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Banking on new laws

With the amendment bill being passed, you can expect greater choice with new banks in the offing and more safeguarding of investor interests by the RBI, reports Gaurav Choudhury.

india Updated: Dec 25, 2012 21:25 IST
Gaurav Choudhury

In a major reform initiative, the Parliament last week passed the Banking Laws (Amendment) Bill setting the stage for opening up of a new set of banks. An explainer:

What is the main crux of Banking Laws (Amendment) Bill?
The Banking Laws (Amendment) Bill paves the way for setting up of new private banks and strengthens the regulatory oversight of RBI. The Bill, along with proposed legislations on pension and insurance that could not be taken up, were among of the key reforms measures on the government’s agenda during the current session of Parliament.

How does the new law give more powers to the RBI?
It gives RBI powers to supersede bank boards to safeguard depositors’ and shareholders’ interests.

Why does the RBI need these powers?
Several industrial houses including the Anil Ambani-controlled Reliance Group and Mahindra and Mahindra (M&M) group are keen on setting up banking companies. The RBI, which had come out with guidelines for issuing new licences, had made it clear that it should be armed with appropriate statutory powers to allowed industrial houses to set up banks to ensure that promoters do not misuse banks. The Bill will give the RBI powers to call for and investigate the books of associate enterprises of a bank if required.

When will RBI come out with final guidelines for grant of new bank licences?
The RBI, it is speculated, may come out with the final guidelines for issue of bank licences in January. The RBI may decide to appoint a committee for vetting and scrutinising applications seeking bank licences. Bank licences, unlike allocation of natural resources such as coal or telecom spectrum, cannot be given out through a process of auction to the highest bidder. Experts tracking the sector expect the central bank may give out the first set of bank licences by the second half of 2013.

When did the RBI come out with draft guidelines? What were its specifications?
The RBI had come out the draft guidelines on grant of new bank licences in 2011. It had indicated that industrial houses will be allowed to set up banks, but stipulated stringent norms that may disqualify many of the aspirants.

Why did the RBI insist on powers to supersede the boards of banks?
In the draft guidelines, the RBI had made it clear that it would move ahead with new bank licences only after the amendments in the Banking Laws were brought about. It had said that these amendments were vital for finalisation and implementation of the policy for licensing of new banks in the private sector. These vital amendments are: removal of restriction of voting rights; empowering RBI to supersede the Board of Directors of a bank so as to protect depositors’ interest; and facilitating consolidated supervision.

Has the Banking Laws (Amendment) Bill addressed these concerns of the RBI?
Yes it has. The Bill, which seeks to amend three Acts: the Banking Regulation Act, 1949, the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970, and the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1980, will also raise the ceiling on voting rights of shareholders of nationalised banks from 1% to 10 % and ease voting right restrictions of foreign shareholders in Indian banks from the current cap of 10%.

What is the objective of giving licences to new private sector banks?
The government had announced in February 2010 that a new set of private players would be allowed to set up banks. The objective was to expand banking services, or the so-called financial inclusion.

What are the conditions that the RBI is likely to set for new bank licences?
Under the draft norms companies that have an exposure of 10% or more to real estate and brokerage businesses in terms of revenue or assets are not eligible to seek licences.

To be able to float a bank, a corporation or a non-banking financial company (NBFC) will need a “diversified ownership, sound credentials and integrity”, and a 10-year track record.

New banks can be set up only through a wholly owned non-operative holding company.