Critical Analysis Of The Banking Laws (Amendment) Bill, 2024

Salient Amendments And Its Implications

The bill amends the explanatory procedural provisions under section 42 of the RBI Act, 1934. Section 42 deals with the concept of Cash Reserve Ratio (CRR), which the average daily balance kept with the RBI by the scheduled banks^[2]. The section defines average daily balance as “the average of the balances held at the close of business of each day of a fortnight”. Similarly, fortnight is defined as “the period from Saturday to the second following Friday, both days inclusive”. The bill amends this definition of fortnight to “the period from the first day to the fifteenth day of each calendar month or sixteenth day to the last day of each calendar month, both days inclusive”. Therefore, earlier the banks were to calculate the average daily balance fortnightly i.e., the 14 day period starting from Saturday to the second Friday after that. However, the bill fixed the fortnight as a 15 day period of the month including the 1^st of every month to the 15^th or the 16^th to the end. It seeks to create uniformity in order to create a consistent and easier regulatory framework for the banks through determining CRR from shifting weekdays to a fixed period in a month.

The bill also amends section 38A of the SBI Act, 1955. The section requires the State Bank of India to transfer the unpaid or unclaimed dividend to the “unpaid dividend account”, if within 30 days it remains unpaid or unclaimed. Further, if it remains unclaimed after seven years of the transfer, the same shall be transferred to the Investor Education and Protection Fund established under the Companies Act, 1956.^[3] The amendment changes the nomenclature from “dividend” to “money”. Additionally, it also increases the scope of transfer to the Investor Education and Protection Fund from mere “money” to the “shares” as well as “any interest or redemption amount upon any bond”.

Further, the bill makes some substantive amendments in the Banking Regulation Act, 1934 (herein after referred as “the Act”). It increases the amount provided for the “substantial interest” in the Act from five lakh rupees to the two crore rupees. This amendment directly affects the limitations on the power to grant loan by the commercial banks under section 20 of the Act. The section prohibits the banks to grant loans to any company in which the directory of the bank holds any substantial interest.^[4] Therefore, the amendment relaxes the restrictions on loan granting power of the banks. It modernizes the amount as per the prevailing economic conditions considering the last amendments made to it was in 1984. However, it raises concerns on the issue of impartiality as the raised amount holds the tendency to hamper with the issue of conflict of interest.

The bill also increases the limit on the number of nominees from one to four by the depositors. The Act grants these nominees access to the deposit, items, or locker in the event that the person who nominated him passes away. The nominees can be appointed either successively or simultaneously while for other purposes they can be appointed successively. It increases the flexibility for the depositors as the depositors are empowers to choose the proportion for the distribution of funds, among multiple nominees, in the event of their death.

Further, the bill seeks to interfere with the working and appointments of directors of the coo-operative banks as well.

Under section 10A of the Act, a director of the banking company cannot hold the office for more than eight years. The bill increases the period from eight to ten years for the co-operative banks. Thus, it ultimately included the co-operative banks within the purview of this section.^[5]

Along with this, the bill amends section 16 of the Act, which deals with the “Prohibition of Common directors”.^[6] Hitherto, the provision prohibited any person to be the director of the two-banking company at the same time, to reduce the conflict of interest and increase the commitment and transparency. The 1969 amendment made an exception for the same as provided in sub-section (3), which reads as follows “Nothing in sub-section (1) shall apply to, or in relation to, any director appointed by the Reserve Bank”. The current bill further increased the scope of the exception clause through adding the following sentence “or the director of a central co-operative bank elected to the Board of the state co-operative bank in which he is a member”. The amendment would have several implications, it not only enhanced the issue of conflict of interest but also interfered with the independence of the state co-operative banks.

The Constitutional Controversy

Article 245 of the Constitution of India states that the Parliament is entitled to make laws for the whole of the territory of India while the states can make laws within their territory. It is read with Article 246, which demarcates the legislative and executive power between the Union and the states. It provides that the Union can make laws for the subject matter provided under List I (Union list) of the 7^th schedule while the subject matter of the states is provided under List II (State list). Similarly, List III i.e., the concurrent list contains the subject matter on which both the Union and the states can make laws.^[7] These provisions act as the backbone of the Indian federal structure by clearly bifurcating the domain of the Union and the states.

The issue of interference with the co-operative banks (emphasis on state co-operative banks) is highlighted due to the problematic constitutionality of the same. It brings into question the power of the Central government to deal with the co-operatives. Entry 43 of the Union list empowers it to regulate the banks in India, however it explicitly excludes “co-operative societies” from its purview. Similarly, the power to deal with “co-operative societies” is provided under Entry 32 of List II, thus making it a state subject.^[8] Needless to say, “co-operative societies” include “co-operative banks” as indicated under section 56 of the Act and affirmed in the case of PCIT v. Totagars Co-op. Sale Society.^[9] The Centre, by the virtue of Article 248 of the Constitution, is strictly prohibited from entering into the domain of the state list.^[10]

Although, when the issue of the bill being ultravires of the federal principle was raised in the Parliament, the finance minister Nirmala Sitaraman rebutted “There is no attempt to undermine the cooperatives, particularly cooperatives dealing with everything other than banks. Banks, cooperatives with a licence for banking will have to have a rule and therefore we have shown this”. Nevertheless, the controversial provisions in the bill could be challenged, on this ground, if it gets the clearance from the Parliament for enactment.

The Amendments brought in by the bill deals with some serious procedural and substantive provisions. The statement of object and reasons of the bill states the purpose behind bringing it as “As the banking sector has evolved over the years and with a view to improve bank governance and investor's protection, it has become necessary to make certain amendments in the concerned Acts”. The bill encompasses the interest of all the stakeholders including the depositors, investors and the banking company itself. However, some provisions could have adverse consequences, which could hamper the transparency in the future and holds the tendency to engender the issue of conflict of interest. Further, the bill may find itself on clutches of the Supreme Court on the federal issue of substantial interfering by the Union with the co-operative banks, which is the subject matter of the States.

Views are personal.