Banking Bill paves the way for new bank licences

The legislation to facilitate wider investment in the banking sector and allow for new bank licences was approved by Lok Sabha on Tuesday. The Banking Laws (Amendment) Bill, 2011, was steered by finance minister P Chidambaram after dropping a clause to allow banks to trade in commodity futures which had been objected to by the BJP.

"Since the rest of the Bill is too important for me and the RBI is also waiting for it (the Bill), I did not press that clause," the minister said during the discussion of the Bill in the house.

The Bill is the most significant piece of financial sector legislation for the economy since the first phase of reforms of 1991. The Bill aligns shareholding in banks in line with voting rights making it attractive for domestic and foreign investors to invest in them. This makes it easy for both private and public sector banks to raise equity and debt necessary to bolster their capital base, to provide more credit.

In private sector banks such as HDFC Bank and ICICI Bank, the cap on voting rights for investors will rise to 26 per cent from the current 10 per cent, while in government banks it will increase to 10 per cent from the existing 1 per cent.

The Bill also adds to the regulatory powers of RBI including superseding the boards of banks if necessary. This will give the regulator the confidence to give out licences for setting up more private banks in the country.

The Reserve Bank of India had made it clear that it would not issue new bank licences until the amendments were approved by Parliament, despite repeated prodding by the finance ministry.

The Bill was sought to be introduced last week in the House but after Opposition parties sought the clause to be either dropped or the Bill be referred to the Standing Committee on Finance again, it was withdrawn.

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