In a major legislative breakthrough, the UPA government on Tuesday secured the Lok Sabha’s approval for the Banking Laws (Amendment) Bill, which seeks to pave the way for issuing new bank licences and attract more foreign capital into the sector by enhancing investors’ say in the management of banks.
The government managed to overcome the BJP’s opposition to the Bill by conceding to the latter’s demand for dropping the contentious provision allowing banks to trade in commodity futures. This facilitated passage of the Bill in the lower House through a voice vote. The Bill will now go to the Rajya Sabha, before being sent to the President for signing it into law.
While the banking Bill is a crucial component of the financial sector reforms on the government’s agenda, other bills including those on insurance and pension are unlikely to be cleared by Parliament in the current session, ending on Thursday.
The banking Bill seeks to empower the Reserve Bank of India to supersede bank boards when needed, a prerequisite for the central bank to issue new bank licences. Private entities including L&T, Mahindra & Mahindra, Reliance and a host of non-banking finance companies had evinced interest in bank licences. The government reckons that a clutch of new banks are needed to expedite the process of financial inclusion in the country.
The Bill also proposes to hike the cap on voting rights of shareholders of nationalised banks to 10% from 1% and that of private banks to 26% from 10%. Enhanced voting rights will be an additional incentive for foreign investors to acquire or raise stakes in Indian banks and help meet their capital needs.
The BJP had earlier taken a firm stand that the new clause allowing banks to trade in commodity futures could not be inserted as the version of the Bill vetted by the standing committee on finance did not have it. The government had contended that the procedural/propriety issue did not arise as the standing committee on consumer affairs had approved the provision last December. Relenting, finance minister P Chidambaram said on Tuesday: “(We are) withdrawing the clause (on commodity futures) in deference to the views expressed by members.”
The minister assured the Opposition that the government would strengthen public sector banks and maintain their public sector character by infusing capital. Despite a marginal rise in NPA levels and some stressed sectors being accorded debt recast packages, Chidambaram asserted that “our banks are well-capitalised” and would be able to perform the higher lending demands for the economy, which has turned the corner. The minister reiterated his promise to infuse Rs 15,000 crore into public sector banks in the current fiscal.
Making a case for merger of some small banks with the big ones he said the country needs “two-three world size banks,” through consolidation.
Chidambaram clarified that while RBI would regulate banking-related activities in the banking sector, the Competition Commission of India (CCI) would have jurisdiction over competition practices in the sector which included merger regulations. “If we exempt the banking sector from the Competition Act, then sectors such as insurance, telecom and petroleum, which all have the respective sectoral regulators will also make similar demands,” he said.
Experts hailed the Lok Sabha nod for the legislation, but said that dropping the provision to allow banks to trade in commodity futures was regressive. Care Ratings chief economist Madan Sabnavis said: “Banks have significant direct and indirect exposure to commodities, and a permission to participate in futures would have enabled them to hedge this exposure. This is pertinent in the backdrop of rising bad loans, especially commodity-related exposures such as agriculture loans or credit to steel companies.”
Meanwhile, shares in Financial Technologies (India) and Multi Commodity Exchange of India (MCX) dropped 1.2% and 0.8% respectively at the BSE following the government’s announcement to drop the clause.
The insurance Bill, inter alia, seeks to hike FDI limit in the sector to 49% while the pension Bill envisages to allow FDI at par with the insurance sector in pensions, besides giving statutory powers to the sectoral regulator.