Author: Yash Sharan
Second year law student at Hidayatullah National Law University, Raipur
I. Introduction
The Indian Parliament has recently passed the Banking Laws (Amendment) Bill, 2024 (“Bill”), potentially a move towards modernizing India’s banking industry. The Bill aims to strengthen banks’ governance, ease the interaction between customers and institutions, and ameliorate investors’ protection. The Bill is deemed to completely overhaul the banking industry as it amends the Reserve Bank of India (“RBI”) Act, 1934, the Banking Regulation Act, 1949, the State Bank of India Act, 1955, and the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970 and the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1980. Since the Bill brings staggering and reconditioning changes, it becomes imperative to discuss this elephant in the room.
Through the means of this article, the author delves into the intricacies of the Bill. Firstly, the article discusses the status quo of the banking industry, the major provisions of the Bill, and the changes they seek to bring. Secondly, it highlights the shortcomings and challenges of the Bill. The article concludes with a way forward and the author’s suggestions to resolve the roadblocks.
II. Breaking the Bank: Navigating the Legal Implications of the 2024 Amendment
The Bill brings with it some major changes that are forecasted to remodify the Indian banking industry. Firstly, the Bill has relaxed the substantial interest and has given more leeway by raising its threshold from Rs. 5 Lakh to Rs. 2 Crores. Since, the definition of “substantial interest” is enshrined under Section 5(n-e) of the Banking Regulation Act, 1949, the amendment has been brought in this section.
Substantial interests assist in the functioning of the bank by placing restrictions on banking companies from granting advances and loans to any individual or entity where any director holds substantial interest. It also helps regulatory bodies such as the Reserve Bank of India in monitoring and controlling the influence of significant shareholders in banking institutions. Substantial interests also help in the practices of regulatory compliance. Under this, the banking companies are obliged to maintain records regarding substantial interests to comply with regulatory requirements. In light of these functions of substantial interest, the Bill is anticipated to attract more manpower into the Indian banking industry. Raising the bar for ‘substantial interest’ could have an effect of extending shareholder engagement, diversification of the bank boards, and the promotion of policies that would benefit minority constituencies. Thus, increasing the diversity and inclusivity within the banks’ boards.
Secondly, the Bill mandates that there shall be four nominees for a bank account. This arrangement allows the family members or nominees to access the account funds once the account holder is dead avoiding the normal legal processes that consume time. It also avails account holders the opportunity to nominate individuals in a sequence or split the money in a specified proportion to the nominees. These nominees can be appointed simultaneously or successively. However, in the case of bank lockers, nominees can only be added successively.
The amendment which requires four nominees for a bank account is deemed to have a huge impact on the banking scenario of India. Since it eases the methods of transferring funds and enables nominees to avail the funds without lawyers taking a long time before clearing them; it makes banking safer for families and makes families trust banking institutions. It may help spur higher utilization of banking services and lead to even improved levels of financial access. In total, this reform is greatly in the interest of the account holders but it does come with certain expectations from the banking sector regarding the structural, functional, and communication changes necessary to make these accounts work.
Thirdly, the Bill puts forth that the auditors, having the authority to receive the remuneration fixed by the RBI in consultation with the Central Government, under Section 41(2) of the State Bank of India Act, 1955, must now receive remuneration as the State Bank may fix. Thus, it delegates the duty of the RBI to the State Bank.
Delegating the authority of fixing the remuneration to the State Bank may also help increase the operational efficiency of the banks and decrease the cumbersome time taken by approvals from the regulators. This flexibility means that the State Bank can pay its auditors according to the market conditions with the view of attracting qualified auditors and thus enhancing the quality of the audit. This is because this move empowers the institution and opens up the system for decentralization meaning that the various institutions would be more responsible for their undertakings. Finally, it may lead to quicker decision-making, efficiency and improvement in the feasibility of the Indian banking sector in a competitive environment.
Thus, the Bill brings myriad amendments to the Indian banking industry out of which, we have discussed a few. This move by the Parliament is deemed to be a great action towards enhancing customer satisfaction by rationalizing transactions, improving bank board management through acquiring qualified directors and auditors, decreasing compliance costs, and increasing efficiency in the delivery of basic banking services. But with great actions comes great hurdles, therefore, it is imperative for us to discuss the roadblocks and plausible solutions that inadvertently creep into the Bill.
III. Behind the Banking Bill: Roadblocks, Suggested Reforms, and Legal Safeguards
While the bill has been largely applauded, concerns persist over potential risks such as heightened cyber threats, emphasizing the need for strong cybersecurity measures. Banks must prioritize advanced security technologies and enforce stringent data protection policies to protect customer data. Moreover, there are other concerns over the Bill which are further discussed.
Firstly, the amendment regarding raising the bar of “substantial interest” to ₹2 Crores may pose certain risks such as conflict of interest, insider trading, or lack of transparency in decision-making. By allowing large ownership stakes, can lead to the concentration of control, which is counterproductive for corporate governance.
To solve this quandary, stricter disclosure norms must be implemented which will guarantee the preservation of clear and public ownership structures. Independent board control might prevent undue influence, and improved auditing procedures would assist in identifying such abuses. Reporting to regulators would enhance transparency and would ensure officials do not abuse their powers to exploit the financial institutions.
Secondly, extending the number of nominees up to four per bank account may cause confusion or disagreement with the other family members in case the account holder’s wishes are not properly recorded. The flexibility in nominating simultaneously or successively could lead to conflict in the distribution of funds. Of course, the same rule restricting the list of nominees to the next in succession can reduce the choices of the account holders in the case of lockers. To overcome these problems, it becomes imperative for banks to ask for proper legal documentation from the account holders as well as the method to solve the conflict arising from the implementation of this kind of system. Also, although the amendment aims to avoid legal concerns in the first place, disagreements between nominees over distribution or succession may still occur resulting in such matters being managed within defined and more structured legal frameworks in respect of the banks. The operational challenges in putting a system that will be able to deal with multiple nominees, distribution ratio as well, and keep data privacy laws into consideration may be a challenge to banks which may need to upgrade their system, train their employees and educate their customers more. The difference that simultaneous nominees cannot be appointed for bank lockers may cause some customers to be dissatisfied, so the banks should clarify the information.
Thirdly, delegating the authority of decision-making power over the auditors’ remuneration issues to the State Bank may compromise independence since auditors may be forced to tow the line of the institution that hired them. This could make the organization liable for conflicts of interest and decrease accountability. One possible approach would be to impose strict procedures and controls for the remuneration process, which would mean that these procedures are fair, non-discriminatory, and subject to external examination or review to safeguard auditor independence and credibility.
Additionally, The Bill should prioritize tackling the underlying economic challenges while fostering the growth of the banking sector towards enhanced financial stability. As the Indian banking landscape evolves, it is crucial to maintain a harmonious balance between innovation and regulation. This bill marks a pivotal move in that direction, and its execution will be keenly observed by both industry stakeholders and customers.
IV. Concluding Remarks
Therefore, it can be concluded that the Bill represents a nuanced legislative intervention, strategically balancing innovation and regulatory prudence. The Bill has provisions including changing the thresholds of substantial interest, allowing multiple nominations for accounts, leaving auditors’ remuneration decisions to the company ,and widening the definition of unclaimed assets to increase good governance, operational effectiveness, and customer satisfaction. But these changes also bring issues such as conflict of interest, nominee issues, and possible abuse of unutilized funds for which legal protection and enforcement measures have to be robust. These challenges can be overcome by institutions having strong security on its online platforms, good transparency in its operations, and good documentation. Bill success will depend on how innovation can be achieved while at the same time maintain accountability to the customers while at the same time building trust and stability in the financial sector. If implemented properly the Bill could revolutionise the structure of banking in India and lead to a more effective, integrated and robust financial sector.