The Banking Laws (Amendment) Bill, 2024

Posted 22 Jan 2025

Updated 24 Jan 2025

4 min read

Why in the News?

Recently, the Banking Laws (Amendment) Bill, 2024 was passed by the Lok Sabha which seeks to improve governance standards in India's Banking System.

More on the News

The Bill proposes amendments to the RBI Act, 1934; Banking Regulation Act, 1949; State Bank of India Act, 1955; and the Banking Companies (Acquisition and Transfer of Undertakings) Acts of 1970 and 1980.
Key Provisions of the Bill
- Definition of fortnight for cash reserves: Fortnight for cash reserves redefined as either 1st to 15th or 16th to last day of each month, applicable to scheduled and non-scheduled banks.
- Substantial interest in a company: Substantial interest threshold in a company raised from ₹5 lakh (or 10% of the paid-up capital of the company, whichever is less) to ₹2 crore, with revision possible via notification.
- Investor Education and Protection Fund (IEPF): Enables transfer of unclaimed dividends, shares, and interest or redemption of bonds to IEPF when they remain unclaimed for seven consecutive years.
- Remuneration of Auditors: Banks empowered to decide auditors' remuneration, replacing RBI-central government consultation.

Issues with the Governance of Banking System in India

Rise in Banking Frauds: RBI's Report on Trend and Progress of Banking in India 2023-24 noted 18,461 frauds amounting to ₹21,367 crore.
- Frauds pose risks including reputational, operational, and business risks, alongside customer confidence erosion and financial stability concerns. E.g., PNB Scam (2018).
Governance and autonomy of Public Sector Banks (PSBs): PSBs face issues including lack of autonomy and inefficiencies in decision-making due to factors like government interference in board appointments and operational matters.
- Also, there exists duality of control over PSBs from the RBI and the banking division of the Union Ministry of Finance.
- Further, majority government stakes in PSBs results in risk-aversion and delayed decision-making due to fear of 5Cs (CAG, CBI, CVC, CIC, Courts).
Regulatory gaps and ambiguity: Coexistence of multiple regulatory bodies like the RBI, SEBI, IRDAI, CCI, etc., creates overlaps and ambiguities.
- Further, cooperative banking sector often suffers from weaker regulation due to dual control by RBI and state registrar of cooperatives resulting in sub-optimal regulatory control.
  - Closure of 17 cooperative banks and a record number of license cancellations by RBI in 2023.
Structural issues: Credit growth outpacing deposit growth due to shift in household savings from bank deposits to mutual funds, insurance, and pensions, leading to structural liquidity issues.
- Political considerations in loan disbursement, debt waivers disrupting credit culture and balance sheets of banks, etc.
Cybersecurity and IT Risks: Rising cyberattacks on banks and financial institutions necessitating enhanced IT governance and resilience.
- Digital Frauds: Increase in social engineering attacks and misuse of mule accounts.

Recent measures taken to improve Banking Governance in India
By the Union Government	By the RBI
Reforms in PSBs: Consolidation of PSBs (merger of 10 PSBs into 4 in 2019) to improve scale, operational efficiency, and risk management; recapitalization of PSBs to Basel III norms, etc. Legislative reforms: Amendments to the Banking Regulation Act, 1949 to empower RBI to supersede boards in case of governance failures; implementation of IBC to streamline NPA resolution; etc. Reducing stress on Banks: Constitution of National Asset Reconstruction Company Ltd. (NARCL) and India Debt Resolution Company Ltd. (IDRCL) in 2021.	Strengthened risk management framework: Risk-based Supervision, Asset Quality Review and Prompt Corrective Action Framework, Prudential Framework for Resolution of Stressed Assets Framework (2019) for time-bound resolution of NPAs, etc. Regulatory reforms for Cooperative Banks: Enhanced RBI's regulatory control over cooperative banks under Banking Regulation (Amendment) Act, 2020; regulatory approval for umbrella organization for urban cooperatives, etc.

Way Forward

Autonomy of PSBs: Government can set up Bank Investment Company under the Companies Act, 2013 as a parent holding company to manage government stakes in PSBs. (P J Nayak Committee)
Performance-Based Incentives: Align the compensation of bank executives with profits, fostering a results-driven approach focused on marketing, customer base expansion, and operational efficiency. (P J Nayak Committee)
Transparency and accountability: Strengthen transparency in decision making and financial disclosure through real-time reporting of key financial metrics to the RBI and other stakeholders.
- A robust whistleblower mechanism can be put in place to allow employees and stakeholders to report any suspicious activities or potential collusion without fear. (Narasimham Committee - II)
Regulatory coordination: Simplify and streamline regulatory coordination by fostering collaboration RBI, SEBI, IRDAI, etc., for holistic and effective regulation of banking and finance sector in India. (Narasimham Committee – II)