The Banking Laws (Amendment) Bill, 2024, passed by the Lok Sabha last week, aims to improve governance in the banking sector. Sachin Kumar explains how these will strengthen the banks while making the processes more customer-friendly and efficient.
More flexibility in nomination for account holders
One of the key changes proposed by the Bill is to allow bank account holders to nominate up to four individuals for their accounts. Current norms allow single or joint deposit holders to appoint one nominee for their deposit. Also, depositors will have the option of successive or simultaneous nomination facility, while locker holders will have only successive nomination. Successive nominations means that the nominee who has been named first in the order of nomination will receive priority. Simultaneous nomination means all nominees are simultaneously eligible to receive the account proceeds in case of the account holder’s death. The nominees will be eligible to receive the amount as per the percentage specified by the deceased account holder. Multiple nomination is expected to prevent accumulation of funds as unclaimed deposits as there will be a clear line of succession for access to the funds. The Bill proposes that a depositor can either go for successive nomination or simultaneous nomination but not both.
Simplified handling of unclaimed deposits
Existing regulations provide for transferring unpaid or unclaimed dividends to an unpaid dividend account of the bank. If the money in the account remains unpaid or unclaimed for seven years, it is transferred to the Investor Education and Protection Fund (IEPF).
The Bill widens the ambit of the funds that can be transferred to the IEPF. These include shares for which dividend has not been paid or claimed for seven consecutive years, and any interest or redemption amount for bonds which is unclaimed for seven years. Any person whose shares or unclaimed money is transferred to IEPF can claim a refund. As per the annual report of the RBI, unclaimed deposits rose 26% from Rs 62,225 crore at the end of March 2023 to Rs 78,213 crore at the end of March 2024.
Redefining substantial interest for directorships
The Banking Regulation Act defines “substantial interest” in a company as owning shares valued at more than Rs 5 lakh or 10% of the company’s paid-up capital, whichever is lower. This interest can be held by an individual, their spouse, or minor child, either separately or jointly. The Bill seeks to raise this to Rs 2 crore to streamline compliance requirements for individuals and reduce the regulatory burden.
“The Rs 5-lakh cap was established back in 1968 and clearly needed revision to account for inflation. At present, investors (along with spouse and minor child) holding shares worth Rs 5 lakh in any particular company may be faced with certain restrictions, including access to bank loans in some cases,” said Anish Mashruwala, partner & co-chair (Finance) at JSA Advocates & Solicitors. “Additionally, those holding shares valued at or above this threshold are subjected to further compliance formal-ities, leading to increased paperwork. By raising the limit, the amendment will spare many investors from these unnecessary restrictions,” he added.
Revised reporting dates for banks
The bill proppses changes to the current “Reporting Friday” system for banks, revising regulatory compliance dates. Under the new framework, banks would be required to submit reports on the 15th and last day of each month instead of the second and fourth Fridays. Currently, a fortnight is defined as the period from Saturday to the second following Friday. For monthly reporting, banks submit data to the regulator up to the last Friday of the month.
Similarly, quarterly reports are submitted up to the last Friday of the quarter. “The Bill redefines a fortnight as the period from the 1st to the 15th day of each month or from the 16th to the last day of the month,” explained Mashruwala. “This change will improve the accuracy of reporting in the banking system, as the last Friday may not always align with the actual last working day of the reporting period,” he added.
The Bill also seeks to give greater freedom to banks in deciding the remuneration to be paid to statutory auditors.
Improved governance for coop banks
The Banking Regulation Act prohibits the director of a bank (except its chairman or whole-time director) to hold office for more than eight consecutive years. The Bill seeks to increase this to 10 years for cooperative banks. This is to bring the banking regulation norms in sync with the 97th amendment to the Constitution which mandates a five-year or multiple of five-year tenure for elected members of the board in cooperative societies. Continuity of directors for longer tenure would give continuity in policies and governance. The Banking Regulation Act prohibits a director on a bank’s board to serve on the board of another bank. However, the Bill also proposes to allow the director of a central cooperative bank to serve on the board of a state cooperative bank.