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Column : Gearing up for banking reforms

Jan 03 2013, 00:36 IST
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SummaryIn a major breakthrough, the Banking Law (Amendment) Bill was recently passed in the lower house of Parliament.

With RBI set to get more powers, aspirant companies seeking to enter the banking industry need to be well prepared

In a major breakthrough, the Banking Law (Amendment) Bill was recently passed in the lower house of Parliament. The development is likely to have major ramifications for the financial sector not only in paving the way for the issuance of new banking licences but also in attracting more foreign funds into the banking sector.

In an effort to ensure Indian banks adhere to international best practice and, as importantly, play on a level-playing field, the government amended the 60-year-old Banking Regulation Act, 1949. The amendments encompass 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.

Central to the Bill is the mandatory requirement for entities/persons seeking to acquire share capital in a bank in excess of 5% to obtain approval from the Reserve Bank of India (RBI). The provision seeks to ensure not only that control of banks is available only to fit and proper persons but also that it is both in the public interest and in the interest of the broader banking industry. The Bill authorises RBI to halt transfers to the proposed transferee and, in a case where a transfer has been registered, the transferee shall not be entitled to exercise voting rights in any company meeting.

In the original version of the Bill, RBI sought to retain control over matters relating to the amalgamation, merger, reconstruction, or acquisition of banks, which would have otherwise been determined by the Competition Act, 2002. But in the face of stiff opposition politically, and in the larger interest of the other regulators, the clause was eventually dropped.

The amendment also simplifies the definition of “approved securities” to encompass those securities issued by the central or state governments or other securities as specified by RBI.

Providing the regulator with more effective control of the industry and increasing penalties to crores from thousands, the Bill provides RBI with more flexibility in its efforts to manage liquidity and rein in inflation via the cash reserve ratio (CRR). At the same time, the Bill empowers RBI to grant banks ad hoc exemptions from the CRR provisions.

The Bill also activates the significant funds that accrue in dormant accounts by aggregating into a single fund that can be used to promote the interests of depositors.

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