Banking Laws (Amendment) Act, 2025

What the ₹2 Crore Threshold Really Signals in the Banking Laws (Amendment) Act, 2025

Between 2020 and 2023, unclaimed deposits in Indian banks swelled to over ₹48,000 crore, a staggering amount that speaks to deeper issues within asset succession and nomination frameworks. The Banking Laws (Amendment) Act, 2025 seeks to address this anomaly with 19 amendments, including the redefinition of 'substantial interest' by raising the threshold from ₹5 lakh to ₹2 crore. While the headline reform seems aimed at enhancing governance standards, the implications—both intended and unintended—deserve closer scrutiny.

The irony here is unmistakable: a sector projected to cross ₹15 lakh crore in gross banking credit by 2025 requires legislative tinkering not just for operational efficiency but to grapple with basic loopholes like missing nominees. This transactional shift from manual to streamlined systems is overdue, but the Act’s procedural depth belies its broader structural tensions.

Five Laws, One Amendment: Institutional Reach

The Banking Laws (Amendment) Act, 2025 spans five key legislations that form the backbone of India’s banking regulation:

• Reserve Bank of India Act, 1934: Operational definitions updated for modern banking challenges.
• Banking Regulation Act, 1949: Core provisions governing nomination processes restructured.
• State Bank of India Act, 1955: Streamlines director tenures and cooperative governance.
• Banking Companies Acts (Acquisition/Transfer of Undertakings) 1970 and 1980: Empowers PSBs to handle unclaimed shares and funds.

The underlying driver is governance reform, but much of the implementation rests on regulatory bodies—chiefly the Reserve Bank of India (RBI)—and Public Sector Banks (PSBs). The real test lies in how state governments, given their role in cooperative banks, align with constitutional targets such as those set under the 97th Constitutional Amendment.

Promises vs Ground Realities: Gaps in Execution

The Act’s provision for simultaneous or successive nominations offers clarity to a long-standing operational grey area. For instance, depositors can allocate percentages across up to four nominees, ensuring smooth transfer even in the event of legal disputes. A notable improvement. Yet, the lived experience of families struggling for legitimate claims often hinges on decentralized banking systems that lack uniformity.

The changes in director tenures for cooperative banks are equally significant, but state compliance remains questionable. Despite the Act's alignment with the 97th Constitutional Amendment, cooperative banks in states like Maharashtra and Gujarat are often bogged down by political interference. Increasing tenure from 8 years to 10 years might inadvertently entrench directors in these politically influenced entities while undermining the Act’s governance objectives.

Section 4’s increase in the ‘substantial interest’ threshold, from ₹5 lakh (unchanged since 1968) to ₹2 crore, is a game of optics. While ₹2 crore reflects contemporary benchmarks for regulatory compliance, India’s gross banking deposits are dominated by small and medium accounts—far below this threshold. The question is whether these reforms disproportionately focus on large-scale banking interests instead of inclusivity for smaller depositors.

Structural Challenges: Centralized Ambitions, State-Level Execution

The governance issues in cooperative banks highlight perennial centre-state tensions. Cooperative banks, often regulated by state governments, fall into a legal grey zone despite recent constitutional amendments. The Act’s uniform duration for directors is progressive in theory but risks political capture in practice. What remains unclear is how the RBI and state financial ministries plan to enforce stricter oversight mechanisms when cooperative banks remain prone to embedded patronage networks.

The issue of transparency in PSBs, particularly the transfer of unclaimed funds to the Investor Education and Protection Fund (IEPF), is another critical juncture. While this move aligns with practices under the Companies Act, what’s missing is a robust dispute resolution mechanism for depositors who might come forward years after such transfers. Without a practical recourse framework, the Act risks alienating less tech-savvy banking clients.

How Australia Handles Unclaimed Deposits: Lessons to Learn

India’s unclaimed deposit issue invites comparison with Australia’s banking system. Under Australian law, unclaimed bank deposits are transferred to the government after seven years of inactivity but can be reclaimed at any time. The Australian Securities and Investments Commission (ASIC) ensures that all unclaimed funds are traceable through centralized registries—a level of transparency Indian banking lacks.

The Indian amendment moves in the right direction by introducing nomination processes, but a registry akin to ASIC could bring far greater clarity to both depositors and financial institutions. Despite increasing technology adoption, India’s fragmented data systems are ill-equipped to offer similar traceability.

Success or Stagnation? Metrics to Watch

For the Banking Laws (Amendment) Act, 2025 to be deemed successful, several metrics require tracking:

• Number of nominee registrations per 10,000 deposit holders post-implementation.
• Percentage reduction in disputes over unclaimed funds within the next five years.
• State-wise compliance with governance standards for cooperative banks.
• Increase in audited PSB reports by qualified professionals.

However, implementation remains the Achilles’ heel of most banking reforms, and it is too early to assess whether states and banking bodies will overcome political and administrative hurdles.

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