[Economy] Banking Amendment Bill: Issues, Features, Problems, Reforms meaning explained

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UPSC Paperset
  1. What is Banking Regulation Act?
  2. RBI Power #1: Can remove entire Board of a Bank
  3. RBI Power #2: Connected Lending Prevention
  4. RBI Power #3: Unclaimed Accounts
  5. Public Banks Issue#1: Need consolidation
  6. Public Banks Issue#2: Need more investment
  7. Banks issue #3: More voting rights for investors
  8. Foreign Banks Issue #1: Stampduty
  9. Foreign Banks Issue #2: Want to invest in Commodity
  10. Standing Committee problem
  11. Issues raised in parliament
    1. #1: Commodity speculation
    2. #2: Competition Monitoring: RBI vs CCI
  12. Anti-Bill arguments

Boring technical details intentionally skipped. I don’t do Ph.D on current affairs, neither should you.
What is Banking Regulation Act?
This act empowers reserve bank of India (RBI ) to regulate all public sector banks (SBI, PNB etc.) and private sector banks.(ICICI, HDFC etc.) in India.

Set : Finance Minister’s Office

Finance minister and RBI governor are holding a meeting.

ChinduYaar many new players want to open banks in India. But they can’t, because you’re not giving new licenses, So what is your problem?
RBI governorWell, I’m given powers to regulate public and private sector banks, under Banking Regulation Act 1949.But those powers are not enough.
So, I’m not going to give new bank-licenses to anybody, unless and until you get me more powers, by updating that Banking Regulation Act.
ChinduOk, I’ll move a Banking laws (Amendment) bill, to amend the necessary things.But first tell me what new powers do you need?

RBI Power #1: Can remove entire Board of a Bank

RBIAt present, if a Bank doesn’t play by my rules, I can remove its CEO or one or two directors. But that is not enough. What if the whole board of directors is involved in some mischief.
So, I want powers to remove the entire board of directors.
I also want you to increase the rates of existing monetary penalties that I can impose on a bank if it disobeys my rules, directives or gives me false information.
ChinduOk agreed.I’ll get you the powers to supersede boards of the banks if any irregularities.And I’ll increase the penalty rates as well.Anything else?
RBISecond problem. Connected lending.
ChinduWhat is that?

RBI Power #2: Connected Lending Prevention

  • 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, education and business-loan seekers, who then pay interest and thus bank makes profit.
  • Bank must make good profit, so It can pay 1) good interest rate to its bank account holders. 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-Fisher bank to Pawn-Fisher airlines @very low interest rate, to fix the mess.
  • And or, this Pawn-Fisher airlines gets the bank loan @market rates from the Pawn-Fisher Bank but it doesn’t pay EMIs regularly, yet the bank doesn’t take any action.
  • Similarly, Mr.Paraajay also opens Pawn-Fisher Mutual funds, but it also makes losses, and money is transferred from bank deposits to mutual funds, to cover up those losses.
  • These type of activities = Not good, because in long term, bank will collapse and depositors’ money will be stuck.
RBISo, I must be given powers to check the records and account-books of those mutual funds, 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?
RBIYes, money from unclaimed bank accounts.

RBI Power #3: Unclaimed Accounts

  • If Mr.X has not used his bank account for more than 10 years, it is called “unclaimed bank account.”
  • There are crores of rupees in such unclaimed bank accounts, it increases the Administrative burden on bank employees (=need to maintain files etc)
  • Plus there is also an opportunity to commit a fraud. for example some bank employee knows that Mr.X’s bank account is never checked, then he’ll forge checkbooks signature or some other trick to withdraw money from Mr.X’s account.
RBIso we must take some measure to tackle this issue.

  • If a bank account is not operated for more than 10 years, bank will have to transfer its money in the “Depositor Education and Awareness Fund”
  • And I’ll appoint a Committee 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
RBIYes 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 take permission from me. And before giving him approval, I can put conditions on him, For example give me deposit worth Rs.xyz, so if you play some mischief, I’ll take away your deposit.
  2. If primary cooperative societies want to continue their banking business, they’ll have to get a license from me.
  3. I can conduct special audits of cooperative banks because they’re more liable to collapse and frauds.
  4. If a bank fails to maintain the prescribed minimum amount of Cash Reserve Ratio (CRR) on any day, I can demand penalty interest from that bank.
ChinduAll agreed. Anything else.
RBIThat’s enough for now.
ChinduOk then please leave my cabin and send the SBI chairman in. He too had an appointment with me.

Public Banks Issue#1: Need consolidation

SBI chiefGood morning Mr. Finance Minister. As you’re aware, SBI is the largest public sector bank in India, we’ve more than 11,000 branches. Yet if you make a list of top 5 biggest banks of the world, our name doesn’t figure.
ChinduWhy is it so?
SBIThis is because too many small public banks exist in India. So, the ‘incoming-money’ (from people to bank accounts) gets fragmented in so many bank branches. Finally, we don’t have enough cash, to expand in a big way.
ChinduOk so what do you want from me?
SBI
  • There is need for consolidation in the banking sector so India can have two to three large public banks that can compete globally.
  • For this, I need you to simplify Banking Companies Acquisition and Transfer of Undertakings Act.
  • And to exclude bank mergers from the scrutiny of Competition Commission of India (CCI).
  • Bank mergers should need only approval of RBI.
ChinduAgreed.

PSU Banks Issue#2: Need more investment

SBIRight 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.
SBIAgreed.

Banks issue #3: More voting rights for investors

SBIBefore 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’ meetings, voting is done on many issues (for example election of board of directors, changing name of company etc.).
  • A shareholder should have voting rights proportional to the number of shares held by him.
  • But in case of public banks, the shareholders have only 1% voting right irrespective of number of shares held. So they cannot heavily influence any Decision.
  • I need you relax these voting rights. Only then foreign investors will be attracted to invest in Indian banks.
ChinduAgreed. We’ll revise the voting rights.

Revised voting rights

Voting rights (%)
BankExampleBeforeAfter
Private sectorHDFC, ICICI1026
Public sectorSBI , PNB110
ChinduAnything else.
SBINo this is all for now.
ChinduThen you may leave. But please send the chairman of Citibank in, he too had taken appointment and is waiting outside.

Foreign Banks Issue #1: Stampduty

ChinduOk what can I do for you?
CitibankWhen I transfer my branches from the main company to the subsidiary company, I don’t want to pay stamp duty. This should help me expand my business in India.
ChinduAgreed. Anything else.
CitibankYes there is one more matter

Foreign Banks Issue #2: Want to invest in Commodity

Citibank
  • Right now, the Banks can trade in shares, bonds and currencies speculation but the Banking Regulation Act forbids them from trading in commodities.
  • But we (foreign banks) see huge profit making opportunity in that sector.
  • So we need you to amend Banking regulation Act, to allow the banks to invest in Commodities market.
ChinduAgreed.

Standing Committee problem

  • After a bill is introduced in parliament, it goes to the Standing Committee of Parliament for particular subject.
  • for example Banking Regulation bill to Standing Committee on finance.
  • They inspect the bill clause by clause, put forward their recommendations. And then voting is done.
  • In case of Banking regulation bill, after the parliamentary Standing Committee on Finance put its report, Chindu added some new provisions in it.
  • so opposition parties got angry “this wasn’t part of the original bill, if you want to add new provisions, then this bill must be sent back to the Standing Committee for re-consideration”.

Set: parliament

In the parliament, Opposition members are shouting slogans. (as usual)

Meera Kumar says “beth jayiye, beth jayiye, kripyaa shaant ho jayiye.”(please sit down, please sit down, as usual)

#1: Commodity speculation
ChinduWhat 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 speculative trading, especially with those Foreign banks.
  • What if some investors loose money because of this?
  • The Forward Markets Commission (FMC) doesn’t have enough powers to safeguard them. because
  • 1) FMC doesn’t have legal powers for compulsory registration of traders.
  • 2) FMC doesn’t have power to impose huge financial penalty.
  • Parliament is yet to pass Forward Contract Regulation Act (FCRA) Amendment Bill, which aims to empower FMC.
  • And more importantly, you added the this Commodity provision in banking bill, after it was reviewed by Standing Committee. So this bill must be sent back to standing Committee for review.
ChinduNo, no, no. if bill goes back to standing Committee, it’ll take lot of time.Ok I back off, I remove this provision, so there is no need to send this bill back to standing Committee.

#2: Competition Monitoring: RBI vs CCI

ChinduFriends, I also propose that only RBI’s permission should be necessary for Bank mergers and acquisitions. Competition Commission of India should not play any role in it.
OppositionNot acceptable. Again this is new provision added after Standing Committee gave its report. So, send the bill back to Standing Committee.
ChinduNo, no, no. if bill goes back to standing Committee, then it’ll delay the implementation.Ok I back off, I remove this provision.CCI will have the power to investigate and clear mergers and acquisitions in the banking sector.

Lok sabha passed the bill.

Rajya Sabha also passed the bill.

Now this bill file will goto President. Once he signs it, this bill will become a “Law”.
Banking regulation Act

Anti-Bill arguments

In December, employees of public banks went on strike. (although SBI  employees did not join the strike.)

The Bank unions give following Anti-Bill arguments:

  • Government claims “more banks = more branches = more poor people get banking facilities = financial inclusion”. But it is mere lip service. Because new corporate banks/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 operations will be outsourced via contractual business route.
  • This type of ‘privatization’ will negatively affect our job security and interests of those poor people.
  • Statistics indicate that only 50 percent of people in India have bank accounts.
  • The Centre should focus on educating rural people and cultivating banking habit among them instead of taking steps to merge banks or diluting voting rights.
  • Merger of banks will de-stablise public sector banks, then corporate firms will start their own banks and gobble up public savings. And that money will be misused for the benefit of 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 people next year.)

Critiques also argue that

  • It seems the whole exercise is not a comprehensive banking reform but just firefighting because  1) Foreign banks and domestic players put pressure on FM to help them get bank licenses. 2) RBI blackmails FM to get more powers. 3) FM comes with banking regulation bill. Prime objective of this bill seems to help private players get new banking licenses.
  • Government should further relax the voting rights otherwise, Government will keep abusing its majority shareholding to further its own political goals and election agendas.
  • e.g. in 2008, public sector banks were asked to forgo farmers’ loans (Debt Waiver scheme). Although Government promised to refund the loan-money to banks on behalf of farmers but it is not a good business practice.

Summary

The Banking regulation bill, 2011 was passed in the Winter session of parliament in Dec.2012.

The salient features of the Banking regulation bill are (list not exhaustive)

  1. RBI can inspect books of associate business arms of a bank.
  2. RBI can supercede entire board of directors of a bank.
  3. RBI can conduct special audits of cooperative banks.
  4. Cooperative societies cannot carryout banking activities without license from RBI.
  5. A “Depositor Education and Awareness Fund to receive money from deposit accounts not operated for more than 10 years.
  6. Increased the penalties and fines for violating Banking Regulation Act.
  7. Public Banks can obtain more capital via bonus shares and rights issue.
  8. Increases the voting 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 acquisition 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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