Proposed Amendments to Bank Deposit Nominations - An urgent need for a healthy debate

Executive Summary

• The Banking Laws (Amendment) Bill 2024 proposes significant changes to bank deposit nominations, introducing successive and simultaneous nominations. While these amendments aim to simplify the process for depositors, nominees, and banks, they inadvertently introduce complexities and challenges.

Key points from the proposed amendments

• Successive nominations: Allows for up to four nominees to be appointed in a specific order of priority. This can be beneficial in cases where the first nominee predeceases the depositor or cannot claim the deposit, in that order.
• Simultaneous nominations: Permits the depositor to name up to four nominees with a specified % age (share) of the deposit. This introduces potential complications, as the death of a nominee may result in the share being treated as if it had not been nominated and must be withheld by the bank (debtor).
• Both successive and simultaneous nominations are mutually exclusive

Potential issues and concerns

• Complexity: Simultaneous nominations can complicate the claims process for both the bank, and nominees (in the nominee's death situation it will complicate the matter further).
• Inconsistent with existing laws: The amendments replicated from Insurance, MF, PF, and Depository segments, may conflict with existing laws, such as the Indian Succession Act, and personal laws of the deceased etc leading to confusion and related challenges.
• Lack of clarity: The proposed changes do not provide sufficient clarity regarding the rights and responsibilities of nominees and legal heirs, not envisage certain scenarios.
• Limited benefits: While the amendments aim to simplify the process, especially the provision of simultaneous nominations may not help to reduce the number of unclaimed deposits.

Recommendations

• Thorough review and consultation: Lawmakers and regulators should carefully consider the potential implications of these amendments with stakeholders and engage in public consultations to gather feedback.
• Clarification of legal aspects: The amendments should be drafted unambiguously, avoiding conflicts with existing laws. Drawing direct parlance to MF, PF, and Depository segments that operate in more ambiguous legal environments (and respective laws partially support it) may not be appropriate.
• Education and awareness: Banks and regulators should prioritize educating depositors about the implications of nominations, succession and the importance of executing a will.
• Consideration of alternative approaches: Explore alternative approaches, such as simplifying the existing nomination process (duly omitting the proposed amendment "Simultaneous Nominations") and promoting the use of WILL, to address the underlying issues.

By carefully considering these recommendations, policymakers can ensure that the proposed amendments to bank deposit nominations are beneficial and do not create unnecessary complexities.

Are changes in bank deposit nomination proposed [Banking Laws Amendment Bill 2024] going to make the life of bank/s, nominees, and legal heirs simple? Urgent need for a healthy debate.

Many of us know that among others there is a proposal to fine-tune bank deposit nominations sec 45 ZA introduced in the year 1985. Banking Laws (Amendment) Bill 2024 is before the Lok Sabha. Eventually, it may get passed and become an amendment act.

In the statement of objects and reasons concerning the point the bill states:

"to amend sections 45ZA, 45ZC, and 45ZE of the BR Act, to allow for the nomination of up to four persons, including provisions for simultaneous and successive nominations, to ease services for depositors and their nominee".

This write-up aims to stimulate healthy discussion and highlight to regulators and lawmakers that merely increasing the number of nominees by introducing the concept of successive nominations, and introducing simultaneous nominations to bank deposits is not going to bring down the numbers of bank unclaimed deposits numbers unless we popularize WILL, tweak personal laws, Indian Succession Act,1925 that intersect bank nominations.

The concept of successive nominations will help the banks in specific scenarios, but simultaneous nominations will make the lives of all involved complicated with benefit to none. Both together will not address the broader legal implications concerning the settlement of claims.

The public must be made aware that a nominee for a bank deposit does not become the rightful owner of the funds. Instead, the nominee acts as a trustee, managing the funds until the legal heirs come forward to claim them. This arrangement expedites the fund disbursement process for banks and relieves them from dealing with succession-based claims tied to the deceased's religion.

There are two major changes contemplated concerning bank deposit nomination. The first one is the introduction of successive nominations up to four and The second one is simultaneous nominations up to four. Both are mutually exclusive.

1. Successive nominations

As against nomination in favour of one individual hitherto permitted nomination in favour of not more than 'four individual persons' can be made.

Sec 45ZG: Where the nomination is made in favour of more than one person successively the nomination shall be effective only in favour of one person in the following order of priority, namely:

Nomination of the first nominee shall be effective if that nominee survives the person or persons who made the nomination;

Nomination of the second nominee shall become effective only after the death of all the first nominees;

Nomination of any nominee lower in the order of nomination shall become effective only after the death of all the nominees whose names are higher in the order of nomination.

Where the order of nomination is not mentioned, persons shall be deemed to have been nominated in the order in which their names appear in the nomination form.

Thus in effect, the nomination shall be always effective only in favour of one person in the order of priority stated above. The proposal for successive nominations may be helpful when the nominee dies before the amount is paid to it by the bank.

However, depositor/s can always specify 'only one nominee' and later may switch to more than one nominee under Successive nominations or vice versa using the appropriate nomination modification form.

All other existing provisions (appended below*) will continue:

• Nomination to be made by the single depositor or, all the depositors together as the case may be, in respect of a deposit held by such one or more individuals.
• The nomination may be made only in respect of a deposit, which is held in the individual capacity of the depositor and not in any representative capacity as the holder of an office or otherwise.
• Where the nominee is a minor, the depositor or, as the case may be, all the depositors together, may, while making the nomination, appoint another individual not being a minor, to receive the amount of the deposit on behalf of the nominee in the event of the death of the depositor or, as the case may be, all the depositors during the minority of the nominee.
• In the case of a deposit made in the name of a minor, the nomination shall be made by a person lawfully entitled to act on behalf of the minor.
• The cancellation of the said nomination is to be made by the depositor or, as the case may be, all the depositors together.
• A variation of the said nomination is to be made by the depositor or, as the case may be, all the depositors together.
• A nomination, cancellation of nomination or variation of nomination may be made as aforesaid at any time during which the deposit is held by a co-operative bank to the credit of the depositor or depositors, as the case may be.
• In the case of a deposit held to the credit of more than one depositor, the cancellation or variation of a nomination shall not be valid unless it is made by all the depositors surviving at the time of the cancellation or variation of the nomination.
• The bank shall acknowledge in writing, to the concerned depositor or depositors the filing of the relevant duly completed Form of nomination or cancellation of nomination or variation of nomination, as the case may be, in respect of a deposit.
• The relevant duly completed Form of Nomination or cancellation of nomination or variation of nomination filed with the -operative bank shall be registered in the books of the bank.
• A nomination or cancellation of nomination or variation of nomination shall not cease to be in force merely because of the renewal of the underlying deposit.

*All of the above old norms.

Successive Nominations: Potential Benefits and Challenges

The proposal for successive nominations could be advantageous if 1st nominee predeceases the depositor or predeceases before the amount claimed by him/her is settled by the bank. The proposed provision may give the required flexibility and assurance of smooth payment of money by the bank to the nominee as directed by the depositor.

However, it is not clear where the 1st nominee is alive but not claiming/ed the money (not able to claim money due to physical reasons or otherwise) can the second nominee claim the money from the bank? If it is in the event of death, the second one has to get the death certificate of deceased depositor/s + death certificates of 1st or all previous nominees. This makes the process of claims by subsequent nominees more complex. Best for the heirs to directly approach the bank and claim money (by asking the bank to ignore the nomination). In such a case bank should oblige and recognize the fundamental right of legal heirs and respect the succession.

Though banks cannot legally deny a direct claim from legal heirs if the nominee is not cooperative, banks would discourage such claims. Successive nomination will not address this issue until death is the deciding factor in switching to nominee number two.

I have concerns about the 2nd (proposed) amendment. In my view, it is going to complicate things for all those involved in the process. No one (depositor, the bank, nominee or heirs) will benefit.

The second amendment proposed permits the depositor customer to name 'up to four nominees' allocating different preparation shares in the underlying deposit amount'.

Simultaneous nominations

Where the nomination is made simultaneously in favour of more than one person under sub-section (1), the nomination shall be effective in favour of all such persons in proportion to which it is declared, and the following terms and conditions shall apply, namely:-

(a) the nomination shall not be made in favour of more than four persons

(b) the nomination shall explicitly state the proportion of the amount of deposit in percentage in favour of each nominee;

(c) the nomination shall be made in respect of the whole amount of the deposit;

If any nominee dies before receiving a deposit from the banking company, the nomination in respect of such nominee alone shall become ineffective and the amount of deposit purported to be nominated in favour of the deceased nominee shall be treated as if the nomination had not been made in respect of that portion of the deposit,

Any nomination which does not comply with any of the terms and conditions specified in clauses (a) to (c), shall be invalid as if the nomination had not been made by the depositor or all the depositors together, as the case may be".

Probably adequate internal debate might not have taken place on simultaneous nominations. While recommending this proposal clue is possibly taken from life insurance, Mutual Funds or Depository segments of the financial sector. if a depositor nominates more than one up to four nominees apportioning a certain percentage of the amount to each such (up to four) nominee it is going to pose more problems to the nominees themselves, to the creditors (bank) who are going to settle that claim (even if all nominees join together) and also to the ultimate owners of the money i.e legal heirs.

If one of the nominees dies it is stated that the nomination in respect of such nominee alone shall become ineffective. This means a bank will be required to pay the allocated portion as claimed by nominees who are alive. Thus the settlement of the rest of the liability to the creditor (deceased) will be in limbo. The heir/s has/have to claim that portion of the money from the bank and claim separately the portion received by nominees from nominees, the portion held by surviving nominees (received from the bank).

Law is amply clear that nomination does not supersede or intersect the personal law of the deceased or the provisions of the Indian Succession Act [including about WILL 2(h)]

I appeal to the entity who recommended such an amendment of this nature to revisit it and before the parliament passes the bill get the bill suitably modified such that there would not be an immediate need to omit certain provisions of Sec 45ZG inserted through this Amendment Act (2024). I suggest RBI, the entity that recommended such an amendment and the Law Department of the Government of India discuss the matter with concerned stakeholders before the bill is passed such that the other side can be properly understood and do needful to delete or defer the amendment in part of full.

Lawyers and members of the public who have good financial backgrounds would know that the nominee of a bank deposit does not become the owner of the funds in the true sense. Amount claimed by him or her after (the death of the diseased depositor) is received in the capacity of a trustee.

However, as far as the bank is concerned by paying the amount deposited to the nominee, the Bank gets discharged of its liability to the depositor/creditor.

It is necessary to educate the nominees and all members of the public that nominees are not the owners of the funds and act as trustees and should facilitate settling legal heirs' claims without involving the bank with who such amounts were held by the deceased.

I wonder is what purpose this change and in which manner it is going to be help the bank depositors or legal claimants. Instead of a single nominee, claimants may need to approach the nominees collectively to claim assets held by nominees, as trustees.

To explain the associated issues, let me take an altogether slightly different case

A share certificate issued by the society to a formal member of the society represents (a share in common land held in the cooperative housing society, governed under the State cooperative society's law). In this case, the coop society gets the legal right to the land beneath all the super structure-flat/s and common space used by members. This is done through a deed of conveyance or deemed conveyance. The share certificate indicates the formal/general member's right in the common portion held by the society. This share (represented by a share certificate) can be nominated by the member/share certificate holder. Upon the death of this formal/general member, the nominee provisionally gets a right to that portion of the undivided portion of the common assets held by the society hitherto held by the deceased member. He/she is admitted as a provisional member. He does not get right to the superstructure (flat) whose sale deed is been executed by the developer/builder in favour of the flat owner (now deceased). Hence despite getting interim right to the undivided share of common assets held by the society, represented by a share certificate such as the nominee (provisional member) does not get the title of the flat i.e superstructure/flat. He continues to be just a provisional member of society.

Through a process of transmission/succession/WILL (if any) the heirs do get possession and title to the flat/superstructure. The nominee now a provisional member of the society (having his/her name on the share certificate) does not get a saleable title to the superstructure without appropriate transmission (even though he/she may be the sole legal heir). Many such nominees assume that he/she is the owner of the flat. But when one goes to sell it buyer needs proof of the transmission of property.

Likewise in the above case unless relevant laws are suitably amended I see no benefit from introducing simultaneous nomination duly allocating a share of each nominee (up to four).

It could have been done by the owner (while he was alive) through a WILL, as otherwise despite nomination to the share certificate there is no way to pass on the title to the flat/superstructure acquired by the deceased. The sale of such property cannot be effected either by the heirs of the nominee (if are different) as there is no concurrence between society share certificate nomination and the succession. If the person named in the will is also nominated in the share certificate the transmission of the title of flat and society membership passes on smoothly. Many people do not know this and assume once they nominate a person to society (for a share certificate) through society nomination form the job of transmission of the flat upon the death of the property owner, would be smooth. If the property owner executes a WILL and also nominates the same person to the society as the nominee both the transmission would be in sync and final.

'The simultaneous nominations to bank deposit account', will also complicate things. I could not comprehend the object with which the team suggested this modification. It will open the door to many litigations. On one side it will pose problems to legal heirs. Heirs may have to approach multiple nominees and receive their rightful money from all of them, instead of one (the bank). If the nominee's share is left with the bank due to his/her death, approach the bank for the deceased nominee's share held unsettled by the bank.

On the other side, the bank has to collect multiple claim forms (sets) from all nominees for respective shares they claim as a nominee, also stating that he/she would act as trustee for the heirs, the bank will have to decide the process flow, do separate calculations and accounting, and hold the unclaimed portion, if any and do its accounting. It benefits none.

Consider the following scenario: A depositor has nominated 4 individuals with their shares 30%, 25%, 25% and 20% respectively (as nominees).

Nominee one is unable to claim (outstation or health issue) or simply not interested in joining the other three nominees in claiming the amount. The three nominees want to claim the amount and are ready to submit the required papers. One of them is prepared to submit the death certificate however in the absence of 4th person would the bank settle the claim 70%? The full amount will be stuck as one nominee is alive so the legal condition is not met.

Even if we assume the bank settles the claim (70% amount) and holds 30% amount the position of the nominees who received the money would continue to be that of the trustee.

Now the legal heirs would need to take up the matter with nominees seeking their share in the diseased person's funds [70% of funds] received by nominees from the bank and 30% of funds (still lying with the bank) as unclaimed? Considering the chances of one of the nominees not being alive settlement of the amount concerning that nominee would become more difficult. Therefore, the Bank would not like to settle the matter without all four nominees coming together. If this 4th nominee's amount remains unclaimed this money will have to be transferred to DEAF, A fund managed by RBI and everyone will lose track of it. Settlement of a death claim 'in one go' is always convenient to all.

Smultaneous nominations Complicates the whole process with no benefit to anyone, associated/involved.

One needs to understand the purpose for which the depositor is permitted to specify a share of each nominee in a simultaneous nomination.

As mentioned above permitting simultaneous nomination will neither facilitate quick settlement of the claim by the bank nor would it help as far as the finality of disposal of money.

If the lawmakers want to give finality of payment to the nominees as if they were to be legal heirs they will have to see how the amended provision intersects with the Indian Succession Act,1925 (ISA) and respective personal laws. Above all last WILL (Sec 2(h) ISA will supersede the personal law or succession applicable to the deceased.

In that case, these laws need to be tweaked along with it otherwise it would serve no purpose. Provision of successive nomination is good but specifying the share of each nominee will neither beneficial to the Bank or to nominees or to ultimate claimants. Even if all nominees are given the same % age share all have to join hands while cleaning the amount from the bank. That will delay the settlement of amounts by the bank. Above all the machinery needs to educate the depositors that the nominee is always an interior holder of the money and is not a substitute nor supersede succession.

In all cases, the banking regulator must educate the clients on the related aspects of nomination otherwise the nominee (in future nominees) will start assuming that he/she (all such persons) are lawful owner of the funds received by them as nominees.

It can be done by RBI through advertisements, and training bank staff using the funds from the Depositor Education and Awareness Fund (DEAF) created and managed by RBI. It needs to print appropriate literature educating all concerned about the fact.

The depositor should be made aware that nomination is not a substitute for the WILL nor it will pass on the title to such amounts received as a nominee. If the intent is to pass on full title to underlying money without the obstruction of other laws the depositor can execute a WILL (to supersede the law of succession applicable to the religion of the diseased etc). As many of us know execution of the WILL is a very simple and no-cost process.

In alternative suitable enactment can be done by making the nomination made in this manner will override the succession. However, if the WILL exists it will override the nomination as well as the succession.

Conclusion proposed 'simultaneous nomination' arrangement: It will neither expedite fund settlement by banks nor alleviate their burden in dealing with succession-based claims tied to the deceased's religion.

It is going to confuse the masses as gullible members of the public including the legal heirs may assume that the proportion of the amount of deposit stated 'as a percentage' specified in the nomination form signed by the depositor is the money that 'belongs' to that particular nominee (whereas it is not) and is like a WILL?

If the object is to simplify and reduce the number of cases going to the judiciary, appropriate guidance may be given to the depositor community. Depositor education is a must without which awareness will not increase. Many legal and fiancé wizards have written on bank deposit nominations, and succession (including WILL etc). There is a dire need for clear and crisp guidance.

This aspect should have been considered with proper deliberation and a public debate so that all-encompassing provisions could have been taken care of.

If such multiple nominations are given by depositors specifying the share of each nominee in the absence of overriding provisions over the succession act (personal law) or till the position of the nominee in eyes of law is altered from the trustee of funds (held for the legal heirs) it will unnecessarily complicate things.

To foster smoother transitions, educational initiatives about WILLs and proper estate planning should be prioritized. Without addressing these fundamental issues, the introduction of multiple nominees may lead to confusion and complications in claims processing, ultimately complicating the responsibilities of banks and finally the rights of legal heirs.

In conclusion, while the amendments proposed in the Banking Laws (Amendment) Bill 2024 aim to enhance the nomination process, they also risk introducing complexity into a system that needs clarity. Lawmakers and regulators need to engage in thorough discussions and consider the broader implications of these changes to ensure that they benefit all stakeholders involved.

From my experience with RBI-MoF (GoI), I assume no serious thought would be given to the thoughts put on the table through this write-up and without proper discussions the amendments now proposed by the government would be through.

Annexure

Nominee: (concerning bank deposit)

A person appointed by the depositor to receive the funds from a fixed deposit if the depositor dies. The nominee is responsible for safeguarding the funds until the legal heirs claim them from him.

A nominee can help ensure a smooth transfer of funds to the rightful heirs. Legal heirs may face difficulties accessing the funds without a nominee, such as proving their relationship and obtaining a death certificate.

A nominee is a trustee of funds for the legal heirs who are entitled to inherit the assets of the diseased and the bank gets discharged to the liability of the depositor by effectively paying to the nominee (as stated by the depositor through current DA1/DA3 form).

A nominee is only for convenience and does not override the law on succession. When successors claim the asset, or property of the deceased, the nominee cannot decline.

Legal heir

A person who is legally entitled to inherit a deceased person's assets and liabilities. Legal heirs are designated by the account holder in a will or through succession laws.

The distinction between nominees and legal heirs is critical, as nominees serve to facilitate the transfer of funds while legal heirs hold the right to inherit assets.

WILL

While the succession laws will prevail this can be overridden with a WILL. WILL is defined in Sec 2(h) of the Indian Succession Act as: Will means the legal declaration of the intention of the Testator with respect to his property which he desires to be carried into effect after his death

Important to note the following

The nominee is expected to help a smooth transfer of funds to the rightful heir/s and heirs may not face difficulties in approaching the Bank (while the bank is relieved from spending its time processing the legal side of the papers and making the payment to legal hairs).

Thus nominee is only for convenience and does not override the law of succession if that situation is not going to undergo any change I wonder what is the purpose of and advantages of specific share of each nominee indicating proportion with the amount of deposit in such a case the money is will be received by many nominees stated herein. I am assuming nominees are not the legal hairs.

Due to the introduction of simultaneous nomination with a share of each nominee specified against each such nominee, it is likely to create confusion in the minds of nominees that they are ultimate owners of the money (while the legal situation would not undergo a change amending this aspect).

The matter will become complex for the heirs and settlement of the claim would be difficult for the bank/creditor as all nominee-stated nominations may not come together to the bank to claim the underlying amount. There will be many duplications of papers. To legal heirs also it would be difficult to deal with multiple nominees spread across as against a single nominee.

A nomination form that would be designed after the passage of this bill could clearly state relevant aspects suitably and should remove forthwith allocation of percentage as it is done in the case of a depository demat account, mutual fund (book-entry) account, where the nominee receives the assets duly transferred in its name (almost on par with owner) along with apparent title to such assets.

In respect to Shares, Demat bonds, Depository Demat accounts, and Mutual Fund (Book Entry-electronic mode) accounts nominee gets close to the ultimate right to receive, hold and own in the absence of WILL, due to some presence of enabling conflicting provisions, upheld by Supreme Court of India. These segments thus operate in slightly ambiguous legal environments and respective laws partially support such actions.

Contrary to that concerning bank deposits, in unambiguous terms, the nominee remains the holder of money as a trustee (does not give the ultimate right to own) hence applying the practice of the Insurance Act, MF, Depository Act, may not be appropriate till the ultimate right/finality is accorded to bank deposit nomination.

RBI- Bank regulator should take steps to popularize the concept of execution of a WILL among the masses or remove all the bugs associated with nomination so that the nominee could be given special status as an absolute owner. In such a case simultaneous nomination will be helpful.