mrunal-economy banking amendment bill issues features problems reforms meaning explained
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[Economy] Banking Amendment Bill: Issues,Features, Problems, Reforms meaningexplained
1. What is Banking Regulat ion Act?2. RBI Power #1: Can remove ent ire Board of a Bank3. RBI Power #2: Connected Lending Prevent ion4. RBI Power #3: Unclaimed Accounts5. Public Banks Issue#1: Need consolidat ion6. Public Banks Issue#2: Need more investment7. Banks issue #3: More vot ing rights for investors8. Foreign Banks Issue #1: Stampduty9. Foreign Banks Issue #2: Want to invest in Commodity
10. Standing Commit tee problem11. Set: parliament
1. Parliament f ight #1: Commodity speculat ion2. Parliament Fight #2: Compet it ion Monitoring: RBI vs CCI
12. Ant i-Bill arguments
Boring technical details intent ionally skipped. I don’t do Ph.D on current af fairs, neither shouldyou.
What is Banking Regulation Act?It is governs all public sector banks (SBI, PNB etc.) and private sector banks.(ICICI, HDFCetc.) in India.
Set : Finance Minister’s OfficeFinance minister and RBI governor are holding a meet ing.
Chindu Yaar many new players want to open banks in India. But they can’t , because you’renot giving new licenses, So what is your problem?
RBIgovernor
Well, I’m given powers to regulate public and private sector banks, under BankingRegulat ion Act 1949.But those powers are not enough.So, I’m not going to give new bank-licenses to anybody, unless and unt il you get memore powers, by updat ing that Banking Regulat ion Act.
Chindu Ok, I’ll move a Banking laws (Amendment) bill, to amend the necessary things.But f irsttell me what new powers do you need?
RBI Power #1: Can remove entire Board of aBank
At present, if a Bank doesn’t play by my rules, I can remove its CEO or one or two
RBIdirectors. But that is not enough. What if the whole board of directors is involved insome mischief .So, I want powers to remove the ent ire board of directors.I also want you to increase the rates of exist ing monetary penalt ies that I can imposeon a bank if it disobeys my rules, direct ives or gives me false informat ion.
ChinduOk agreed.I’ll get you the powers to supersede boards of the banks if anyirregularit ies.And I’ll increase the penalty rates as well.Anything else?
RBI Second problem. Connected lending.ChinduWhat is that?
RBI Power #2: Connected LendingPrevention
Suppose Mr.Paraajay gets license to open a new bank.He opens Pawn-Fisher bank, people deposit their hard earned cash in it .Ideally, bank should lend this money to the home, car, educat ion and business-loanseekers, who then pay interest and thus bank makes prof it .Bank must make good prof it , so It can pay 1) good interest rate to its bank accountholders. 2) good dividends to its share holders.But Mr.Paraajay also owns another company, Pawn-Fisher airlines.And this airlines company is making losses. Mr.Paraajay gives loans from Pawn-Fisherbank to Pawn-Fisher airlines @very low interest rate, to f ix the mess.And or, this Pawn-Fisher airlines gets the bank loan @market rates f rom the Pawn-FisherBank but it doesn’t pay EMIs regularly, yet the bank doesn’t take any act ion.Similarly, Mr.Paraajay also opens Pawn-Fisher Mutual funds, but it also makes losses, andmoney is t ransferred from bank deposits to mutual funds, to cover up those losses.These type of act ivit ies = Not good, because in long term, bank will collapse anddepositors’ money will be stuck.
RBI So, I must be given powers to check the records and account-books of those mutualfunds, insurance and other companies associated with a bank.
ChinduAgreed.you’ll get the power to inspect those other business arms of a bank.Anything else?
RBI Yes, money from unclaimed bank accounts.
RBI Power #3: Unclaimed AccountsIf Mr.X has not used his bank account for more than 10 years, it is called “unclaimed bankaccount.”There are crores of rupees in such unclaimed bank accounts, it increases theAdministrat ive burden on bank employees (=need to maintain f iles etc)Plus there is also an opportunity to commit a f raud. for example some bank employeeknows that Mr.X’s bank account is never checked, then he’ll forge checkbooks signatureor some other t rick to withdraw money from Mr.X’s account.
RBI
so we must take some measure to tackle this issue.
If a bank account is not operated for more than 10 years, bank will have totransfer its money in the “Depositor Educat ion and Awareness Fund”And I’ll appoint a Commit tee to use money from this fund to create awareness.Although if Mr.X returns, he can claim his money and that bank will have to pay
him interest also.
ChinduAgreed. Anything else
RBI
Yes one tea, two samosas and four more powers
1. If any person wants to buy more than 5% shares of any bank, he’ll have to takepermission from me. And before giving him approval, I can put condit ions on him,For example give me deposit worth Rs.xyz, so if you play some mischief, I’ll takeaway your deposit.
2. If primary cooperat ive societ ies want to cont inue their banking business, they’llhave to get a license from me.
3. I can conduct special audits of cooperat ive banks because they’re more liable tocollapse and frauds.
4. If a bank fails to maintain the prescribed minimum amount of Cash Reserve Rat io(CRR) on any day, I can demand penalty interest f rom that bank.
ChinduAll agreed. Anything else.RBI That ’s enough for now.
ChinduOk then please leave my cabin and send the SBI chairman in. He too had anappointment with me.
Public Banks Issue#1: Need consolidationSBIchief
Good morning Mr. Finance Minister. As you’re aware, SBI is the largest public sectorbank in India, we’ve more than 11,000 branches. Yet if you make a list of top 5 biggestbanks of the world, our name doesn’t f igure.
ChinduWhy is it so?
SBIThis is because too many small public banks exist in India. So, the ‘incoming-money’(f rom people to bank accounts) gets f ragmented in so many bank branches. Finally, wedon’t have enough cash, to expand in a big way.
ChinduOk so what do you want f rom me?
SBI
There is need for consolidat ion in the banking sector so India can have two tothree large public banks that can compete globally.For this, I need you to simplify Banking Companies Acquisit ion and Transfer ofUndertakings Act.And to exclude bank mergers f rom the scrut iny of Compet it ion Commission ofIndia (CCI).Bank mergers should need only approval of RBI.
ChinduAgreed.
PSU Banks Issue#2: Need more investmentSBI Right now the Public Sector banks cannot issue shares worth more than Rs.3000
crores. I want you to relax this, because We need lot of investment.
ChinduOk agreed. You can issue more shares, including bonus shares and rights issue etc.(already explained click me)But you’ll have to take permission from Central Government+ RBI if you want to do it .
SBI Agreed.
Banks issue #3: More voting rights for
investorsSBI Before moving on, I must thank you for allowing us to issue bonus shares etc. But that
alone will not bring investment in public or private sector banks.ChinduWhy?
SBI
Because in shareholders’ meet ings, vot ing is done on many issues (for exampleelect ion of board of directors, changing name of company etc.).A shareholder should have vot ing rights proport ional to the number of shares heldby him.But in case of public banks, the shareholders have only 1% vot ing rightirrespect ive of number of shares held. So they cannot heavily inf luence anyDecision.I need you relax these vot ing rights. Only then foreign investors will be at t ractedto invest in Indian banks.
ChinduAgreed. We’ll revise the vot ing rights.
Revised voting rightsVoting rights (%)
Bank Example Before AfterPrivate sectorHDFC, ICICI10 26Public sector SBI , PNB 1 10ChinduAnything else.SBI No this is all for now.
ChinduThen you may leave. But please send the chairman of Cit ibank in, he too had takenappointment and is wait ing outside.
Foreign Banks Issue #1: StampdutyChindu Ok what can I do for you?
Cit ibankWhen I t ransfer my branches from the main company to the subsidiary company, Idon’t want to pay stamp duty. This should help me expand my business in India.
Chindu Agreed. Anything else.Cit ibankYes there is one more matter
Foreign Banks Issue #2: Want to invest inCommodity
Cit ibank
Right now, the Banks can trade in shares, bonds and currencies speculat ion butthe Banking Regulat ion Act forbids them from trading in commodit ies.But we (foreign banks) see huge prof it making opportunity in that sector.So we need you to amend Banking regulat ion Act, to allow the banks to invest inCommodit ies market.
Chindu Agreed.
Standing Committee problemAfter a bill is introduced in parliament, it goes to the Standing Commit tee of Parliamentfor part icular subject .for example Banking Regulat ion bill to Standing Commit tee on f inance.They inspect the bill clause by clause, put forward their recommendat ions. And thenvot ing is done.In case of Banking regulat ion bill, af ter the parliamentary Standing Commit tee on Financeput its report , Chindu added some new provisions in it .so opposit ion part ies got angry “this wasn’t part of the original bill, if you want to add newprovisions, then this bill must be sent back to the Standing Committee for re-consideration”.
Set: parliamentIn the parliament, Opposit ion members are shout ing slogans. (as usual)
Meera Kumar says “beth jayiye, beth jayiye, kripyaa shaant ho jayiye.”(as usual)
Parliament fight #1: Commodity speculationChinduWhat is the problem?
Oppn. The share-market and mutual funds = regulated by SEBI.Similarly Commodity market=regulated by Forward Market Commission (FMC)
ChinduSo?
Oppn.
So, if banks invest in commodity futures, it would lead to high-risk speculat ivetrading, especially with those Foreign banks.What if some investors loose money because of this?The Forward Markets Commission (FMC) doesn’t have enough powers tosafeguard them. because1) FMC doesn’t have legal powers for compulsory registrat ion of t raders.2) FMC doesn’t have power to impose huge f inancial penalty.Parliament is yet to pass Forward Contract Regulat ion Act (FCRA) AmendmentBill, which aims to empower FMC.And more important ly, you added the this Commodity provision in banking bill,af ter it was reviewed by Standing Commit tee. So this bill must be sent back tostanding Commit tee for review.
ChinduNo, no, no. if bill goes back to standing Commit tee, it ’ll take lot of t ime.Ok I back of f , Iremove this provision, so there is no need to send this bill back to standing Commit tee.
Parliament Fight #2: CompetitionMonitoring: RBI vs CCI
ChinduFriends, I also propose that only RBI’s permission should be necessary for Bankmergers and acquisit ions. Compet it ion Commission of India should not play any rolein it .
Opposit ionNot acceptable. Again this is new provision added af ter Standing Commit tee gaveits report . So, send the bill back to Standing Commit tee.No, no, no. if bill goes back to standing Commit tee, then it ’ll delay the
Chindu implementat ion.Ok I back of f , I remove this provision.CCI will have the power toinvest igate and clear mergers and acquisit ions in the banking sector.
Lok sabha passed the bill.
Rajya Sabha also passed the bill.
Now this bill f ile will goto President. Once he signs it , this bill will become a “Law”.
Anti-Bill argumentsIn December, employees of public banks went on strike. (although SBI employees did not jointhe strike.)
The Bank unions give following Ant i-Bill arguments:
Government claims “more banks = more branches = more poor people get bankingfacilit ies = f inancial inclusion”. But it is mere lip service. Because new corporatebanks/foreign banks won’t have any interest in serving poor people.If mergers are allowed then rural branches will close down and/or rural banking operat ionswill be outsourced via contractual business route.This type of ‘privat izat ion’ will negat ively af fect our job security and interests of thosepoor people.Stat ist ics indicate that only 50 percent of people in India have bank accounts.The Centre should focus on educat ing rural people and cult ivat ing banking habit amongthem instead of taking steps to merge banks or dilut ing vot ing rights.Merger of banks will de-stablise public sector banks, then corporate f irms will start their
own banks and gobble up public savings. And that money will be misused for the benef itof few corporate honchos and not for the general public.
Although Chindu counters them saying “these banking reforms= new banks will be opened=more employment. (he expects 6,000 new bank branches and recruitment of 84,000 peoplenext year.)
Crit iques also argue that
It seems the whole exercise is not a comprehensive banking reform but just f iref ight ingbecause 1) Foreign banks and domest ic players put pressure on FM to help them getbank licenses. 2) RBI blackmails FM to get more powers. 3) FM comes with bankingregulat ion bill. Prime object ive of this bill seems to help private players get new bankinglicenses.Government should further relax the vot ing rights otherwise, Government will keepabusing its majority shareholding to further its own polit ical goals and elect ion agendas.e.g. in 2008, public sector banks were asked to forgo farmers’ loans (Debt Waiverscheme). Although Government promised to refund the loan-money to banks on behalfof farmers but it is not a good business pract ice.
SummaryThe Banking regulat ion bill, 2011 was passed in the Winter session of parliament in Dec.2012.
The salient features of the Banking regulat ion bill are (list not exhaust ive)
1. RBI can inspect books of associate business arms of a bank.2. RBI can supercede ent ire board of directors of a bank.3. RBI can conduct special audits of cooperat ive banks.4. Cooperat ive societ ies cannot carryout banking act ivit ies without license from RBI.5. A “Depositor Educat ion and Awareness Fund to receive money from deposit accounts
not operated for more than 10 years.6. Increased the penalt ies and f ines for violat ing Banking Regulat ion Act.7. Public Banks can obtain more capital via bonus shares and rights issue.8. Increases the vot ing rights of shareholders in Public and Private sector banks.9. Prior approval of RBI necessary if a person wants to purchase more than 5% shares of a
bank.10. Banking Mergers and acquisit ion will fall under purview of CCI.11. Bank will have to pay penalty interest rate, if it doesn’t maintain CRR on daily basis.12. Foreign banks exempted from stampduty payment for certain cases.
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