The Banking Laws Amendment Act, 2025

**Diksha Singh

Introduction

The Banking Laws (Amendment) Act, 2025 marks a significant shift in India’s continued bid to align its banking regulation with the nation’s rapidly changing financial landscape. Indian banks have dramatically changed over the past decades, adopting digital technologies, broadening services, and competing globally. Yet the legal and regulatory regimes that oversee them have too frequently not been updated. This amendment aims to streamline unnecessarily burdensome compliance, enhance governance procedures, and further safeguard depositors. However, the reform is not without its own challenges. The greater autonomy afforded to banks in important matters, including setting auditor fees and changing reporting frequencies, is causing worries whether regulatory stringency could be relaxed in the interest of operational convenience. This risk is particularly acute in the cooperative banking sector, which still struggles with entrenched governance frailties and system risk. This article conducts a comprehensive legal-economic and jurisprudential analysis of the Amendment in the context of empirical evidence and comparative experience to determine if it achieves a sufficient balance between efficiency gains and depositor security or inadvertently lays bare new vulnerabilities.

Historical Context and the Imperative for Reform

India’s banking sector’s history has been one of grand expansion and its share of challenges. Nationalisation of banks towards the late 1960s greatly expanded the reach of credit to rural and underserved regions a social and economic necessity. But nationalisation also brought in complicated bureaucratic hierarchies that, with accompanying political intrusion, contributed to mounting non-performing assets and weak governance. With liberalisation in the 1990s, competition increased, new entrants came into the market, and technological upgradation gained pace. However, paradoxically, the statutory and regulatory framework continued to be mostly rooted in laws written decades ago. This lag produced a dissonance between the innovative operational abilities of banks and the regulatory framework operating on them. The vulnerability of this disconnection was laid bare with the dramatic failure of the Punjab and Maharashtra Co-operative Bank (PMC) and persisting woes affecting numerous cooperative banks. These incidents exposed ongoing governance failures, poor supervisory processes, and oversight loopholes, significantly damaging public confidence and highlighting the need for legal reform sensitive to the nuances and risks of modern banking.

The 2019 PMC Bank crisis revealed the dangers of light-touch oversight. Bank officials concealed over ₹6,500 crore in bad loans to HDIL by creating fictitious accounts, and regulators only caught on when the damage was irreversible. The episode illustrates how decentralised “efficiency” in cooperative banks collapses without robust monitoring, leaving small depositors most exposed.

Key Amendments and Their Implications

• Raising the “Substantial Interest” Threshold

A major shift increases the term “substantial interest” from ₹5 lakh to ₹2 crore. This change aims to curb regulatory burden by restricting scrutiny to those holding material interests. This is understandable considering increasing asset sizes, but risks forgetting the aggregate impact of mid-sized holders which empirical corporate governance literature points to as being most important for ensuring balanced supervision.

• Lengthening Tenures of Cooperative Bank Directors

The Amendment lengthens cooperative bank directors’ tenure from eight to ten years to encourage leadership stability. Nonetheless, RBI statistics in 2024-25 document 264 fines against cooperative banks, reflecting continued governance issues. The 2019 PMC Bank crisis illustrates the stakes that officials concealed over ₹6,500 crore in bad loans to HDIL through fictitious accounts, and the problem was discovered too late, causing withdrawals to be frozen and depositor panic. This shows that, without strong oversight, extended tenures may entrench leadership while failing to improve governance, exposing depositors to systemic risk. Transparent fitness assessments and independent checks remain essential to prevent such failures. 

• Auditor Fee Autonomy and Independence Issues

The Act provides banks the freedom to set auditor fees, aiming to invite competent auditors and minimise information asymmetries. However, analysis categorically cautions that such freedom coupled with the lack of imposed auditor rotation and transparency measures compromises the independence of auditors through potential capture by the management. The PwC audit scandal in the Satyam case illustrates the danger: for years, PwC approved falsified accounts, overlooking inflated cash balances and fictitious revenues. The case highlights that efficiency and operational convenience cannot replace rigorous oversight, and underscores the need for statutory auditor rotation, public disclosure of fees, and robust penalties for negligence.

• Relaxed Frequency of Reporting

Efficiency at the Expense of Early Warning Transitioning from obligatory weekly to monthly or quarterly reporting lowers banks’ compliance burdens, a pragmatic reaction to bureaucratic lethargy. Frequent disclosures, though, are integral to regulatory early warning systems critical for the detection of nascent risks. India should mandate the use of real-time regulatory technology (regtech) platforms for banks, with compliance monitored by an independent audit team. This is the only way reduced reporting requirements can be reconciled with depositor safety. 

Indonesia offers a useful model here. Its Financial Services Authority (OJK) has deployed supervisory technology that integrates Markov-switching models and other predictive analytics into its oversight framework. This allows regulators to detect early signs of financial distress and intervene dynamically, even with less frequent reporting by banks. For India, which is considering similar flexibility in disclosure norms, such a system shows how efficiency can coexist with robust oversight if regulators invest in advanced monitoring capacity.

• Law and Economics Analysis: Navigating the Trade-Off

At its essence, the Amendment illustrates the eternal regulatory balance between reducing compliance costs and maintaining firm oversight. While simplifying processes can enhance business efficiency and innovation, it could undermine controls central to stability of the financial system. The freedom given for auditor fee-setting, in the absence of strong rotation and disclosure requirements, is a textbook example of regulatory capture, whereby auditors become complicit with management interests at the expense of audit quality. On the other hand, extending cooperative bank directors’ terms may inadvertently lock in leadership, reducing competitive pressures and leading to riskier lending, as seen in similar rural banking environments. In the same vein, though lower reporting frequency saves costs, it also compromises financial distress early detection unless regulators adopt technologically sophisticated, real-time monitoring regimes. This is often overlooked, complement keeps deregulation from subjecting the system to blind spots. A regulatory framework that balances these competing concerns, streamlining compliance but enforcing proper, transparent control is crucial to prevent the repetition of previous governance and depositor protection failures. Jurisprudential and Constitutional Considerations

The Amendment’s granting of sweeping discretionary powers to the Reserve Bank of India with no well-defined procedural protections raises constitutional issues of first importance under the rule of law as stated in Maneka Gandhi v. Union of India. The threat of arbitrary discretion without reasoned openness can subvert administrative fairness. In addition, a lack of defining formal fiduciary duties for bank directors and auditors maintains principal-agent issues well-documented in the literature. This absence contrasts with regimes such as the UK’s Senior Managers and Certification Regime which formalise individual responsibility, supported by enforceable sanctions. An equity aspect is also troubling. The amendment does not provide specific safeguards for vulnerable cooperative bank depositors, triggering concerns under Article 14’s equality before the law guarantee, as differential treatment could perpetuate socio-economic inequalities. 

Comparative Jurisdictions and Global Best Practices

• Mandatory Auditor Rotation and Transparency

Introduce statutory auditor rotation cycles and require public disclosure of auditor fees and related-party transactions to ensure audit independence. Lessons from the UK’s Senior Managers and Certification Regime show that assigning clear individual responsibility and enforcing transparency significantly reduces auditor capture, enhancing oversight. The PwC audit scandal in the Satyam case demonstrates the domestic risks: long-tenured auditors failed to detect falsified accounts, showing that efficiency gains without robust accountability can threaten depositor safety. India must ensure that operational freedom for banks does not come at the cost of rigorous audit standards. 

• Regtech-Enforced Real-Time Monitoring

Mandate the use of real-time regulatory technology platforms for banks, with an independent regulatory audit team ensuring compliance. Indonesia’s OJK illustrates the potential of such systems: by embedding Markov-switching models and predictive analytics into oversight, the regulator detects early signs of financial distress even when reporting is less frequent. The 2021 IndusInd Bank microfinance misclassification scandal highlights domestic vulnerability, loans were disbursed without consent and misreported, creating systemic risk despite established governance. A regtech framework allows India to reconcile operational efficiency with robust risk monitoring.

• Independent Cooperative Bank Governance

Link tenure extensions of cooperative bank directors to stringent, independently verified fitness and propriety tests. Brazil’s rural banking regulations, which mandate board diversity and enforce external audits, demonstrate how structural governance reforms can reduce capture and improve transparency in smaller, cooperative institutions. The PMC Bank crisis underscores the stakes: concealing ₹6,500 crore in bad loans revealed how weak governance endangers depositors. India’s cooperative banks require similar structural safeguards to ensure stability while allowing operational autonomy.

Reserve Bank of India data indicate persistent governance challenges within cooperative banks, with 196 monetary penalties imposed in 2023 and 2024, along with the cancellation of 15 bank licenses in 2023. These sanctions underscore ongoing issues related to compliance and liquidity. Additionally, the IndusInd Bank accounting scandal, involving discrepancies exceeding ₹2,600 crore, highlights the risks associated with insufficient auditor independence and oversight

• Granular Monitoring and Data-Driven Oversight

Establish ongoing, data-informed monitoring regimes to track governance quality, financial health, and depositor performance, enabling rapid policy responses to emerging risks. Both Indonesia and Brazil show the effectiveness of predictive analytics and continuous monitoring for early risk detection, particularly when routine reporting is relaxed. Such data-driven supervision can prevent the blind spots that previously allowed governance lapses and fraud to escalate.

• Financial Literacy and Stakeholder Engagement

Implement campaigns to raise depositor awareness of rights, obligations, and risks, enhancing market discipline and trust. International experience, including Brazil and the UK, demonstrates that empowered depositors act as an additional layer of oversight, complementing regulatory supervision. Greater transparency and awareness help ensure that efficiency gains in banking operations do not disadvantage vulnerable depositors, reinforcing systemic resilience.

Conclusion

The Banking Laws (Amendment) Act, 2025 is an important step toward bringing India’s banking system into the modern age. By giving banks more freedom and easing some compliance requirements, it opens the door for faster decision-making and innovation. But these gains come with real risks. Cases like PMC Bank, PwC/Satyam, and IndusInd show how quickly things can go wrong when oversight is weak. International lessons from the UK, Indonesia, and Brazil make it clear: efficiency only works when paired with strong accountability.

For India, that means putting rules in place that enforce responsibility rotating auditors, using technology to monitor risks in real time, ensuring cooperative bank directors meet high standards, and helping depositors understand their rights. If we get this balance right, banks can be both nimble and safe. The Amendment is not just a piece of legislation; it’s a chance to modernise responsibly. The challenge is simple: don’t sacrifice oversight for convenience, and don’t let efficiency come at the cost of the people whose money the system is meant to protect.

**Diksha Singh is currently a third-year B.A L.L.B (Hons.) student at National Law Institute University, Bhopal.

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