October hope for new banking licences

The government expects a breakthrough in providing new banking licences, which is part of the renewed reform agenda, in October.

“We are moving ahead in this direction. It will take two to three weeks,” said a senior finance ministry official.

Despite the central bank issuing draft guidelines after consultations, the new banking licences are stuck because there is no final decision on if the process should be started without amending the Banking Laws Act.

RBI wants the Banking Laws (Amendment) Bill to be first cleared by Parliament and then initiate the process of providing new licences. But many in the government, including chairman of the Prime Minister’s Economic Advisory Council C Rangarajan, are of the view that new licences can be issued according to current banking regulations and the law could be modified in due course.

In the changed circumstances — with finance minister P Chidambaram at the helm of affairs and government’s resolve to push economic reforms — the chances of the idea moving ahead has increased, officials pointed out.

They said that the differences between RBI and the Competition Commission of India (CCI) over powers to review mergers and acquisitions will also have to be resolved if the government decides to go ahead and take Parliament’s nod to the Banking Laws (Amendment) Bill in the winter session even though it is difficult to pass any Bill in the current political situation.

The Bill to amend the Banking Regulations Act of 1949 was introduced in the Lok Sabha in March 2011. Among other proposals, it seeks to keep mergers and acquisitions in the sector under the purview of RBI, the sector regulator.

In case there are no chances of an early passage of the Bill, RBI can consider issuing new bank licences without amendments in the Banking Regulations Act.

RBI has until now stressed that it would be open to issuing new bank licences only when it is given more powers to regulate the sector. The amendment Bill gives RBI the power to supersede bank boards and inspect other arms of banks to avoid systemic risks.

The Banking Laws (Amendment) Bill also seeks to allow private banks to raise the voting rights to 26 per cent from a maximum of 10 per cent, as recommended by the parliamentary standing committee. For buying more than five per cent of equity stake, approval of RBI will be mandatory.

The parliamentary panel said that M&As should not be kept out of the CCI purview forever and should be considered as a special case.

It also proposed an “expedient measure” to be revisited after both the Reserve Bank and the Competition Commission have gained some experience.