Shivanand Pandit
The Indian Parliament has taken a significant step towards reforming the country’s banking sector with the passage of the Banking Laws (Amendment) Bill, 2024. This landmark legislation introduces a range of reforms designed to enhance bank governance, strengthen investor protections, and improve the ease with which customers interact with financial institutions.
On December 3, 2024, the Lok Sabha green-flagged the Banking Laws (Amendment) Bill, 2024, marking a significant milestone in the Winter Session, following a week-long legislative impasse. The Bill, introduced by Finance Minister Nirmala Sitharaman, was approved by a voice vote suggesting 19 amendments to the banking laws. First tabled on August 9, 2024, the Bill seeks to amend several crucial banking laws to update the regulatory framework and improve the efficiency of banking operations. Specifically, it makes changes to the Reserve Bank of India (RBI) Act, of 1934, the Banking Regulation Act, of 1949, the State Bank of India Act, of 1955, and the Banking Companies (Acquisition and Transfer of Undertakings) Acts of 1970 and 1980.
Key Amendments
Under the current provisions, a single or joint deposit holder can appoint only one nominee. The new provision, however, allows up to four nominees. These nominees can be designated either simultaneously or successively. In the case of simultaneous nominations, the share is divided proportionally among the nominees. For Lockers and Articles in Custody, successive nominations can be made, with priority determined by the order in which the nominations are made. This change is one of the most significant aspects of the Banking Laws (Amendment) Bill, 2024. It allows up to four nominees for a bank account, enabling family members to inherit the account funds more quickly upon the account holder’s death without the delays typically associated with legal processes. Account holders can designate their nominees in a specified order or allocate specific portions of the funds to each nominee, ensuring greater convenience and clarity in the inheritance process.
Under the current provision, substantial interest in the functioning of a bank or company is defined as holding shares worth more than ₹5 lakh or 10% of the company’s paid-up capital, whichever is lower. The amendment raises the monetary threshold to ₹2 crore. This relaxation is expected to attract more talent into the banking sector, enhancing the composition and diversity of experience within the boards of banks.
Under the existing rule, directors (other than the chairman or whole-time director) are limited to serving a maximum of 8 consecutive years. The new rule extends this tenure to 10 consecutive years for cooperative banks, aligning with constitutional provisions. Additionally, it allows executives of Central Cooperative Banks to serve on the boards of State Cooperative Banks, fostering improved efficiency and collaboration. Under the existing rule, a director of one bank cannot serve on the board of another bank, except for RBI-appointed directors.
Under the current provision, the Reserve Bank of India, in consultation with the central government, determines auditors’ remuneration. The amendment grants banks the autonomy to set the remuneration for their auditors independently. This change provides banks with greater flexibility in deciding fees for statutory auditors, which is expected to attract high-quality auditing firms and ensure thorough and effective financial scrutiny of the institutions.
Under the current definition, a fortnight is considered to be from Saturday to the second following Friday (14 days). The amendment revises this to define a fortnight as the period from the 1st to the 15th of each month, or from the 16th to the end of the month. To reduce the operational burden on banks, the Bill also proposes changes to the dates for filing compliance reports, setting them as the 15th and the last day of each month. This adjustment impacts how both scheduled and non-scheduled banks manage their cash reserves with the Reserve Bank of India.
Under the current rule, unpaid or unclaimed dividends are transferred to the Investor Education and Protection Fund (IEPF) after seven years. The amendment broadens this to include shares with unclaimed dividends for seven consecutive years, as well as unpaid interest or redemption amounts for bonds over the same period. It also allows claimants to retrieve shares or funds that have been transferred to the IEPF.
In addition to the above, the new provisions address other regulatory concerns and streamline several processes within the banking system, making it easier for customers to manage their accounts and ensuring that the banking sector operates with greater efficiency and transparency. Overall, these amendments reflect a broader push to modernize and simplify banking practices in India, making the system more customer-friendly while also enhancing security and accessibility.
Banking reforms must be well-designed
While the recent banking reforms are welcome, they do not address India’s most pressing banking challenge. Bank credit to the commercial sector in India remains around 50% of GDP, which is significantly lower than in most developed countries and even China, where bank loans exceed the country’s annual output. The only developed country with a similarly low bank credit-to-GDP ratio is the United States, but the U.S. has a well-established debt market that allows companies to borrow directly from individual investors and savings pools, regardless of whether the loans are deemed safe or risky. In contrast, businesses in India struggle with limited access to bank credit.
A 2022 report by the Lok Sabha Standing Committee on Finance revealed that India’s micro, small, and medium enterprises (MSMEs) have an unmet credit demand of ₹25 trillion, or 47% of their total borrowing needs. Over 90% of India’s 60 million MSMEs are micro-sized and are best served by specialized non-bank financial companies (NBFCs), which are better equipped to handle the high processing costs associated with small loans. However, banks must still play a crucial role. They should lend to NBFCs, which in turn can extend credit to small enterprises. While some lending to NBFCs is taking place, MSME associations report that banks are meeting only about 15% of their credit needs. Recently, the Reserve Bank of India took action against certain NBFCs accused of charging excessive interest rates, partly due to concerns that some retail loans were being used for stock market speculation. While the RBI’s concerns are valid, curbing the lending capacity of NBFCs is counterproductive. Without access to formal credit through NBFCs, small businesses are likely to turn to informal moneylenders, who often charge exorbitant interest rates far higher than those deemed “usurious” by the Reserve Bank of India.
India’s credit market needs a structural overhaul. Large, well-established companies should be encouraged to raise funds through bond issuances rather than relying on bank loans, especially for project financing. Banks often find it easier to lend to large clients, as these loans are relatively safe and profitable, but this reliance fosters complacency and discourages risk assessment for smaller loans. Risk pricing is a fundamental role that banks should be playing as financial intermediaries, and this complacency must be addressed. The introduction of India’s Account Aggregator framework allows banks to access detailed financial data on smaller borrowers, making it easier to assess risks and manage smaller loans. Banks should take on larger MSMEs as clients and consider investing in bonds issued by NBFCs that lend to smaller enterprises. By doing so, banks can earn higher interest rates than they would on loans to large corporations, benefiting both the MSMEs and the banks’ bottom lines, while also helping to broaden access to credit across the economy.
The bill represents a step toward privatisation, though Finance Minister Sitharaman has argued that it will improve governance and enhance customer convenience. While the bill aims to improve bank guarantees and investor protection, its true intent appears to be reducing the government’s stake in public sector banks from 51% to 26%. While the reforms have several positive aspects, concerns about the banking sector remain. The government must ensure that these changes do not undermine the role of public sector banks in providing affordable and accessible banking services. All types of banks—whether public, private, regional rural, differentiated, or cooperative—play a critical role in extending banking access to all segments of society. To further improve financial inclusion, the government should focus on strengthening these institutions.
Additionally, the Bill faces numerous significant challenges that could hinder its success. One major issue is the increased compliance burden, which may overwhelm smaller cooperative banks with limited resources, requiring substantial capacity-building support. Attracting qualified directors and auditors also remains a critical obstacle, particularly for these smaller institutions. Additionally, the effective and transparent management of unclaimed funds transferred to IEPF will demand rigorous oversight to avoid inefficiencies or potential misuse.
Striking the right balance between the Bill’s goals of inclusivity, stability, and operational efficiency, alongside the costs and complexities of implementation, will be essential for its transformative success. While the Bill has the potential to modernize India’s financial system by fostering resilience, inclusivity, and governance reform, its success hinges on overcoming the implementation challenges, especially those faced by smaller banks, and ensuring transparent management of funds.
The current high loan-to-deposit ratio in the sector reflects micro imbalances rather than macroeconomic issues. Large corporations are borrowing less, while households, MSMEs, and the agricultural sector are borrowing more, though demand remains weak. A broader macroeconomic view reveals that businesses, facing compressed demand and slowing consumption, are sitting on cash and credit without substantially investing in new capacity or inventories—a pattern this author has repeatedly highlighted. As credit, despite high demand, is used to finance existing debt rather than to fund productive investment, India’s macroeconomic position is at risk. Unless productive investment accelerates across sectors, the credit cycle will weaken over time. With limited space for the Reserve Bank of India to finance further borrowing without sufficient savings and investments, overall growth—which is already stagnating—will likely be further stifled.
There is an urgent need to analyse and address the deposit-credit growth gap in the context of broader macroeconomic vulnerabilities. This requires structural changes to the underlying market conditions, rather than mere adjustments. The government’s failure to grasp the structural roots of the current crisis and its economic implications could ultimately harm the nation’s financial health and economic stability. While amendments to the Bill may be welcome in principle, they will yield limited reform if institutional stakeholders—including both public and private banking bureaucracies and management—fail to implement them effectively.
As the government continues to support this vital sector, the next phase of banking reforms must be carefully planned. It should prioritise enhancing governance, risk management, and compliance frameworks. Special attention should also be given to green financing initiatives to mitigate climate risks and support sustainable growth.
The writer is a tax specialist, financial adviser, author, guest faculty and public
speaker based in Goa. He can be reached at [email protected] or
9822983420
