FE Editorial : Banking on commodities

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The Financial Express: Dec 12 2012, 01:08 IST

Former finance minister and head of the finance standing committee Yashwant Sinha is understandably upset at the impropriety of the government having inserted a new proposal in the Banking Regulation Amendment Bill (2011) without having referred it to his committee. While some part of this may be dismissed as pique, Sinha’s worry stems from the fact that the rest of the world is trying to ring-fence the core activity of banks. The Vickers Commission in the UK, for instance, wants banks to stick to plain vanilla banking—lend to retail and corporate customers—without indulging in any proprietary trading or transacting in derivatives. In the US, the Volcker rule was included in the Dodd-Frank legislation to restrict risky trading at banks that operate with federal guarantees.

The proposal to allow banks to take forward positions in commodity markets, presumably, stems from the fact that while banks lend to farmers, these positions are largely unhedged since small farmers don’t know how to use such contracts, which means the value of securities (farmers crops) that the banks have are quite volatile. An RBI committee which went into the issue way back in 2005 said banks could, after proper checks and balances and based on their macro portfolio, take independent proprietary positions in commodity futures.

The fact that RBI has not pressed for allowing banks into commodity futures all these years suggests the central bank is not comfortable with the idea, and perhaps even feels commodity markets are not as efficiently regulated as equity or forex markets.

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