The Banking Laws (Amendement) Bill, 2024

Much to Do About Nothing

I. BACKGROUND

The Lok Sabha passed The Banking Laws (Amendment) Bill, 2024 (“2024 Amendment”) on December 3, 2024, with the broad objective of reforming certain provisions of, inter alia, the Reserve Bank of India Act, 1934 (“RBI Act”); the Banking Regulation Act, 1949 (“BR Act”); and the State Bank of India Act, 1955 (“SBI Act”). These amendments were hinted at by the Finance Minister in her Budget Speech for the year 2023-24, where amendments in order to improve bank governance and investor’s protection fund were mentioned.

While the 2024 Amendment stops short of making any massive reforms to either of the statutes mentioned above, it does make certain changes to the specific provisions of these laws that may give an indication of considerable changes to come. 

Broadly, the changes made by the 2024 Amendment can be divided into five subdivisions: (i) changes to the definition of the term “fortnight” and related changes in reporting and maintenance requirements of the entities covered under the BR Act and the RBI Act, respectively; (ii) changes to certain provisions governing co-operative banks; (iii) increase in number of nominees for bank account holders; (iv) audit and Investor Education and Protection Fund (“IEPF”) related reforms for public sector banks; and (v) change in the definition of “Substantial Interest” in the BR Act. 

II. OVERVIEW OF CHANGES

1. Change in the definition of fortnight and other reporting and maintenance related changes: Under the current regime, the timelines for reporting and maintenance of cash reserves under Section 42 of the RBI Act, and Section 18 of the BR Act, respectively, are calculated on a day of the week basis and not on a day of the month basis. The 2024 Amendment amends the definition of the term fortnight in both these sections, ensuring that a ‘fortnight’ is calculated from (i) the first to fifteenth of a month; and (ii) the sixteenth to the last day of the calendar month. Under the present regime, a fortnight was calculated from a Saturday to the next Friday. Further, the maintenance requirements under Sections 24 and 25 of the BRA (dealing with maintenance of a percentage of a bank’s assets in India), which were earlier calculated from Friday as the trigger day, will now follow the revised definition of fortnight. This change has been brought about to ensure consistency in reporting for scheduled banks.      

2. Changes in regime related to co-operative banks: The 2024 Amendment has made two changes with respect to the management of co-operative banks. Firstly, the continuous period for which a director (not being the chairman or a whole-time director) of a co-operative bank may hold office has been extended to ten years. For all other banking companies, this limit is eight years. 

Secondly, the 2024 Amendment has paved the way for a director of a central co-operative bank to also be elected on the board of a state co-operative bank of which they are a member. Ordinarily, no banking company incorporated in India can have a director who is already on the board of directors of another banking company, with the only exception made for directors appointed by the Reserve Bank of India (“RBI”). 

These changes have been made in furtherance of the ninety-seventh amendment to the Indian Constitution, which enhanced the role of co-operative societies and provided them with constitutional backing. 

3. Nomination of up-to four nominees for bank accounts: The 2024 Amendment has also amended the relevant provisions of the BR Act to provide for up-to four nominees for a bank account, i.e. the persons to which the deposits kept with a bank are to be distributed in case of a depositor’s (or all depositors’) death. The re-vamped regime for nomination of multiple nominees is also applicable to articles kept in the safe custody of banks, or to the contents of a locker maintained by the bank. 

4. Reforms concerning Public Sector Banks: 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”). The Public Sector Bank Laws provide the framework for, inter alia, governance of the various public sector banks in India. The 2024 Amendment, firstly, permits the relevant bank to decide the remuneration payable to the statutory auditor appointed under section 141 of the Companies Act, 2013. Previously, the remuneration of the statutory auditor was fixed by the RBI in consultation with the central government. This step has been taken to increase the autonomy of public sector banks, and to ensure that the services provided by the auditors hired by them are at par with those availed by private sector banks. Next, the provisions concerning transfer of unclaimed dividends issued by the relevant bank have been expanded. Earlier, only such amount in the bank’s unclaimed dividend account which was unclaimed or unpaid for a period of seven years was to be transferred to the IEPF established under section 125 of the Companies Act, 2013 (the 2024 Amendment has also removed references to section 205C of the erstwhile Companies Act, 1956 setting up the IEPF). Under the expanded regime, any interest or redemption amount upon any bond issued by the bank, which remains unclaimed or unpaid for a period of seven years from the date such interest became due must also be deposited in the IEPF. 

5. Other Changes: The 2024 Amendment has also made an amendment to the definition of the term “Substantial Interest”. The threshold for having “Substantial Interest” in a company has been increased from holding shares worth a paid up capital of INR 5,00,000 (Indian Rupees Five Lakh) to INR 2,00,00,000 (Indian Rupees Two Crore), or ten percent of the paid up capital the company, whichever is lower. The definition of the term “Substantial Interest” becomes relevant in the governance of banking companies, especially in ensuring that persons having interest in other companies are prevented from taking over the majority in the board of directors of a banking company. Further, enabling language has also been added to the amended definition so as to enable the Central Government to revise the limits to trigger Substantial Interest by a notification in the Official Gazette. Given that the limit was at INR 5,00,000 (Indian Rupees Five Lakh) for over sixty years, permitting the Central Government to revise this limit will ease administrative hassle, and allow seamless revision of limits to keep up with inflation trends.

III. CONCLUSION

While the 2024 Amendment has made some positive strides in making long overdue changes, it fails to make any substantive reform of note. A majority of the changes are procedural and so called house-keeping changes. For instance, while the increased independence granted to public sector banks with respect to appointment of auditors is welcome, it does not substantially ease the burden of over-regulation faced by these banks. 

Further, the 2024 Amendment could have been a great opportunity to reform the key aspects of the banking regime in India, such as customer and know-your-customer services, which at present are complicated and isolating to the end consumer of banking services. However, the 2024 Amendment steers clear of such major changes. 
However, there is a possibility that the 2024 Amendment may end up being a precursor to major reforms into laws governing the banking sector in the future.

Disclaimer: The views expressed in this blog do not necessarily align with the views of the Vidhi Centre for Legal Policy.