The government will amend key legislations like the Reserve Bank of India (RBI) Act, and the Banking Regulation Act to improve governance and enhance investor protection, finance minister Nirmala Sitharaman announced in the Budget.
The banking industry is adopting a ‘wait and watch’ approach with regard to the specific amendments. But, the proposed amendment to the taxation norms sheds some light on the reasoning behind the latest announcement.
In its memorandum to the Union Budget, the government has proposed the insertion of a clause in the Income Tax Act that defines “strategic disinvestment” as the sale of shareholding by a public sector company, which results in reduction of its shareholding to below 51%, as well as the transfer of control to the buyer.
Broadly, Wednesday’s announcement was in line with the RBI’s attempts to improve the governance standards in the banking industry.
The need for these measures has been accentuated by instances of large scale bank frauds, cases of money laundering, as well as the unusual exposure of banks to credit risk, which has raised concerns over the inadequacies of the governance structure for banks and its ramifications for the soundness and efficiency of the banking industry, a recent research report issued by RBI’s Development Research Group said.
As on April 1, 2020, there are 12 public sector banks in which the government holds more than 50% stake. There are 22 private banks and 44 foreign banks.
All public and private banks are listed except Catholic Syrian Bank, Tamilnad Mercantile Bank and Bank of Nainital.
The RBI regulates banks under the Banking Regulation Act, 1949, which creates a unified regulatory environment. But, governance regulations, especially concerning board composition, are separate for banks under distinct ownership types.
There are eight categories of directors on the boards of PSBs while there are three categories on the boards of private banks. A state-owned bank is required to conduct board meetings at least six times a year, whereas a private bank needs to hold such meetings at least four times.
“Our findings uncover that better governance compliance has strong predicting power for explaining bank soundness. Further, bank soundness in India is not just determined by traditional equity governance principles, compliance with debt governance standards also assumes an important role in this regard, particularly as shown by the evidence for the post-2014 NPAs crisis period,” the RBI report said.