The Banking (Amendment) Bill, 2012: Changes afoot

The Parliament, before concluding its winter session, has brought about a host of changes to the banking law by passing the Banking Regulation (Amendment) Bill, 2012. The bill has primarily amended 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.

The primary legal developments in the banking sector introduced by the bill include:

1. RBI’s power to issue new bank licenses: The present amendment paves way for new bank licenses to be given by the RBI. This would be a boon to the banking sector in general as more upcoming banks would increase the competition in the banking sector, which would eventually benefit the customers. Further, in a country where 2/3^rd of the population does not enjoy access to the most basic banking services or are ‘unbanked’, new licenses will greatly boost the availability of services across the country. This can be ensured as long as the RBI mandates operation in unbanked areas as a condition of granting a banking license.
2. Increase in voting Rights of the investors: The amendment has increased the cap of voting rights of private investors to 26% in case of a private sector bank from an initial of 10%. Similarly, in the public sector banks also the said cap has been increased from 1% to 10%. This hike will make the sector a viable area of investment especially as it allows investors to wield more power for instance, by blocking special resolutions.
3. Power conferred on the nationalised banks to issue rights issue and bonus shares: The bill seeks to empower publc sector banks to issue bonus shares and rights shares. This will greatly benefit shareholders as such banks have traditionally sat on massive cash reserves without being able to pass on the benefit to its shareholders. It may also benefit banks to reduce their debt footprint and complying with the rigid Basel norms.
4. Greater autonomy to nationalised banks regarding the ‘authorised capital’: Till now, the ‘authorised capital’ of the nationalised banks had been fixed at 3000 crores as per the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970 and Banking Companies (Acquisition and Transfer of Undertakings) Act, 1980. After the bill, banks can either increase or decrease the authorised capital subject to prior approval from both the central government and the RBI.
5. RBI approval when a 5% shareholding is sought in any bank: The bill mandates the prior approval of RBI when a person seeks to acquire a shareholding of 5% or more in a banking Company. In addition, the RBI can give additional directions which it deems fit in such scenarios.
6. Increase in RBI’s power to call for information, conduct inspections etc: The bill has paved the way for RBI to call for information from the associate enterprises of the banking companies as well as to inspect the disclosed records. This will be done on the lines of the norms given by the Basel Committee on international banking regulation, which aims at establishing a sound banking system across the globe.
7. Establishment of a “Depositor Education and Awareness Fund”: The bill has aimed at promoting the depositor’s interests by mandating the banks to create the said fund out of ‘inoperative deposit accounts’ (which have not been claimed for a period not less than ten years).

With all these promising amendments brought forth via the Bill, it would be interesting to see whether these amendments would in fact prove to be a boon to the banking regime in India. There have been some concerns voiced regarding the supposed benefits of the bill. For instance, while attracting investmnets, an increase in voting rights may lead to a scenario where investors, not having adequate knowledge of the nuances of banking sector, might decide against an otherwise appropriate decision taken by the board of the banking company.  

It is hoped that the RBI judiciously uses the wide powers vested in it vide the said amendment and succeeds in infusing a pro-banking culture in India.