Banking Act changes to give RBI needed flexibility – published in the Economic Times

Read one compliance insider’s analysis of the proposed changes to the 60 year old Indian Banking Regulation Act. Tighter controls over banks should manage liquidity and reign in inflation. The author works for a multinational bank and the views contained in this article are personal.

In an effort to ensure Indian banks adhere to international best practice and, importantly, play on a level-playing field, the Indian government is seeking to amend the 60-year-old Banking Regulation Act, 1949. The proposed amendments will encompass the Banking Regulation Act, 1949, the Banking Companies (Acquisition and Transfer of Undertaking) Act, 1970, and the Banking Companies (Acquisition and transfer of Undertaking) Act, 1980.

First introduced in the Lok Sabha in May 2005, the Banking Law (amendment) Bill 2011 lapsed as the Lok Sabha was dissolved for the general election in 2009. In effect, the government’s previous efforts were stymied by stiff opposition from Left parties and coalition partners. Central to the Bill is the mandatory requirement for entities/persons seeking to acquire share capital in a bank in excess of 5% to obtain approval from the Reserve Bank of India.

The provision seeks to ensure not just that control of banks is available only to fit and proper persons, but also that it is both in the public interest and in the interest of the broader banking industry. The Bill authorises the RBI to halt transfers to the proposed transferee and, in a case where a transfer has been registered, the transferee shall not be entitled to exercise voting rights in any company meeting.

Providing the regulator with more effective control of the industry and proposing to increase penalties to crores from thousands, the Bill will provide the RBI with more flexibility in its efforts to manage liquidity and rein in inflation via the Cash Reserve Ratio (CRR) tool. The words ‘at least three per cent’ is proposed to be replaced by ‘such per cent’. The Bill also empowers the RBI to grant banks such exemptions from the CRR provisions as it thinks fit. The Bill also seeks to activate the significant funds that accrue in dormant accounts by aggregating into a single fund, which can be used to promote the interests of depositors.

Specifically, it proposes the establishment of a “Depositor Education and Awareness Fund”, which will comprise funds from non-operational accounts which have remained unclaimed for more than 10 years. Nonetheless, depositors are protected by a proviso which allows customer/depositors to claim previously unclaimed funds from the bank after expiry of the 10-year period.

For India to enjoy a healthy banking sector, the regulator requires adequate powers to exert effective control over participants. Under the Banking Regulation Act, 1949, the RBI has the power to remove a director or any other officer of the banking company. Such power is inadequate if the entire board of directors is working against the interest of the depositors and the banking industry. However, in the insertion of Part IIAB, (section 36ACA), the Bill proposes to confer powers to the RBI to supersede those of the board for not more than 12 months.

The chairman, managing director and other directors shall vacate the office from the date of supersession and will not be entitled to claim compensation from the date of termination.

When called upon to issue fresh private sector bank licences, it is right and proper for the RBI to have sufficient powers to inspect the accounts and business of any associate enterprise of the applicant bank. Associate enterprises, which have significant influence in the making of financial or policy decisions, also come within the ambit of proposed amendments.

The proposals represent useful groundwork and will equip the regulator with significantly more powers. Until such time as the Bill is passed by the Parliament, aspirant companies seeking to enter the banking industry will be forced to continue to flex their muscles.

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