Reforms commission looking at uniform legislation for banks

The Financial Sector Legislative Reforms Commission (FSLRC) is considering a single, harmonised and uniform legislation applicable to all banks and giving the central bank the power to sanction takeover of a co-operative bank by commercial banks, said Mr Anand Sinha, Deputy Governor, Reserve Bank of India.

The fact that different banks are governed by different laws has resulted in an uneven playing field and this need to be addressed. The Commission was set up by the Government earlier this year to recommend radical overhaul of laws governing the financial sector.

For example, while amendments were carried out to enable State Bank of India, SBI subsidiary banks and nationalised banks to issue preference shares, though at different points of time, banks in the private sector cannot issue preference shares as the amendments to the Banking Regulation Act is still to be carried out.

Similarly, while bilateral netting (the amount that is due to or from the insolvent counterparty) in the event of liquidation is admissible for private sector banks (which are governed by the Companies Act and the normal bankruptcy laws), the position in this regard for public sector banks, SBI and its subsidiaries is not clear, explained Mr Sinha in his address at the Financial Planning Congress.

“A single, harmonized and uniform legislation applicable to all banks will provide transparency, comprehensiveness and clarity and provide ease of regulation and supervision to the RBI,” said the Deputy Governor.

He observed that there is also a need to sort out the conflicts and overlaps between the primary laws governing the banking sector and other applicable laws. For example, the Competition Act, 2002 is in conflict with the provisions of the BR Act, SBI Act and other statutes dealing with the amalgamation of banks.

Considering the challenges faced in quick resolution of failed cooperative banks, certain enabling provisions in the BR Act facilitating RBI to sanction a scheme for takeover of banking assets and liabilities of

a cooperative bank by commercial banks would be desirable. Partial merger of certain businesses or assets and liabilities of banks also may need to be examined, said Mr Sinha.

Voluntary mergers and transfers help consolidation in financial sector and pave the way for stronger financial institutions to rescue the weaker ones, he emphasised.

Appropriate amendments may have to be carried out in the BR Act to provide a statutory backing for the banking secrecy laws and the limits on the privacy of customers should be laid down.