Banking Bill Paves Way for New Banks, Foreign Investment

The government on Tuesday cleared the decks for the Reserve Bank of India ( RBI) to initiate the process to issue new banking licences and widened the window for infusion of capital into the banking sector. The Lok Sabha cleared the Banking Laws (Amendment) Bill, 2011, after Finance Minister P Chidambaram agreed to drop the contentious proposal on allowing banks to do futures trading. He also clarified status quo would be maintained on the jurisdictions of RBI and the Competition Commission of India ( CCI) in the banking sector. “Since it is important that the banking bill is passed, I am dropping the controversial clauses.” While the central bank would regulate the banking sector, the competition watchdog would look at anti-competitive practices, Chidambaram said.


Most provisions in the Bill are to strengthen RBI. In Parliamentary democracy, give and take was required and rest of the Bill was important as RBI was awaiting more powers, the finance minister added. Changes to the Bill would pave the way for RBI to issue new bank licences. The central bank had been insisting the enabling legislation be put in place before applications were invited for new bank licences. As the Bill has provisions to increase investors’ voting rights in private banks to 26 per cent from the current 10 per cent, it is expected to bring in more foreign investment in the banking sector. In case of public sector banks, voting rights have been enhanced from one per cent to 10 per cent.

The Bill was passed by voice vote after the amendments proposed by the Left parties were rejected by the House. The Bill would now be taken up in the Rajya Sabha. The insurance Bill, which seeks to raise the cap on foreign direct investment in insurance firms to 49 per cent from the present 26 per cent, would not be taken up for consideration in the ongoing session of Parliament, Chidambaram told reporters after the passage of the Banking Bill. Earlier, during the discussion on the Banking Bill, he highlighted the need for consolidation in the banking sector so that India could have two- three large public sector banks that could compete globally. He also said about 6,000 new bank branches would be opened and that banks planned to recruit around 84,000 people this year. He reiterated the government was committed to infusing Rs 15,000 crore into public sector banks in the current financial year and more next year. Capital might be infused now through rights issues and bonus shares.

Earlier, Bharatiya Janata Party leader Yashwant Sinha, who heads the standing committee on finance, had opposed the two contentious clauses in the Banking Bill, saying those were not considered by his panel. He had said the provisions would allow banks to put their money in speculative trading.

-Business Standard