Among other things, the Bill will allow account holders to designate as many as four nominees instead of the one currently permitted, a move that not only makes inheritance dynamics simpler, but also aligns bank deposits with other financial products such as mutual funds, pension and insurance products.

This is expected to enhance efficiency and build trust among account holders. Analysts said other asset classes including mutual funds have gained popularity in recent years, while bank deposits have lost their sheen. “We hope that the improved customer experience will help banks regain the trust that has eroded,” a senior public sector bank executive said.

Once the Bill is approved in both Houses, account holders will also be able to divide the quantum of deposits to different nominees, making estate planning more efficient, transparent and cost effective. Slowing deposit growth in the banking system, particularly in state-owned banks, has become the Narendra Modi government’s Achilles heel.

“This was much required. It was imperative to change the rules and regulations as per need and keep in sync with the changing times. The most important impact of the Bill will be from the investor's point of view, as it will bring more flexibility to inheritance, and reduce estate hassles,” Nirupama Soundararajan, economist, founder and partner at Policy Consensus Centre told The Secretariat.

Soundararajan added that the new rules are likely to reduce withdrawal of deposits. The slowing growth in deposits has also led to expanding credit deposit (CD) ratio — the ratio of how much deposits is used by banks to extend credit.

The CD ratio is about 80 per cent now. An excessively high CD ratio indicates that bulk of the deposits are being used to extend credit, leaving little scope for banks to manage any exigencies.

That apart, estate planning is crucial from the customer's point of view, as it eliminates legal hassles and reduces costs.

The Bill is also expected to reduce the growing numbers of unclaimed deposits. It seeks to simplify the transfer of unclaimed funds, something that will also help customers and boost trust and confidence. Under the present regulatory framework, public sector banks only have to pay dividends, while the funds that have remained unclaimed for seven years can be transferred to the Investor Education and Protection Fund (IEPF). 

So far, only unclaimed funds lying with private sector lenders have been going to the IEPF. With the amendment, state-owned banks will also be able to direct their unclaimed funds to the IEPF — an organisation that collects unpaid or unclaimed amounts belonging to a company’s investors. This will provide greater comfort to investors and depositors. For investors, collecting the funds from IEPF, which maintains the details of every account, is simpler. 

As per the RBI’s Annual Report, unclaimed deposits with banks increased by 26 per cent year-on-year to Rs 78,213 crore at the end of March 2024.

Other Key Proposals

The Bill, which amends the Reserve Bank of India Act (1934), the Banking Regulation Act (1949), the State Bank of India Act (1955), the Banking Companies (Acquisition and Transfer of Undertakings) Act (1970), and the Banking Companies (Acquisition and Transfer of Undertakings) Act (1980), seeks to improve governance for the lenders, including cooperative banks.

One of the proposals is to increase the tenure of directors (barring chairpersons and whole-time directors) in cooperative banks to 10 years in order to boost stability.

Directors attached with central cooperative banks will also be able to serve on the boards of cooperative banks under the aegis of state governments, pushing collaboration and injecting more oversight.

Several cooperative banks have come under the scanner for regulatory discrepancies and non compliance. Lack of strong corporate governance, weak internal checks and balances, and inadequate expertise in management of funds are some of the problems that have been plaguing these banks for years.

The Bill also aims to provide public sector banks more autonomy in determining auditor remuneration, and seeks to define “substantial interest” for directorships in a company. The proposal is to raise it to Rs 2 crore, from the Rs 5 lakh limit that was fixed in 1968.

“The intention is to keep our banks safe, stable and healthy,” Finance Minister Nirmala Sitharaman said, while introducing the Banking Laws (Amendment) Bill earlier this month. “The proposed amendments will strengthen governance in the banking sector and enhance customer convenience with respect to nominations and protection of investors," she said.

Overall, though analysts felt that while the amendments will be a big boost by simplifying the nomination and inheritance rules, the government needs to take more steps to make bank deposits more lucrative. However, the bill will make the overall banking system more efficient.