ruling Congress party.
The banking bill will give the RBI greater regulatory oversight over local banks and the ability to overrule boards when the banks are facing financial difficulties.
The RBI had demanded more oversight as a precondition to issuing new banking licences.
The bill also enables the government to raise voting rights in state banks such as the State Bank of India to 10 percent from just 1 percent now, acceding partially to foreign investors' demands to have more say in Indian banking.
The bank employees unions, reluctant that any control is ceded, have strongly opposed this move for years and are set to strike on Thursday in protest.
The bill will allow foreign banks to convert their Indian operations into local subsidiaries or transfer shareholding to a holding company of the bank without paying stamp duty.
Foreign banks have long sought these changes to the law which they say would encourage them to expand their operations in India.
Under current laws, foreign banks such as Citibank and Standard Chartered Plc have to pay 20-30 percent tax as capital gains and stamp duty when transferring branches to a new legal entity.
Lok Sabha clears banking bill after govt drops controversial clauses
(PTI) In a major step to reform India's banking sector, the Lok Sabha today passed a bill paving way for foreign investments in the sector and establishment of new private banks.
The Banking Laws (Amendment) Bill, 2011 was passed by the Lower House after two short adjournments and withdrawal of clauses allowing banks to trade in futures and keeping the sector outside the purview of Competition Commission.
"Since the bill is too important for me to pass, therefore I am bringing the Bill dropping the controversial clauses," Finance Minister P Chidambaram said, winding up the discussion on the Banking Laws (Amendment) Bill, 2011.
The Bill, which seeks to strengthen banking regulation, was passed by the voice vote after amendments proposed by the Left Parties were rejected by the House.
"The Banking Bill aims to raise the voting rights of investors in private sector banks to 26 per cent, from 10 per cent and will encourage foreign investment...it is a game changer to achieve financial inclusion by opening new banks," said Jagannadham Thunuguntla, head of research at brokerage firm SMC Global Securities.
The Bill will allows RBI to supersede boards of private sector banks and increase the cap on voting rights of private investors in PSBs to 10 per cent, from 1 per