Banking Amendment Bill: What are its benefits to the banking public?

The measures contained in the Banking Amendment bill are expected to create more confidence among investors, depositors and the public in the banking system. But a lot more requires to be done in the area of improving corporate governance, better customer service, and more importantly freeing the public sector banks from the political interference and the dual control of banks by the finance ministry and the RBI

Now that the Banking Laws (Amendment) Bill has been passed by the Lok Sabha, it will easily go through the Rajya Sabha also as it has the approval of the main opposition party, the BJP after finance minister P Chidambaram dropped the controversial clause relating to allowing banks to trade in commodity futures and keeping the sector outside the purview of Competition Commission of India. When the bill becomes law, which is a formality now, what are its benefits to the ordinary banking public?

More powers to the Reserve Bank of India

The main purpose of this bill is to strengthen the hands of the Reserve Bank of India (RBI) with powers to supersede the entire boards of the recalcitrant banks which fail to comply with the directions of RBI. At present the RBI has powers only to remove a director or officers of a banking company, but not the full board. This amendment gives powers to the RBI to supersede the entire board in public interest and appoint an administrator to run the bank for a period not exceeding 12 months.

The amendment also gives powers to the central bank to call for information and returns from the associate and group companies of the banking companies and to inspect them, if necessary. These powers will come handy if and when the RBI proposes to grant licenses to industrial houses for setting up new banks, which is on the anvil now. The bill also substantially increases the penalties and fines for some of the violations of the Banking Regulation Act and the rules framed there under. These powers are expected to create an environment for better compliance of regulations by banks, ultimately benefiting the banking public and the economy of the country.

The bill paves the way for new banking licenses

The central government has been persuading the RBI to issue new banking licenses for expanding the banking network, mainly for financial inclusion and expansion of banking facilities to unbanked areas in the country. The RBI has been insisting on getting the additional powers mentioned above, so as to ensure a healthy growth of the banking institutions. Now that the bill has been cleared, the RBI may consider permitting new banks to be set up in the private sector, which in turn will create more competition among banks in the country. More the competition, better it is for bank customers, as it will provide more choices to the banking public and might bring down bank charges to some extent. The RBI should, however, ensure that new banking licenses are given only to the deserving applicants, which have a record of total dedication to provide transparent, committed and superior customer service and not to fly-by-night operators, who wish to make quick money by floating a bank and then resort to all sorts of manipulations at the cost of the banking public.

The bill raises the voting rights in banks

At present there is a cap of 1% on voting rights to private investors in public sector banks. This in effect means that the private investors had no meaningful role to play in the functioning of the bank even as a shareholder. This cap is now proposed to be raised to 10%, paving the way for more investment in public sector banks by the foreign institutional investors, who have been sitting on the sidelines so far in respect of investing in these banks.

Similarly, there is a cap of 10% on voting rights to investors in private sector banks, which is now proposed to be raised to 26% through this bill. This in effect means that the promoters and their group can have voting powers up to 26%, which, in fact, is a double edged sword. On the one hand, it gives the promoters a better say in the management of the bank and coupled with the higher commitment of the promoters it could be a spring board for the faster growth of the bank.  On the other hand, it can influence the decisions of the management, which may or may not be in the best interest of the bank and its other stakeholders. The RBI should, therefore, keep a close watch on the functioning of all private banks, so that these additional voting rights serve the interest of all stakeholders equitably.

The bill provides for issue of bonus shares by public sector banks

So far only private sector banks, particularly old generation banks have been giving away free shares to their shareholders as bonus shares, though all private sector banks are allowed to issue bonus shares according to the Companies Act, under which they are incorporated. But public sector banks, though holding huge reserves, have not issued any bonus shares so far. This is mainly because there were no provisions to issue bonus shares in the enactments through which they were nationalized. The present bill, therefore, provides for issue of bonus and rights shares, including splitting of shares into lower denomination, by the public sector banks, which is good news for banks’ shareholders.

The biggest bank in the country, State Bank of India (SBI) has the largest free reserves Rs83,280 crore against its paid up capital of Rs.671 crore. These huge reserves, nearly 125 times its paid up capital, are by far the largest reserves held by any bank in our country and if it decides to issue bonus shares, it will surely cheer the stock market, which has been giving a low valuation for all public sector banks on account of investor-unfriendly image of these banks. Now that the decks have been cleared for them to issue bonus shares, the government should encourage all those banks having substantial reserves to issue bonus shares to their shareholders, as the government will be the biggest beneficiary of such a move because of its majority holding in all the public sector banks. This step will also create a conducive environment for banks to raise fresh capital more easily from the market and thus help in meeting their capital adequacy requirements prescribed under Basel III norms.

Why are bank unions against this bill?

If these are the benefits of this Banking Amendment Bill to the banking public, why are bank unions against this bill?

The left parties had opposed the bill and voted against it in the Lok Sabha. The banks unions are also against this bill as they feel that these amendments will dilute the interest of the public sector banks. Besides, these amendments will facilitate corporate entry into banking, which they feel is not desirable, as the public money deposited in these banks can be misused for the benefit of few corporate bigwigs and not for the benefit of the general public. They are also opposed to the increase in voting rights to shareholders, as it may dilute the powers of the government in public sector banks. It is because of these reasons that they have threatened to go on a day’s strike on 20th December 2012.

Whether these apprehensions are justified or not, only time alone will tell, but these amendments have increased not only the powers of the RBI but also its responsibilities to ensure that the banking industry progresses on sound lines for the benefit of the economy and the people of this country.

In short, these measures contained in the bill, which will become law shortly, are expected to create more confidence among investors, depositors and the public in the banking system in our country. But a lot more requires to be done in the area of improving corporate governance, better customer service, transparency in banking operations and more importantly freeing the public sector banks from the political interference and the dual control of banks by the finance ministry and the RBI, as some times, they appear to be working at cross purposes to the detriment of the banks, which are the life line of the nation.

(The author is a banking professional writing for Moneylife under the pen-name ‘Gurpur’)

Sadanand Vinayak Nadkarni
1 decade ago
A very informative and comprehensive article for a lay-man like me. It gives a fairly clear picture -Pros and Cons- of the Banking Bill. Thank you very much-
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Replied to Sadanand Vinayak Nadkarni comment 1 decade ago
I also agree with Mr.Nadkarni's commment. Very well presented too for an ex-banker like me!
1 decade ago
Call me a hopeless conservative if you like. I quit Banking as an Officer on Special Duty (Long Range Planning)of the State Bank of India in 1983, but I am in agreement with the Unions. Following the collapse of the Pale Central Bank, the Hilton-Young Currency Commission and the Radcliff Committee went into all aspects of Banking, and the result was a very strong framework of laws constructed by very serious and deep thought passed by the Viceroy in Council. This has kept Indian Banking reasonably in working order despite the depredations of a notoriously populist, reckless and profligate polity and governance. The last sixty five years have established Indian governance to be incompetent, profligate, hasty and reckless. I deeply suspect the agendas behind this proposal in a nation where "governance" and "rule-of-law" seem like distant dreams. Most likely, this is a move by our latter day dubashis to shake the pagoda tree in partnership with their foreign interlocutors
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