Bill to push banking reforms, strengthen governance gets Lok Sabha nod

Proposes up to 4 successive nominations by bank a/c holders

The Lok Sabha approved the Banking Laws (Amendment) Bill, 2024, on Tuesday. It was tabled in the House by Union Finance Minister Nirmala Sitharaman.

 

The Bill proposes 19 amendments to banking laws, including the Reserve Bank of India Act, Banking Regulation (BR) Act, and Banking Companies (Acquisition and Transfer of Undertakings) Act. 

 

“The proposed Bill seeks to improve governance standards, provide consistency in reporting by banks to the Reserve Bank of India, ensure better protection for depositors and investors, improve audit quality in PSBs (public sector banks) and also to increase the tenure of the directors other than the chairman and whole-time directors in cooperative banks,” said Sitharaman in the Lower House. 

 

Reporting practices for banks set to change

 

The Bill, which will now move to the Rajya Sabha, proposes to amend various sections of the Banking Regulation Act to allow for up to four nominees from one at present in a bid to improve claim handling, provide greater flexibility, and reduce complications for legal heirs.

 

Having one nominee has led to challenges, particularly in cases where both the nominee and the account holder or locker holder pass away, leaving the assets without a valid nomination.

 

“For deposits, successive or (not and) simultaneous nominations are available whereas for articles kept in safe custody or in safety lockers, only successive nominators will be available,” the minister said.  

 

Successive nominations ensure that if the first nominee is unavailable, the nominee next in line will become operative. This approach ensures continuity and reduces disputes among legal heirs.

 

Jyoti Prakash Gadia, managing director at Resurgent India, highlighted that unclaimed amounts in banks had reached Rs 78,000 crore as of March 2024, underscoring the need to streamline and expand the settlement mechanism. “The new provisions on unclaimed deposits will enable smoother handling of such cases, serving the public interest, especially as the volume of unclaimed deposits remains significantly high,” he said.

 

Another significant change involves amendments to the State Bank of India Act and the Banking Companies Act. Via these changes, the finance ministry seeks to enable transferring unclaimed shares, interest, and bond redemption amounts to the Investor Education and Protection Fund (IEPF).

 

Currently, PSBs can only transfer unclaimed dividends to the IEPF.  In contrast, private sector banks follow Sections 124 and 125 of the Companies Act, which require the transfer of unclaimed shares, interest, and bond redemption amounts to the IEPF.

 

This proposed alignment across the banking sector is expected to provide individuals with easier access to claim refunds from the IEPF, safeguarding their financial interests.

 

The Bill also updates the definition of “substantial interest,” raising the shareholding threshold from Rs 5 lakh to Rs 2 crore to reflect contemporary economic conditions. The term “substantial interest” is defined in terms of both an absolute monetary amount and a percentage of the bank’s paid-up capital at 10 per cent. This was last fixed in 1968.

 

Reporting practices for banks are also set to change, with the reference date shifting from “reporting Friday” to the last day of the fortnight, month, or quarter. Reports for the 15th of a month would need to be submitted by the 20th, while reports for the last day of a month would be due by the 5th of the following month.

 

The Bill also proposes to extend the tenure of directors of cooperative banks from eight years at present to 10 years, excluding the chairman and whole-time director. This is to bring the BR norms in sync with the 97th amendment to the Constitution which mandates a five-year or multiple of five-year tenure of elected members of the board in cooperative societies.  

 

It also seeks to allow the director of a central cooperative bank to serve on the board of a state cooperative bank. This exemption recognises the inherent nature of the federated structure and acknowledges the necessity of such common directorship for the effective functioning of the cooperative credit system.

 

The amendments shall also allow PSBs to offer competitive remuneration to statutory auditors changing the current practice of the RBI and the central government fixing such remuneration. This proposed change is to attract top talent, ensuring that auditors are adequately compensated, thereby improving audit standards and overall financial oversight.

 

While replying to concerns raised by members, Sitharaman said PSBs are now professionally managed. “Banks do not come to the government for recapitalisation as they are now capable of raising capital and issuing bonds,” she added.

 

With inputs from Abhijit Lele in Mumbai   

On the table Some of the proposals in the Banking Laws (Amendment) Bill, 2024

 

Nomination: Individuals can nominate up to four people for deposits, safe custody, and safety lockers, with options for successive or simultaneous nominations

 

Reporting timeline: Shifting of submission of statutory reports by banks to the RBI from reporting Friday to the last day of fortnight/month/quarter

 

Director tenure: Extension of director tenures (excluding chairman/whole-time directors) in cooperative banks from 8 years to 10 years.

 

Substantial interest: Threshold for “substantial interest” shall be redefined from Rs 5 lakh to Rs 2 crore or 10% of paid-up capital.

 

Common directors: Directors of central cooperative banks can also serve on state cooperative bank boards under certain conditions

 

Auditor remuneration: PSBs gain discretion in setting auditor remuneration, currently determined by the RBI and the central government