Context: Recently, the Lok Sabha passed the Banking Laws (Amendment) Bill, 2024, marking the first legislative achievement of the Winter Session after a week-long deadlock.

• The Bill, introduced by Finance Minister Nirmala Sitharaman, was passed via a voice vote.

• It amends the:  (i) Reserve Bank of India (RBI) Act, 1934, (ii) Banking Regulation Act, 1949, (iii) State Bank of India Act, 1955, (iv) Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970, and (v) Banking Companies (Acquisition and Transfer of Undertakings) Act, 1980.

Key Changes Made

• Redefining “Fortnight” for Cash Reserves: Shifting to a calendar month-based definition makes calculating the average daily balance for cash reserves simpler and more aligned with standard accounting practices.

• Under the RBI Act, scheduled banks must maintain a certain level of average daily balance with the RBI as cash reserves. 

• Tenure of Co-operative Bank Directors: Extending the tenure to 10 years may provide more stability and continuity in the leadership of co-operative banks.

• Prohibition on Common Directors: The exemption for central co-operative bank directors serving on state co-operative bank boards could facilitate better coordination and collaboration within the co-operative banking sector.

• Substantial Interest in a Company: Raising the threshold to Rs 2 crore reflects the changing economic landscape and may encourage greater investment in companies by individuals associated with banks.

• Nomination: Allowing up to four nominees provides greater flexibility for depositors in distributing their assets and can help streamline the inheritance process.

• Investor Protection: This strengthens investor protection mechanisms and promotes transparency in the handling of unclaimed funds.

• Remuneration of Auditors: Giving banks the power to decide auditor remuneration could provide more flexibility and allow them to attract qualified auditors.

Key Takeaways

• The Banking Laws (Amendment) Bill, 2024 introduces critical changes to enhance banking governance, improve efficiency, and protect customer interests. These include:

• Simplifying regulatory frameworks for cash reserves and director tenures.

• Providing flexibility in nominations and addressing unclaimed funds.

• Empowering banks to determine auditor fees.

• Strengthening the co-operative banking system through revised rules for directors and substantial interest thresholds.