Endorsement of the much awaited Banking Laws (Amendment) Bill 2011 by Parliament is expected to infuse a fresh lease of life in the banking industry.
Amongst the many benefits expected from the Bill, increased competition in the banking industry and enhanced flow of foreign funds are touted as the two biggest outcomes. In addition, the Bill has enhanced the regulatory powers of Reserve Bank of India (RBI) and acceded to RBI’s demand for more ‘enabling legislations’.
The Bill has increased the cap on voting rights for investors from 10 to 26 per cent in private sector banks, and from 1 to 10 per cent for public sector banks (PSBs) to make voting rights commensurate with economic ownership. This was long desired by the foreign investors as increase in minority shareholding is expected to improve the corporate governance standards.
This may increase flow of foreign money in Indian banks which is essential to drive not only incremental credit growth but also help banks meet enhanced capital requirements under Basel III.
Under the Bill, RBI has been accorded greater regulatory control including the ability to overrule bank boards and oversight over acquisition of a substantial stake in banks. RBI was demanding these enhanced regulatory powers before inviting applications for new banking licenses.
It is anticipated that new banking licenses will be awarded to those who have significant presence in semi-urban and rural areas as Government seeks to deepen financial inclusion.
If it is able to successfully meet its objectives of enhancing competition, attracting foreign investors and creating global Indian banks, it may prove to be game changer for the industry.
(The author is Partner – Financial Services, Ernst & Young)