More Bank Reforms Soon
The government plans to further tighten prudential norms, reorganise the internal structure of banks, overhaul the legal framework governing banks and develop an India-specific model of Asset Reconstruction Companies to deal with non-performing assets as part of a fresh burst of banking sector reforms, to be launched next week.
Top finance ministry officials said the government is also amending the State Bank of India Act to permit mergers between the seven SBI subsidiaries.
A one-year schedule has been set to implement the second round of reforms, which will be based on the report of the second Narasimham Committee, submitted in April. At present, the finance ministry is engaged in last minute consultations with the Reserve Bank of India (RBI) to study the modalities. The latter has already studied the Narasimham report and has submitted its comments to the banking division in the finance ministry. The move to tighten the prudential norms is in keeping with the increasing freedom being accorded to banks, officials said. "In a liberalised scenario, there is a strong case for strengthening the prudential norms. And we are going to do that," officials added.
Finance ministry officials said the next phase of reforms would mainly see legal reforms being updated to keep pace with the financial sector reforms, besides a concerted effort to deal with the massive bad loans piled up in the system. The reform process would be kicked off next week with the finance ministry planning to announce an expert committee to study the "external laws" (like Transfer of Property Act) affecting the banking system. Sources said the banking division has already submitted the names of the committee members to the finance minister for his approval.
The members would include at least two legal experts, and representatives from the RBI, the finance ministry's banking division and commercial banks. The committee is likely to be given a three month deadline to submit its report.
Officials pointed out that along with these external changes, the government would also bring about changes "necessary as a follow-up" in the "internal laws" like the Banking Regulation Act, State Bank of India (SBI) Act and Bank Nationalisation Act. In fact, the government has already decided to bring about amendments in the SBI Act to include "enabling clauses", aimed at granting greater autonomy to SBI and its subsidiaries. "Right now, the SBI Act is very rigid. We are planning to include certain enabling clauses into the Act which will give greater freedom to SBI and subsidiaries. Maybe three or four subsidiaries could merge among themselves, or the banks could do anything else that would be profitable for them," sources said.
The banking division plans to be ready with a model of an ARC within a month and will start the process with either Indian Bank, Uco or United Bank of India (UBI). "We are studying the ARCs that are in operation in Latin America, Philippines, Japan and other countries and would come up with a model that would best suit the Indian conditions. The model would specify how the ARC would function _who would capitalise the ARC, how the realisable value of the assets would be worked out, the manner in which the bonds would be issued by the ARC to the banks in return for the assets etc," sources said. Sources said that at the moment, the RBI and the government is having discussions to distribute the workload for the next course of reforms. "The workload is being divided into three or four categories. The set of prudential norms will be announced by the RBI. Then there is banks' internal reorganisation, and changes in the legal environment, for which a committee is being set up."