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Thursday, December 20, 2012

Banking Bill passed by Lok Sabha: Corporates set to open bank accounts

Large Indian business houses such as the Tatas , Birlas, Bajaj and Reliance came a step closer to entering the banking space with the Lok Sabha passing the Banking Regulation (amendment) Bill on Tuesday, a move which has been cited by the Reserve Bank of India (RBI) as a pre-requisite for granting new bank licences.

The passage of the bill in the Lok Sabha was facilitated by the removal of a controversial Forward Market's Contract clause that would have allowed banks to enter into future trading of commodities. Very few banks were keen on trading in commodities and some felt that the clause had been incorporated to provide banks a level playing field with corporate giants.

The amendments empower RBI to inspect books of conglomerates , make board and top management appointments in banks and control transfer of large chunks of shares. The bill also allows investors to have voting rights with a higher cap of to 26% from the existing 10% in case of private sector banks and 10% from 1% at present in case of public sector banks.

The increased voting rights to investors, commensurate with their shareholding in existing banks, would help both private and public sector banks to get more foreign investors and help in expanding their capital base. The bill also seeks to exempt certain mergers and acquisitions (M&As), such as peer group mergers, from the purview of the Competition Commission of India (CCI). However, it was clarified that the banking sector will not be outside the CCI's purview.

"The amendments have a much wider ramification than the entry of new banks. It empowers the regulator and gives it much more say in M&As and in appointment of directors," said Ashwin Parekh, partner & global financial leader, Ernst & Young.

Existing banks will gain as their strategic shareholders will be encouraged by the move to increase voting rights. "Entry of new banks may create new market segments and may not hurt existing banks as much as there is undepenetration of banking services in India. We have also seen in the past that competition has benefited the industry as a whole when there is enough room for growth," said Monish Shah, director, Deloitte India.

Once the amendments are enacted, RBI is expected to come out with its final guidelines for the entry of new private banks. Although several conglomerates - including L&T, Tatas, the Aditya Birla Group, Bajaj FinservBSE -0.35 %, Shriram Transport, Religare , ADAG, LICHF and SREI - had evinced interest, there are a host of riders.

The big challenge for RBI would be in the selection process. Bankers say that following the telecom licence scandal and the report of the Comptroller and Auditor General on the issue of licences, RBI would find it necessary to come out with a watertight process.

Replying during the debate in Parliament, finance minister P Chidambaram said the government would infuse Rs 15,000 crore in public sector banks by March 31, 2013. He said that though Indian public sector banks were very well capitalized, infusion of fresh capital is required to meet increasing demands. He also said that banks would recruit more than 84,000 in the current year and add at least 6,000 more branches, while replying during the debate on the banking bill, which was passed by a voice vote.

Source: Economic Times


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