Banking Reforms: What the New Act Means for You

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Banking Reforms: What the New Act Means for You

The Central Government has implemented key provisions of the Banking Laws (Amendment) Act, 2025, from 1st August 2025. These changes aim to strengthen the Indian banking sector by improving governance, protecting depositors, and enhancing audit standards. From now on, a 'substantial interest' in a bank is defined at a much higher value, cooperative bank director tenures are longer, and public sector banks can transfer unclaimed funds to the Investor Education and Protection Fund (IEPF).

A New Era for Indian Banking: Key Amendments Go Live

The Indian banking landscape is undergoing a significant transformation. On 1st August 2025, several critical provisions of the Banking Laws (Amendment) Act, 2025 officially came into force, marking a major step towards modernising the sector and aligning it with international best practices.

The Act, which was originally notified in April, is a comprehensive piece of legislation that introduces 19 amendments across five key banking laws. The goal is clear: to enhance governance, provide better protection for investors and depositors, and improve the quality of audits in our public sector banks.

So, what are the changes that will directly impact the banking ecosystem?

A Modern Definition of 'Substantial Interest'

For decades, the legal definition of 'substantial interest' has been a little out of date. Originally set at a mere ₹5 lakh back in 1968, this threshold has now been dramatically increased to a more realistic ₹2 crore. This change reflects the vast economic growth we've seen over the last five decades and ensures the regulation remains relevant in today's financial climate.

Longer Tenures for Cooperative Bank Directors

In a move to foster greater stability and long-term vision, the new provisions align the tenure of directors in cooperative banks with the 97th Constitutional Amendment. Directors (excluding the chairperson and whole-time directors) will now be able to serve for a maximum of 10 years, up from the previous limit of 8 years. This extended period will allow for more consistent leadership and better strategic planning.

Public Sector Banks to Streamline Unclaimed Funds

For a long time, public sector banks have had a different set of rules for handling unclaimed funds compared to private companies. That's all changing now. The new law allows PSBs to transfer unclaimed shares, interest, and bond redemption amounts to the Investor Education and Protection Fund (IEPF). This brings them in line with the practices of companies under the Companies Act, making the process more efficient and transparent for all.

Furthermore, these banks are now empowered to offer competitive remuneration to their statutory auditors. This is a crucial change aimed at attracting top-tier audit professionals, which in turn will significantly enhance the quality and reliability of audits across the public banking sector.

These provisions, which took effect from 1st August, represent a concerted effort by the government to create a stronger, more resilient, and more accountable banking system. The implementation of these changes is a clear signal of the commitment to a robust financial framework that supports both banks and their customers.

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