, and individuals storing valuables in bank custody to nominate up to four beneficiaries. This change ensures smoother succession planning and better risk management, reducing legal complexities in asset distribution. It provides greater control over corporate assets, making financial planning more efficient and secure. Overall, these reforms aim to create a more business-friendly banking sector.
Footnotes
1. Section 10-B (4) of the Banking Regulation Act, 1949
2. Section 10-A (2) (b) of the Banking Regulation Act, 1949
3. Section 20 (b) of the Banking Regulation Act, 1949
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