INTRODUCTION
The Indian banking sector is paving its way to transformation through amendments reforms and policy. The Banking Law Amendment Bill and the recent Union Budget 2025 are the two recent aspects that have brought significant changes that will improve the efficiency of the banking sector. Banking laws are facing many hurdles such as Non-Performing Assets (NPA), digital disruptions, and financial inclusion gaps so there was a need for strong governance and policy mechanisms.
The Bill was a game changer as it brought significant changes with an aim to modernize the banking sector through amendments. The economic implications of the Bill are in its increasing potential impact on financial stability, credit growth, and investor confidence. The main objective is to increase the efficiency of the banks, attract private investment, and make the banks customer-friendly.
The Union Budget plays an important role in setting an approach to the upcoming year. Meanwhile, there was an absence of much-anticipated changes in the Budget 2025 but there were some significant changes in the Budget such as tax reforms, credit enhancement measures, and the role of foreign investment which was expanded. Because of these changes, the banking sector is ongoing changes with a new stage of growth and inclusion financially with an investment-driven approach which will make the financial ecosystem stronger and more resilient.
BANKING LAWS (AMENDMENT) BILL, 2024
The Parliament recently passed the Banking Laws (Amendment) Bill, 2024 on December 3, 2024, which aims to strengthen governance and enhance efficiency in the banking sector easing customer convenience also it strengthens regulatory oversight which helps curb financial mismanagement and brings stability. The bill proposed to reform India's banking system by introducing changes to the Reserve Bank of India, 1934, Banking Regulation Act, 1949, State Bank of India, 1955, Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970, Banking Companies (Acquisition and Transfer of Undertaking) Act, 1980.
The Bill introduces some major changes to the banking laws. Firstly, the bill introduced a much-needed change relating to nominations for the payment of depositors' money. Firstly, previously there was provision for only one nominee; the bill has increased it to four nominees offering greater flexibility and clarity for transforming ownership or distribution of assets in case of unforeseen events. For deposit accounts, nominations can be either successive (where nominees inherit in a predetermined sequence) or simultaneous (nominees are assigned a specific percentage). Simultaneous nominations will divide benefits based on declared proportions.
Secondly, the Bill sets a substantial interest limit for directorship from Rs 5 Lakh to Rs. 2 Crores or ten percent of the 10% of the paid-up capital of the company, whichever is lower. This change will attract individuals willing to make high investments and reduce the regulatory scrutiny for smaller investments, also increasing shareholder engagement which could increase diversity and inclusivity within the banks' boards. Substantial Interest refers to the holding shares that this amendment has raised. This can be held by an individual, his spouse, or a minor child, either individually or collectively. The amendment has also included the enabling language to provide a way for the Central Government to revise the limit by a notification which will ease administration hassle in modifying the limit as per the inflation trends.
Thirdly, the 2024 Amendment has made two amendments each to 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 (collectively referred to as the "Public Sector Bank Laws"). Earlier the remuneration of statutory was fixed by the RBI in consultation with the central government and now through this amendment, the public sector banks are empowered to determine the remuneration of their statutory auditors under Section 141 of the Companies Act, 2013. This aims to attract topmost talent by ensuring that auditors are amply compensated to be at par with private banks increasing the autonomy of public sector banks. Another significant change is expanding the provisions concerning the transfer of unclaimed dividends issued by the relevant bank as any interest or bond redemption amount that remains unclaimed or unpaid for seven years can also be deposited to IEPF(Investor Education and Protection Fund).
BANKING BILL BREAKDOWN: ROADBLOCKS, REMEDIES, AND LEGAL SAFEGUARDS
The bill was mostly appreciated, but they're always persisted concerns by the opposition mainly that this amendment might be the passage to privatization of the Indian banking sector as the suggested amendments could reduce the government's stake in public sector banks. The a need to prioritize the cyber security of bank and implement the policies to protect data of customers.
Firstly, increasing the number of nominees can cause misunderstanding or confusion between the family members of the account holder if it is not recorded properly. Limiting the list of nominees to the next succession could create more difficulties. To prevent these issues from happening, there is a need for banks to ask for proper and complete legal documents from account holders as well as the solution to solve the conflict. The challenge in implementing this practically will be the difficulty of managing multiple nominees, distribution ratio, and privacy concerns of the customers which can be overcome by keeping the data privacy laws in consideration along with upgrading the system from time to time and training the employee.
Secondly, the increase in substantial interest might act as a conflict of interest as it gives too much power in the hands of high-net-worth individuals which could overshadow the small investors in terms of decision-making. There can be a lack of transparency and the possibility of insider trading. To overcome this, an independent board might prevent any kind of undue influence or bias. Also, since technology has been a catalyst to manage the affairs insider trading could be predicted using that and regular disclosure of the financial account to ensure that there is no abuse of power.
Thirdly, the Amendment has made some positive changes but it needs an upgraded banking system and administrative processes as changes are procedural which can lead to delays and inefficiencies. Awareness is an important aspect of the amendment in case the bondholders remain unaware that their funds are been transferred to IEPF which led in increasing of complaints and disputes.
BUDGET ON BANKING LAWS
EXPECTED CHANGES
There was some expectation of banks from the finance minister as the budget was to be announced on February 1, 2025. They required some support as they have been through global challenges and need government support to move the banking sector further.
The banking sector must first prioritize tax rebates on savings and large loans, as a tax incentive on an investment instrument like savings could encourage the middle class to keep funds in savings accounts.
Even though, the fall in Non-Performing Assets is seen there is a chance of an increase in the future so preventive measures and systemic reforms are the need of the hour. The budget could include reforms that can be implemented step by step through better staffing and management at the judicial level or strengthening the role of Asset Reconstruction Companies. Also, the banks could use AI tools to regulate credit risk assessment, and tie-ups of banks and financial institutions with AI tools can reduce the risk of NPA and help in managing the risk assessment. Talking about AI, digital infrastructure is needed to boost the efficiency and infrastructure of financial services. Digital literacy should be a compulsory skills for the employees working in the banks.
The industry also expects measures regarding credit growth meaning an increase in loan growth. The plan is to take credit growth to double digits. The decrease in personal loans is also seen so the industry expects the budget to boost deposits and streamline lending.
ACTUAL CHANGES
The Budget was farther away than what was expected from it but it still managed to make certain changes that will improve the efficiency of banks. The finance ministry is expecting a cash flow of around 40,000- 45,000 crore into banks as deposits as a result of the tax changes announced in the Budget, which raised the tax-free income level to 12 lakhs. The Financial Sector witnessed an increase in the FDI limit in insurance from 74% to 100%, which gave way to more foreign investment in this sector. Also, a Credit Enhancement Facility is provided which supports the corporate bond market which will benefit public sector and private sector banks.
Bank lending will be supported by the expansion of the Credit Guarantee Fund for MSME. The credit cover for small and micro-enterprises has been doubled from Rs 5 crore to Rs 10 crore, likely unlocking Rs. 1.5 lakh crore in credit over the next five years. Banks are also required to deduct tax at source when interest paid to account holders goes over the specified threshold in one financial year. At the moment, it is $10$ if the PAN is available.
The recommendation was given to the finance ministry to make retail credit from banks go deeper in rural and semi-urban areas, without creating risks of bad loans. This recommendation was implemented in Budget 2025meaning that a bank can use the credit score of an SHG to offer its member an individual credit score- a Grameen Credit Score. While financial institutions that work in small used versions of this to offer loans it was not possible for banks up until now.
CONCLUSION
In conclusion, the transformation of India's banking sector is driven by legislative amendments and policy reforms. The reforms aimed at building a more resilient, inclusive, and investment-driven financial ecosystem that modernizes bank regulation enhancing financial stability. The Banking Laws (Amendment) Bill introduces key changes, such as revising substantial interest, enhancing customer convenience, and empowering public sector banks in determining statutory auditor remuneration highlighting the need for thorough implementation. The Union Budget 2025, though not addressing every issue as anticipated, introduces measures like improved MSME credit support, tax reforms, and increased FDI in insurance. Overall, the combined effort of these reforms can create a more effective, resilient, and future-ready ecosystem.
REFERENCES
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- Banking Laws Amendment Bill 2024, PARLIAMENT OF INDIA, https://sansad.in/getFile/BillsTexts/LSBillTexts/Asintroduced/banking89202450403PM.pdf?source=legislation (last visited Feb. 4, 2025).
- Banking Laws Amendment Bill: Governance, Customer, INDIAN EXPRESS, https://indianexpress.com/article/india/banking-laws-amendment-bill-governance-customer-fm-sitharaman-9704252 (last visited Feb. 4, 2025).
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