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Banking sector set for major reforms

Special Correspondent

The move is to ensure greater operational flexibility to the RBI

NEW DELHI: The banking sector is set for far-reaching reforms. To keep pace with the major changes taking place in the financial sector globally, the Union Cabinet on Wednesday approved two Bills to amend the Reserve Bank of India Act, 1934 and the Banking Regulation Act, 1949. These will accord "greater operational flexibility" to the central bank and arm it with more powers to monitor and streamline the functioning of all domestic banks.

The Cabinet, which met under the chairmanship of Prime Minister Manmohan Singh, also gave its nod for amending the Credit Information Companies (Regulation) Bill, 2004 to help banks reduce their non-performing assets.

All the three Bills are to be introduced in the current session of Parliament.

Briefing newspersons here, Information and Broadcasting Minister Jaipal Reddy said the RBI would be left free to revise the limits on the Statutory Liquidity Ratio (SLR) and the Cash Reserve Ratio (CRR) of commercial banks to enable release of more funds for productive purposes.

Currently, under the Banking Regulation Act and the RBI Act , while the variation in SLR is restricted to a minimum 25 per cent of bank deposits, the CRR is pegged at three per cent.

Foreign direct investment

More importantly, to facilitate larger inflows of foreign direct investment (FDI) into the banking sector, the Bill provides for voting rights to investors in banks in keeping with their shareholding. At present, the voting rights of foreign investors are capped at 10 per cent, irrespective of the equity stake they held. The amendments to the BR Act — eight in all — will enable the RBI to classify securities issued by the Centre, the States and other entities as "approved securities". As for the banks, the relevant amendment will enable them to issue preference shares to keep in line with the prudential norms in adherence to the Basel II accord.

The RBI will be empowered to grant exemption to any banking company from Section 20 of the Act, extending to it the freedom to grant loans and advances to any company. On the monitoring side, the changes envisaged in the Act will arm the RBI with powers to inspect the financial statements or business affairs of associate entities of banks; the central bank will also be able to supersede the board of any bank, if deemed necessary.

The BR Act Amendment Bill also provides the facility of primary credit societies obtaining licences from the RBI for engaging in the business of banking. On the flip side, the RBI will have the powers to order special audits of their accounts in the interest of the public.

Market regulation

Apart from empowering the RBI to revise the CRR, the amendments to the RBI Act will enable it to effectively regulate the market for interest rate contracts including conventional securities, money market instruments and derivatives.

As for the Credit Information Companies Bill, the amendment will facilitate the setting up of Credit Information Bureau. It will collect, share and disseminate information on loans taken from banks. This monitoring is expected to improve credit appraisal and decision-making and thus help banks in reducing their NPAs.

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