New Delhi: Bhaswati Guha Majumder of CXO News and APAC News Network outlines the key highlights and discusses the impact on the BFSI sector with experts.
The Lok Sabha passed the Banking Laws (Amendment) Bill, 2024, by voice vote on 3 December, aiming to overhaul several banking regulations to align with the modern banking environment.
The bill seeks to amend key legislations, including the Reserve Bank of India Act, 1934, the Banking Regulation Act, 1949, the State Bank of India Act, 1955, and laws governing public sector bank acquisitions.
Union Finance Minister Nirmala Sitharaman told Lok Sabha: “The proposed amendments will only strengthen governance in the Indian banking sector besides enhancing consumer’s and customer’s convenience with respect to nominations and protection of investors.”
Furthermore, Sitharaman stated: “The proposed Bill seeks, inter alia, to improve governance standards provide consistency in reporting by banks to the Reserve Bank of India (RBI), ensure better protection for depositors and investors, improve audit quality in public sector banks, bring customer convenience in respect of nominations and to provide for increase in the tenure of the directors in co-operative banks.”
Here are the key highlights of the Banking Laws (Amendment) Bill, 2024:
Amendments to Governance Standards:
- Redefinition of “substantial interest” under the Banking Regulation Act, increasing the threshold to Rs 2 crore (increased from Rs 5 lakh).
- Extension of director (excluding the chairman and whole-time
- director) tenures in cooperative banks to 10 years (increased from 8 years).
Reporting and Compliance:
- Changes to statutory reporting timelines to align with fortnightly or monthly periods, replacing alternate Fridays.
Depositor and Investor Protections:
- Introduction of up to four simultaneous or successive nominees for deposits, lockers, and safe custody.
- Mandatory transfer of unclaimed dividends, shares, and bond interests to the Investor Education and Protection Fund (IEPF) after seven years.
Audit Reforms:
- Empowerment of public sector banks like SBI to decide auditor remuneration.
- Alignment of audit-related provisions with the Companies Act, 2013.
Specific Legislative Updates:
- Amendments to the Reserve Bank of India Act, 1934; Banking Regulation Act, 1949; State Bank of India Act, 1955; and the Acquisition and Transfer Acts of 1970 and 1980.
- Consistency in terminology, such as standardizing reporting days to the last day of the fortnight/month/quarter.
Investor Protection Enhancements:
- Provisions for rightful claims from the IEPF for individuals affected by unclaimed funds.
Objectives of the Amendment
The government highlighted that these changes are aimed at improving governance, safeguarding investor interests, and aligning operational standards with global practices.
It was also emphasized that the amendments will address challenges of governance in cooperative and public sector banks while enhancing depositor convenience and compliance transparency.
Strategic Significance
According to the Government, this legislative update marks a step toward modernizing India’s banking landscape. It reflects the government’s commitment to fostering a resilient banking system, protecting stakeholders, and ensuring adaptability to contemporary challenges.
By addressing issues like governance lapses and unclaimed financial assets, the bill strengthens trust in the banking sector and supports its role in India’s economic growth.
Experts’ Insight
As the bill now awaits clearance from the Rajya Sabha before becoming law, banking sector experts have shared their views on the bill, what would be possible impact and the sector’s future.
Amey Pathak, Partner (Head – Banking), Cyril Amarchand Mangaldas said: “Last year, the Honourable Finance Minister mentioned the Government’s intent to improve bank governance and enhance investors’ protection, by making amendments to the Banking Regulation Act, the Banking Companies Act and the Reserve Bank of India Act. Further, in her Budget Speech, in July this year, the finance minister stated that the government plans to release a strategy document outlining the future vision for the financial sector, addressing its size, capacity, and skills.”
“In furtherance of this objective, the Banking Laws (Amendment) Bill, 2024, passed by Lok Sabha yesterday aims to bring consistency in bank governance by standardising the reporting deadlines and manner of contribution to the Investor Education and Protection Fund from unclaimed dividends. Customers have been assured of a smoother inheritance process by allowing the nomination of up to four persons to receive a deceased account holder’s funds, to mitigate the issue that came up during Covid-19. In addition, public sector banks have been given additional autonomy in the appointment and remuneration of auditors, levelling the playing field with private sector banks,” Pathak added.
The industry expert believes that this reform coupled with other ongoing work in the financial sector, such as the release of Insurance Amendment Bill 2024 for public consultation is significant in improving financial sector stability and benefits all stakeholders.
Meanwhile, Kunal Sharma, Partner, Singhania & Co. stated that this bill has introduced significant changes aimed at modernizing and streamlining banking operations. “These changes are expected to streamline regulatory compliance, enhance operational efficiency, and improve governance standards. Investors will particularly benefit from provisions on unclaimed assets and enhanced nomination processes, boosting confidence in the banking system and attracting investment,” he noted.
However, Sharma pointed out some concerns stating: “While the amendments are largely positive, they also raise several concerns that warrant critical examination. The provision to allow multiple nominees for bank deposits is a positive step towards aligning banking practices with other asset classes, such as mutual funds.”
“However, it is crucial to ensure that the legatees under a will and the nominees are consistent to avoid confusion or litigation. Further, the redefinition of ‘substantial interest’ and the extension of directors’ tenure could potentially lead to increased privatization and influence of private entities over public sector banks. This shift might undermine the public interest objectives that these banks traditionally serve” he added.
Additionally, he said that granting banks more autonomy in deciding auditor remuneration raises questions about the independence and objectivity of audits, which are crucial for maintaining transparency and trust in the banking sector.
“Furthermore, the amendments do not sufficiently address the growing concerns around cybersecurity and data privacy, which are critical in today’s digital banking environment. The rising incidents of cyber fraud and data breaches necessitate advanced fraud detection mechanisms and stringent regulatory compliance to safeguard customer trust and financial stability. Therefore, the absence of robust measures in these areas could pose significant risks to both banks and their customers,” noted Sharma.
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