CHANGES TO BANKING LAWS

Enhanced Nomination Process

●Current System: Each bank account can currently have only one nominee.

●Proposed Change: The Bill allows depositors to nominate up to four nominees for their accounts. These nominees can be listed simultaneously and successively. This means that depositors can designate up to four individuals who will have rights to the account or assets in case of the depositor's death.

• Simultaneous Nominations: All four nominees can be listed at the same time.
• Successive Nominations: Nominees are listed in a specific order. If the primary nominee is unable to claim the funds, the claim will pass to the next nominee in line.

Unclaimed Assets to Investor Education and Protection Fund (IEPF)

●Current System: Unclaimed dividends, shares, interest, or bonds are not systematically transferred.

●Proposed Change: The Bill proposes that unclaimed assets (such as dividends, shares, and bonds) be transferred to the Investor Education and Protection Fund (IEPF) if they remain unclaimed for seven consecutive years. Individuals can then claim their assets or refunds from the IEPF.

Redefinition of 'Substantial Interest'

●Current Threshold: The current threshold for what constitutes a substantial interest in shareholding is ₹5 lakh, a figure set in 1968.

●Proposed Change: The Bill raises this threshold to ₹2 crore. This update reflects current economic conditions and adjusts the definition to be more relevant today.

Flexibility in Auditor Compensation

●Current Rule: Compensation for statutory auditors is regulated under fixed guidelines.

●Proposed Change: The Bill introduces flexibility in determining how banks can compensate their statutory auditors, allowing banks to set fees based on market conditions and specific needs.

Revised Reporting Dates

●Current Reporting Schedule: Banks currently submit statutory reports to the Reserve Bank of India (RBI) on specific Fridays.

●Proposed Change: The Bill suggests changing the reporting deadlines to the last day of each fortnight, month, or quarter. This aims to standardize reporting dates and align them with financial cycles.

Amendments for Cooperative Banks

●Director Tenure: The Bill proposes extending the tenure for directors of cooperative banks from 8 years to 10 years. This change aligns with the Constitution (97th Amendment) Act, 2011.

●Board Membership: It allows a director of a Central Cooperative Bank to serve on the board of a State Cooperative Bank, fostering greater collaboration between different levels of cooperative banking.

Specific Amendments to Existing Laws

●Laws Affected: The Bill seeks to amend the following laws:

• Reserve Bank of India Act, 1934
• Banking Regulation Act, 1949
• State Bank of India Act, 1955
• Banking Companies (Acquisition and Transfer of Undertakings) Acts of 1970 and 1980

History of banking in India

Ancient and Medieval Periods

●Ancient India: Banking concepts were present in ancient India, with practices such as usury mentioned in Vedic texts and later texts like the Manusmriti and Jatakas. The Mauryan period saw the use of financial instruments like the adesha, which resembles a modern bill of exchange.

●Medieval Period: During the Mughal era, loan deeds and credit instruments like hundis were widely used. The system evolved with the introduction of various forms of financial documentation and instruments.

Colonial Era

● Early Banks: The British period saw the establishment of several key banks, including the Bank of Hindustan (1770), General Bank of India (1786), and Union Bank of Calcutta (1829).

• The presidency banks, such as the Bank of Bengal (1806), Bank of Bombay (1840), and Bank of Madras (1843), played crucial roles in the colonial banking system.

●Development of Indian Banks: The late 19th and early 20th centuries saw the rise of Indian joint-stock banks, such as the Punjab National Bank (1894) and Oudh Commercial Bank (1881).

Post-Independence Era

●Early Reforms: After independence in 1947, the Indian government took active measures to regulate and control the banking sector.

• The Reserve Bank of India (RBI) was established in 1935 and nationalized in 1949. The Banking Regulation Act of 1949 empowered the RBI to oversee and control banks.

●Nationalization: In 1969, the Indian government nationalized 14 major banks, followed by a second round of nationalization in 1980. This brought the majority of banking operations under government control and aimed to facilitate credit delivery.

●Liberalization: The 1990s marked a significant shift with the liberalization of the banking sector. The introduction of private banks, such as ICICI Bank and HDFC Bank, revitalized the sector. Foreign investment norms were relaxed, leading to increased competition and modernization.

Recent Developments

●Amalgamations: In recent years, there have been significant mergers and amalgamations among public sector banks (PSBs). For example, the merger of five associate banks with the State Bank of India (SBI) in 2017.

●The Indian banking sector is now characterized by a mix of public sector banks, private sector banks, and foreign banks. The sector continues to grow, with a focus on expanding reach in rural areas and leveraging technology to improve services.

PRACTICE QUESTION

Q. Critically analyze the role of Public Sector Banks in the Indian economy, how the PSBs contributed to economic growth and financial stability, and what strategies should the PSBs need to adopt to compete in this fast-changing banking sector.