Changes to banking laws have a consumer tilt

Better protection for depositors and investors was one of the chief considerations in Union Finance Minister Nirmala Sitharaman introducing, on Friday, the Banking Laws (Amendment) Bill, 2024, in the Lok Sabha to amend four pieces of legislation.

This amendment is also to improve audit quality in public-sector banks (PSBs), offer consistency in reporting by banks to the Reserve Bank of India (RBI), and provide for an increase in the tenure of directors in cooperative banks.

By proposing to amend the State Bank of India Act and the Banking Companies (Acquisition and Transfer of Undertakings) Act, the government seeks to enable transferring unclaimed dividends, shares, and interest or redemption of bonds to the Investor Education and Protection Fund (IEPF) when they remain unclaimed by investors for seven consecutive years.

This will allow investors to claim transfers or refunds from the fund.

However, the proposed changes to the Banking Companies (Acquisition and Transfer of Undertakings) Act left out the issue of change in the ownership pattern of PSBs.

Sitharaman had announced privatising two PSBs apart from IDBI Bank in her 2021-22 Budget speech.

Mukesh Chand, senior counsel of Economic Laws Practice, said the proposed amendments brought the provisions of the two laws in line with the Companies Act, 2013, which has similar provisions.

“By harmonising these statutes, the amendments create a uniform approach across private-sector banks and public-sector entities.

"This enhances transparency and protects investor interests,” he added.

Business Standard reported the matter on April 8.

The IEPF was created to promote investor awareness and protect their interests. Unclaimed dividends and shares transferred to the IEPF can be easily claimed by the investor by submitting the required documents and following the verification process.

The Bill also proposes to amend various sections of the Banking Regulation Act to allow for up to four nominees from one now.

This includes simultaneous and successive nominations, offering greater flexibility, and convenience for depositors and their legal heirs, especially concerning deposits, articles in safe custody, and safety lockers.

The Bill also proposes to extend the tenure of directors of cooperative banks from eight years at present to 10 years.

This does not include the tenure of chairman and whole-time directors.

In 2011, cooperative banks were granted protection under the Constitution through the 97th amendment, which specified two tenures of five years each.

However, the Banking Regulation Act, which specifies two tenures of four years each, has not been amended yet to align with the constitutional provision.

“Since this provision has constitutional status, the Banking Regulation Act needs to be amended accordingly.

"Thus, the necessary changes were made,” said R Gandhi, former deputy governor of the RBI.

The amendment to the Banking Regulation Act also proposes to redefine “substantial interest” that would lead to an increase in the threshold for shareholding from Rs 5 lakh to Rs 2 crore, reflecting the present value.

This was last fixed in 1968.

The Bill also proposes to allow the director of a central cooperative bank to serve on the board of a state cooperative bank.

Another major change proposed by the Bill is amendment to the RBI Act as well as the Banking Regulation Act to revise the reporting dates for the submission of statutory reports by banks to the RBI.

The Bill proposes shifting the reporting date from the current “reporting Friday” to the last day of the fortnight, month, or quarter.

This amendment aims to ensure consistency in reporting practices.

“Traditionally banks have been required to report on every alternate Friday, whereas most other sectors have moved towards monthly, quarter-end, or calendar-end reporting.

"The practice of reporting on Fridays is an anomaly rooted in historical reasons and does not align well with modern practices.

"Given that Saturdays are now working days for banks due to electronic payments, it would be practical to align reporting with the end of a fortnight rather than a specific Friday,” said a former RBI deputy governor.