Parliamentary panel pitches for integrated banking law

The parliamentary standing committee on finance has suggested instead of bringing piecemeal amendments time to time, the government should consider the formulation of an integrated modern banking law, consolidating the provisions of other statutes that cover various aspects of banking.

“Such an integrated and holistic law would also be in line with the proposed legislation in other areas like the Direct Taxes Code and the Companies Bill,” the panel outlined in its report on the Banking Laws (Amendment) Bill, 2011, tabled in Parliament on Tuesday.

The committee stressed on employee-friendly measures in the integrated banking law. These include the introduction of employee stock options, deterrent safeguards against 'wilful default' by a borrower in repaying loans and other forward-looking proposals that reflect emerging realities.

On the proposal to make voting rights in private sector banks proportionate to shareholding, the panel said the finance ministry may consider increasing the limit from the current 10 per cent to 26 per cent to keep a balance between conflicting factors — concentration of economic power and control and promotion of corporate democracy.

The finance ministry had, in the Banking Laws (Amendment) Bill 2011, proposed that voting rights in private sector banks be proportionate to the shareholding, while removing the existing 10 per cent ceiling.

Market participants said the move was in the direction towards financial sector reforms. “It is a positive move, a move in the right direction. However, investors would want to have voting rights in line with their shareholding pattern. So, that goal has not been achieved. But the positive thing is the government is trying to push reforms, may be in small steps,” said Manek Fitter, partner (financial services), Ernst & Young.

The committee also emphasised on recent failures of major global private banks and said lessons learnt from these should not be lost sight of, while formulating the new policy on banking licences.

“Key issues and concerns such as banking penetration, coverage and financial inclusion should remain paramount and the entire banking industry, including banks in the private sector, should be clearly mandated to achieve the desired objective in this regard,” it said.

While supporting the government's proposal to keep bank mergers outside the purview of THE Competition Commission of India (CCI) as of now, the panel said this exemption should be considered a special case and an expedient measure to be revisited in the light of the experience gained by both the Reserve Bank of India (RBI) and the CCI.

“This, however, does not, in any manner, convey the committee's view on the mergers and acquisition policy in the banking sector, which is an issue meriting a separate discourse,” it said.

“As RBI has been entrusted with the mandate to grant approvals for acquisitions, transfers and mergers in the banking sector, the committee would expect RBI conduct due diligence of 'fit and proper' persons/entities and take sufficient safeguards while stipulating conditions as to credentials, source of funds, track record and financial inclusion before granting approvals under this clause,”the report said.

The committee also stressed it would like the government to consider the merits of issuing non-voting shares as an avenue to expand the capital base of banks without allowing concentration of management control in a few hands, as this would also enable banks to grow faster.

“Considering the wide scope and amplitude proposed in the definition of 'associated enterprises' of a banking company, the committee would expect RBI's regulatory machinery be adequately beefed up in view of its expanding role and augmented functions as proposed in the Bill,” the panel said in its report.

The committee said no serving or retired officer of the central government or a state government should be considered for appointment as administrator on suppression of the board of directors of a banking company.