Banking Laws Amendment Bill

The Banking Laws (Amendment) Bill, 2024, was recently passed by the Indian Parliament. This legislation introduces changes to banking regulations. It allows bank account holders to nominate up to four individuals for their accounts. The Rajya Sabha approved the bill by voice vote after the Lok Sabha passed it in December 2024.

Key Changes Introduced

The bill redefines the term ‘substantial interest’ in a bank. This limit is raised from ₹5 lakh to ₹2 crore. This is update, as the previous threshold had been in place for nearly six decades. The increase aims to modernise banking regulations in line with current economic conditions.

Nominee Provisions

Under the new amendment, account holders can now have multiple nominees. This flexibility is extended to both cash and fixed deposits. However, for lockers, only simultaneous nominations are allowed. This change mirrors existing practices in insurance policies and other financial instruments.

Impact on Cooperative Banks

The amendment also extends the tenure of directors in cooperative banks from eight to ten years. This adjustment aligns with the Constitution (Ninety-Seventh Amendment) Act, 2011. It allows a director of a Central Cooperative Bank to serve on the board of a State Cooperative Bank, enhancing governance across these institutions.

Financial Oversight and Accountability

Finance Minister Nirmala Sitharaman brought into light the government’s commitment to addressing non-performing assets (NPAs). She stated that while NPAs have decreased, the government will continue to take action against wilful defaulters. Over the past five years, the Directorate of Enforcement has initiated approximately 112 cases related to bank fraud.

Profitability and Recovery Efforts

Public sector banks reported record profits of around ₹1.41 lakh crore in the last fiscal year. The Finance Minister expressed confidence that profitability would rise further in 2025-26. She clarified that loan write-offs do not equate to waiving off debts, emphasising ongoing recovery efforts by banks.

Regulatory Compliance Changes

The amendment also modifies reporting dates for banks. Regulatory compliance will now be due on the 15th and the last day of each month, rather than on the second and fourth Fridays. This change aims to streamline compliance processes.

Unique Legislative Approach

Sitharaman noted that the amendments impact five different acts. Eight teams collaborated on these changes, ensuring comprehensive updates to meet the objectives outlined in the budget speech. This collaborative effort reflects a proactive approach to modernising banking laws.

Questions for UPSC:

1. Critically analyse the implications of increasing the nominee limit in bank accounts on financial security.
2. Estimate the potential impact of raising the ‘substantial interest’ limit on banking sector reforms.
3. What are the roles of cooperative banks in the Indian economy? How do amendments affect their governance?
4. Point out the significance of regulatory compliance changes in the context of banking operations.

Answer Hints:

1. Critically analyse the implications of increasing the nominee limit in bank accounts on financial security.

1. Increased nominee limits enhance financial security for account holders, ensuring smoother asset transfer upon death.
2. Multiple nominees can reduce disputes among heirs, promoting family harmony and reducing legal complications.
3. Encourages individuals to plan their finances better, knowing they can designate several beneficiaries.
4. May lead to increased trust in banks, as customers feel their assets are better protected.
5. Potential for misuse if not regulated, as individuals might nominate non-family members, complicating inheritance matters.

2. Estimate the potential impact of raising the ‘substantial interest’ limit on banking sector reforms.

1. Raising the limit modernizes the definition of substantial interest, aligning it with current economic realities.
2. Encourages greater investment in banks from larger entities, potentially leading to increased capital inflow.
3. May reduce the regulatory burden on smaller investors, allowing banks to focus on substantial stakeholders.
4. Could lead to more robust governance structures as larger stakeholders may demand higher accountability.
5. Stimulates reforms that could attract foreign investments, enhancing overall banking sector competitiveness.

3. What are the roles of cooperative banks in the Indian economy? How do amendments affect their governance?

1. Cooperative banks provide credit and financial services to the rural and semi-urban population, promoting financial inclusion.
2. They play important role in agriculture financing, supporting farmers with loans and financial products.
3. The amendments enhance governance by extending director tenures, allowing for more stable leadership and strategic continuity.
4. Facilitates collaboration between Central and State Cooperative Banks, improving operational efficiency.
5. Strengthened governance can lead to better risk management and accountability within cooperative banks.

4. Point out the significance of regulatory compliance changes in the context of banking operations.

1. Changing reporting dates to the 15th and last day streamlines compliance, reducing confusion and improving efficiency.
2. Facilitates timely regulatory reporting, enhancing transparency and accountability in banking operations.
3. Aligns compliance processes with modern business practices, making it easier for banks to manage deadlines.
4. Reduces the administrative burden on banks, allowing them to focus on core banking activities.
5. Improves overall regulatory oversight, which can enhance public trust in the banking system.