December 3rd, 2024, marks a significant milestone in the history of India’s banking sector with the introduction of the Banking Laws (Amendment) Bill, 2024. The bill proposed vital changes and amendments in existing critical laws such as the Reserve Bank of India Act, 1934; the Banking Regulation Act, 1949; the State Bank of India Act, 1955; and the Banking Companies (Acquisition and Transfer of Undertakings) Acts of 1970 and 1980. It aimed to reform the structure, operational powers, and governance, and to ensure more accountability and transparency.
This bill was introduced in the Lok Sabha by our current Finance Minister, Ms Nirmala Sitharaman. Banking services are most necessary in everyone’s life and hence need to be more consumer-centric and stable, and that is the reason the bill was introduced to cope with the long-standing issues of inefficiency and ineffectiveness.
This article will deal with the amendment proposed by the bill and its implications for stakeholders, including customers, investors, and regulatory bodies.
Need for the Amendment
There were certain lacunae in the previous Laws which emphasised the need for amendment in the existing laws. For instance:
- The existing provisions imposed unclear and restrictive limits on the number of nominees, leading to a large volume of unclaimed funds.
- Many Provisions were not updated and became obsolete. It was not able to catch up with the present economic realities, e.g., the threshold limit of Substantial interest was 5 Lakh Rupees, which required updating.
- Inefficient and ineffective governance of the cooperative banks, especially the overlapping of the roles and powers, became an obstacle to the performance of the functions of the cooperative banks.
- There were many inconsistencies in the working of the banks, such as reports not being submitted properly and regularly, which led to the obtuse and sluggish growth of the banks.
- Public sector banks face constraints in exercising financial sovereignty, such as not having the authority to independently determine auditor remuneration.
- Absence of transparency and accountability in the working of the banks which created trust issues for the investors and depositors.
Banking Bill 2024 and Its Constitutional Foundations
Certain constitutional provisions and amendments directly align with the amendments proposed by the Banking Laws (Amendment) Bill, 2024. It includes the proper working and governance of the cooperative societies. It ensures transparency and accountability and also strengthens its function.
Legislation of primary significance includes:
Article 19(1)(c): Right to form cooperative societies and to make them operational within constitutional limits and guarantees
Part IXB, which is the 97th Amendment, provided for administrative changes in cooperative societies, especially in terms of their structure, elections, and independence.
Under the Union List (List I) of the Seventh Schedule to the Constitution of India, banking activities fall within the purview of Parliament, allowing legislation to be enacted that applies to all banking institutions without restriction or limitation.
Financial Independence: Financial reforms aim to strengthen the self-governance and the operational autonomy of cooperative banks. At the same time, central policy supervision by the Reserve Bank of India (RBI) ensures regulatory oversight, transparency, and accountability.
Key Amendments
The proposed amendments to ensure the effective working of the banks are as follows:
- The permissible number of nominees for a bank account has been increased to four. This aimed to ensure the secure custody and transfer of cash, articles, and lockers held by the account holder
- The threshold limit of Substantial interest is 2 Crore Rupees, which imitates present economic realities and purposes to streamline and modernise governance ideals while ensuring accountability and transparency.
- Recognising the critical role of cooperative banks, especially in rural and semi-rural areas, the bill proposed tenure of the director be increased from 8 to 10 years, and also allowed directors of Central Cooperative Banks to serve on the boards of State Cooperative Banks.
- Banks were directed to submit reports twice, once on the 15th day of the month and another on the last day of the month, ensuring consistency and improved supervision of the Reserve Bank of India (RBI).
- Public sector banks were provided with financial autonomy, authority, and sovereignty through which they had the power to determine their remuneration to the auditors.
- The bill mandated the assignment of unclaimed dividends, shares, and interest/redemption amounts to the Investor Education and Protection Fund (IEPF). Depositors can claim refunds or transfers from the IEPF, ensuring trust in the investors and depositors
Impact of the Bill
By addressing previous crises, removing current obstacles, and opening the door for quick expansion in the upcoming years, the bill has the potential to have a long-lasting effect on the banking industry.
Tactics in Favour of Clients
Account holders’ interests are directly aided by the extension of the number of nominations and abridged succession plans that reduce inheritance disputes to some extent. It is expected that these measures will lead to a significant reduction in the level of funds remaining unused and unclaimed in the accounts.
Even at the Reserve Bank level, however, unclaimed deposits totalling Rs 35,012 crore as of March 2023 necessitate changes to domestic policy to improve the effectiveness and efficiency of bank operations.
Board Composition and Functioning
Extending the amount of “substantial interest” and the revisions undertaken in the governance framework in cooperative banks are all steps intended to increase accountability and heterogeneity in the governance structures.
Challenges and Criticism
The Banking Laws (Amendment) Bill, 2024 aims to modernise governance and address long-standing inefficiencies in the banking industry, but several questions and criticisms have been raised about its implications and effectiveness.
- Firstly, the problem arises with the implementation and execution of the bill. The theory part is good enough to influence and attract people, but the gap between philosophy and practicality is increasing day by day.
- Another issue pertains to cooperative banks, which often operate with limited access to resources and infrastructure. These institutions, which include numerous small stakeholders, may struggle to adapt to the revamped regulatory framework and digital systems envisioned by the bill.
- Lack of public awareness, education, and knowledge regarding the new policies has also been an important challenge, as it requires extensive hard work to create understanding among the local people so that they can make better use of it.
- It also increased the compliance, documentation, and procedural requirements.
- It was criticised as a tactic by the government to privatise the bank.
- It also has certain data privacy issues, and it raises cybersecurity concerns.
- Reducing the minimum government holding in public sector banks from 51% to 26% could dilute public control and steer the sector toward private dominance.
Conclusion
The Banking Laws (Amendment) Bill, 2024 marks a significant transformation in India’s banking sector. By fixing governance, transparency, and customer issues, the bill paves the way for more robust financial inclusion. It ensures rapid growth in the economic, financial, and banking sectors. However, its practical success will be primarily based on actual execution and collaboration among the stakeholders, which is upon the specific authorities.
References
[1] The Banking Laws (Amendment) Bill, 2024
[2] The Banking Laws Bill Seeks to Fix Important Issues. What Hurdles Could It Face If Enacted?, Available Here
[3] Banking Laws (Amendment) Bill 2024: What’s proposed and why it’s being opposed?, Available Here
[4] Banking Laws (Amendment) Bill 2024: A Leap Not Far Enough, Available Here