Banking Laws (Amendment) Act, 2025 to Reform Governance and Depositor Protection

Source: LM
Syllabus: Indian Economy (UPSC GS III)

Context

The Banking Laws (Amendment) Act, 2025 comes into effect from 1st August 2025. It aims to improve governance, audit transparency, depositor protection, and regulation of cooperative banks.

What is the Act About?

The Act is a major reform passed by the Ministry of Finance, amending five key banking laws to update outdated norms and ensure better functioning of banks in India.

Legislations Amended

The Act modifies provisions in the following five key laws:

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

Main Objectives

• Improve internal governance in banks
• Safeguard the interests of depositors and investors
• Ensure high-quality and independent audits in public sector banks (PSBs)
• Bring cooperative bank regulations in line with constitutional standards

Key Provisions of the Act

1. Updated Definition of ‘Substantial Interest’

• The monetary threshold is increased from ₹5 lakh to ₹2 crore.
• This reflects inflation and growth in the banking sector since the earlier threshold set in 1968.

2. Director Tenure in Cooperative Banks

• Director tenure (excluding chairperson and full-time directors) increased from 8 to 10 years.
• This aligns with the 97th Constitutional Amendment and ensures better governance.

3. Transfer of Unclaimed Assets to IEPF

• PSBs can now transfer unclaimed shares, interest, and bonds to the Investor Education and Protection Fund (IEPF).
• This brings PSBs in line with practices under the Companies Act.

4. Improved Audit Practices

• PSBs can now determine remuneration of statutory auditors, encouraging the hiring of top-tier audit firms.
• Aims to improve transparency and independence in bank audits.

5. Rationalised Reporting to RBI

• Earlier weekly reporting to RBI is replaced with fortnightly, monthly, or quarterly submissions.
• This reduces operational stress and ensures more meaningful data reporting.

Why This Law Matters

• Modernises Banking Laws: Replaces outdated norms with regulations better suited to today’s financial landscape.
• Strengthens Cooperative Banking: Brings uniformity and accountability in governance.
• Protects Depositors: Better asset recovery and audit oversight boost public trust in the banking system.