Author: Devesh Raj
To the Point
India’s banking framework has received its most comprehensive tune-up in years through the Banking Laws (Amendment) Act, 2025 (“the 2025 Amendment”). Enacted on April 15, 2025 and with major provisions brought into force from August 1, 2025, the law recalibrates governance norms, depositor-facing processes, audit quality in public sector banks (PSBs), and compliance cadence with the Reserve Bank of India (RBI). It does so by amending five statutes: the RBI Act, 1934, the Banking Regulation Act (BR Act), 1949, the State Bank of India Act, 1955, and the Banking Companies (Acquisition and Transfer of Undertakings) Acts of 1970 and 1980.
Clearer, calendar-based compliance with RBI
A long-standing pain point for banks, reporting on “alternate Fridays”,has been replaced with a calendar-based “fortnight”: the 1st–15th and 16th–last day of each month (both days inclusive). This change, written directly into Section 42 of the RBI Act, simplifies computation of the cash reserve average daily balance and aligns internal reporting to fixed calendar windows. The amendment also cleans up obsolete provisos and special returns, with guidance noting a shorter filing window, thereby reducing operational friction without weakening supervision.
Why it matters: Calendarized fortnights mean fewer ambiguities and reconciliation errors across treasury, ALM and regulatory reporting teams. For compliance officers, it standardizes cut-offs, eases systems automation, and improves data quality that flows into RBI monitoring.
A modernized “substantial interest” threshold to curb insider influence
Under the BR Act’s definitions, the rupee value that triggers “substantial interest” had been frozen since 1968 at ₹5 lakh, a level far below today’s balance sheets. The 2025 Amendment raises this to ₹2 crore (and enables the Centre to notify a different sum), tightening governance by updating conflict-of-interest guardrails for directors and connected parties. Expect fewer loopholes where minuscule holdings technically met disclosure thresholds.
Why it matters: In governance practice, thresholds are risk valves. A ₹2-crore trigger reflects current scale, discourages proxy holdings from flying under radar, and strengthens board-room integrity, particularly salient for smaller banks and co-operative entities.
3) Tenure reforms for co-operative bank directors
To align the sector with contemporary constitutional and corporate norms, director tenure (other than chairperson/whole-time director) in co-operative banks is extended from eight to ten years. The change recognises the governance architecture envisaged after the 97th Constitutional Amendment and helps bring stability to boards while preserving refresh cycles.
Why it matters: Co-operatives have faced scrutiny on governance continuity and political capture. A calibrated, longer tenure can improve strategy execution and oversight continuity, while the rest of the law’s checks (including “substantial interest”) aim to temper entrenchment risks.
4) Four-nominee framework: smoother claim settlement for depositors
A depositor-centric highlight is the ability to appoint up to four nominees for deposits, articles in safe custody, and lockers, with a clear mechanism for simultaneous nominations (with proportions) or successive nominations (priority order). This replaces the rigid single-nominee model, a friction point that became glaring during COVID-era successions. The framework is now part of the BR Act via the 2025 package.
Why it matters: Banks can release funds/contents to nominees without first untangling heirship disputes, speeding relief to families, while nominees remain trustees vis-à-vis legal heirs under succession law. The clarity on simultaneous vs successive nominations reduces interpretive disputes at branch level.
5) Public Sector Bank (PSB) audit quality and unclaimed investor protection.
Two further deposit-and-investor-facing improvements stand out:
Audit quality in PSBs: The reform package enables stronger statutory audit arrangements (including remuneration provisions), intended to enhance audit independence and attract top-tier firms, an essential plank after global lessons on audit failures.
Transfer of unclaimed assets to IEPF: PSBs may transfer unclaimed shares, interest and bond-redemption amounts to the Investor Education and Protection Fund (IEPF), harmonising PSB practice with the Companies Act, 2013 regime and centralising claims via the IEPF Authority. Effective August 1, 2025.
Why it matters: Robust audits strengthen public confidence in PSBs. The IEPF move consolidates scattered unclaimed amounts into a single, claimant-friendly channel, protecting small investors and streamlining reconciliations.
6) Scope and commencement
The Gazette bears the Act number (No. 16 of 2025) and records Presidential assent on April 15, 2025. The Government has staggered commencement, with a notification appointing August 1, 2025 for several key sections, consistent with the statute’s clause permitting different effective dates.
7) Practical implications for stakeholders
Boards & Company Secretaries: Revisit related-party and fit-and-proper matrices to reflect the ₹2 crore substantial-interest bar; update director disclosures and board charters.
Operations & Retail Liabilities: Upgrade nomination forms and core banking fields to capture up to four nominees, including proportion splits and priority order; communicate changes to customers. RBI has separately nudged banks to capture nominees’ emails and phone numbers to improve reachability, a complementary policy thread.
Treasury/Finance/Compliance: Align reserve and return calculations to the calendar-fortnight definition; update reporting calendars, MIS cut-offs and maker-checker workflows.
PSBs & Investors: Build IEPF transfer pipelines for eligible unclaimed shares/interest/bonds and enhance customer-facing communication on recovery paths via the IEPF Authority.
Overall, the 2025 Amendment tightens governance, reduces compliance ambiguity, and upgrades consumer-facing processes. Its success will hinge on meticulous implementation in operations, audits, and customer communication.
Use of Legal Jargon
Substantial Interest: A quantitative threshold in the BR Act used to assess a person’s influence in a banking company; now pegged at ₹2 crore (or another amount as notified). It feeds into fit-and-proper evaluations and conflict-of-interest screens for directors.
Fortnight (Calendar-Based): For RBI Act s.42 cash-reserve computations and returns, a fortnight is now 1st–15th or 16th–month-end (both inclusive), replacing the “Saturday to second-Friday” formula, simplifying compliance timing.
Nomination (Simultaneous vs Successive): Statutory right of a depositor/locker-holder to name up to four nominees; simultaneous nominations allocate defined proportions, successive nominations set priority order, streamlining post-death access without determining succession.
IEPF (Investor Education and Protection Fund): A central pool under the Companies Act, 2013 where unclaimed dividends/shares/amounts are transferred; now extended to PSBs for unclaimed shares/interest/bond redemptions, with a standardised claimant process.
Fit-and-Proper / Corporate Governance: A prudential standard for bank directors and key functionaries that screens competence, integrity and independence; the raised substantial-interest bar strengthens this governance filter in practice.
The Proof
Gazette Text: The Gazette of India publishes the Banking Laws (Amendment) Act, 2025 (No. 16 of 2025), explicitly amending RBI Act s.42 (new definition of “fortnight”), BR Act (including raising “substantial interest” to ₹2 crore with power to notify), and co-operative bank tenure changes.
Commencement Notification / PIB: The Government, via PIB, confirms staged commencement and identifies August 1, 2025 for key sections, consistent with the Act’s commencement clause.
Depositor Nomination Reform: PRS and parliamentary reportage on the Banking Laws (Amendment) Bill, 2024, subsequently enacted—detail the four-nominee framework for deposits, lockers and articles in custody, including simultaneous and successive modalities.
PSB Audit/IEPF: Business dailies and circular-style summaries track the new PSB ability to transfer unclaimed shares/interest/bond redemption amounts to the IEPF from August 1, 2025, and note provisions to strengthen PSB audits (including remuneration).
Operational Clarifications: Practitioner notes and law-firm explainers outline removal of certain legacy returns and the calendar-based fortnight migration, with shorter submission windows, corroborating the Gazette amendment’s intent.
Abstract
The Banking Laws (Amendment) Act, 2025 is a multi-statute reform designed to modernise India’s banking governance and improve depositor outcomes. It amends the RBI Act, BR Act, SBI Act, and nationalisation Acts to: (i) replace ambiguous alternate-Friday reporting with a calendar-based fortnight for reserve calculations and returns; (ii) update the “substantial interest” threshold from ₹5 lakh to ₹2 crore, strengthening board independence and conflict-of-interest checks; (iii) extend director tenures in co-operative banks (other than chairperson/whole-time director) from 8 to 10 years; (iv) enable depositors and locker-holders to nominate up to four nominees with clear simultaneous or successive mechanics; and (v) allow PSBs to transfer unclaimed shares/interest/bond redemptions to the IEPF, aligning with the Companies Act framework and easing investor claims. Together, these changes reduce compliance ambiguity, fortify governance, streamline inheritance and claims processes, and elevate audit standards,especially in PSBs. Implementation will require updated board policies, refreshed nomination and KYC forms, core-banking changes, and revised reporting calendars. If executed well, the 2025 Amendment should translate into cleaner supervision, fewer consumer disputes, and stronger confidence in the safety and soundness of India’s banking system.
Case Laws
Central Bank of India v. Ravindra (2001): The Supreme Court clarified the principles on interest, penal interest and capitalization, holding that “interest on penal interest” cannot be charged. The judgment, often invoked in loan and recovery disputes, underscores fair-dealing standards and transparency, cornerstones of depositor and borrower trust.
K.K. Baskaran v. State of Tamil Nadu (2011) & subsequent line of cases: The Court upheld the constitutionality of state Depositors’ Protection Acts (e.g., TNPID Act, 1997; later echoed for MPID Act, 1999), recognising State power to protect small depositors from fraudulent “financial establishments.” This jurisprudence affirms the public-interest legitimacy of strong depositor protection frameworks.
State of Maharashtra v. 63 Moons Technologies Ltd. (2022) : The Supreme Court upheld actions under the MPID Act and prioritised attachment for depositor restitution, confirming that depositor-protection statutes can override competing claims in specified circumstances. This line continues in later decisions emphasising restitution priority for victim-depositors.
Conclusion
The Banking Laws (Amendment) Act, 2025 is not a radical reinvention; it is a targeted, systems-level upgrade. By translating prudential logic into clearer thresholds (₹2-crore substantial interest), predictable calendars (fortnight redefinition), longer but bounded board tenures (co-op banks), friction-free nominations (four-nominee model), and centralised investor restitution (IEPF transfers by PSBs), Parliament has closed several legacy gaps. The result should be leaner compliance, fewer disputes at counters and courts, and cleaner supervision data for the RBI.
Yet, the law’s impact will be determined by execution: timely rule-books, CBS and form redesigns, control-testing for nomination logic (proportions/priority), refreshed board disclosures keyed to the new threshold, audit-committee vigilance over enhanced PSB audit arrangements, and customer communication that is empathetic and plain-English. Over the medium term, these changes, combined with evolving jurisprudence on depositor protection, can anchor public trust in banks and tilt the balance away from procedural gridlock toward timely, equitable outcomes for depositors and investors. For a sector that intermediates household savings into national growth, clarity, governance and restitution are not mere legalities; they are the very currency of confidence the system runs on.
FAQs
1) What is the primary objective of the Banking Laws (Amendment) Act, 2025?
The Act aims to strengthen banking governance, enhance depositor protection, improve compliance efficiency, and align banking laws with modern operational realities. It introduces clearer compliance timelines, increases thresholds for conflict-of-interest checks, reforms nomination procedures, and streamlines unclaimed asset management in public sector banks.
2) What is the major change in the definition of “fortnight” for RBI reporting?
Earlier, banks calculated and reported reserves on an “alternate Friday” basis, creating operational confusion. Now, a “fortnight” is defined as 1st–15th and 16th–last day of the month, both inclusive. This simplifies reporting, aligns with calendar months, and improves automation.
3) How has the “substantial interest” threshold changed?
The threshold for determining “substantial interest” in a banking company has been raised from ₹5 lakh (fixed since 1968) to ₹2 crore. This update reflects inflation and current banking scales, ensuring more accurate governance checks.
4) What is the new provision on nominations for deposits and lockers?
Depositors and locker-holders can now appoint up to four nominees, either simultaneously (with specific share proportions) or successively (priority order). This eases claim settlement and reduces disputes, while legal heirs still retain beneficial ownership rights.
5) How are unclaimed assets in PSBs handled now?
Public Sector Banks can transfer unclaimed shares, interest, and bond redemption amounts to the Investor Education and Protection Fund (IEPF), centralising the process and making it easier for rightful owners or heirs to claim their funds.
