Needed reform

The UPA government’s reform agenda has got another boost with the Lok Sabha passing the Banking Laws (Amendment) Bill on Tuesday, though after conceding some ground to the opposition.

Along with the proposed legislations on pension and insurance, it was among five important measures the government wanted to push through Parliament during the current session. The banking bill has a long history and has been debated in public and studied by parliamentary committees threadbare. The bill had been put off by the first UPA government due to strong opposition from the Left parties, and the government was finally able to see it through the House with the support of the BJP and the Samajwadi Party.

The  bill seeks to ostensibly increase banking regulation, facilitate the issue of new banking licences and encourage the infusion of more capital into the sector.

The government was keen on the issue of more licences for many reasons, but the RBI has insisted that enabling legislation which gives it more regulatory powers be put in place first.

The RBI now even has the power to supersede the boards of banking companies, if necessary. An expansion of the private banking sector without adequate supervisory powers for the RBI would lead to undesirable results, especially when big corporate are expected to have a stake in new banking ventures.

Banks need more capital infusion but critics fear that the higher foreign investment that might be made possible now may make the strategic financial sector vulnerable to external interests. But there are enough safeguards and there is no reason to imagine that the RBI will lower its vigil.

The government did well to withdraw two controversial proposals in response to the opposition’s demand. The legislation had originally sought to allow banks to undertake forward trading in goods.

This would not have been healthy banking activity in many situations. Similarly the proposal to exclude the banking sector from the purview of the Competition Commission was also not desirable. The Commission will now rightly have a say on issues related to mergers and acquisitions in the banking sector which have a bearing on competition. The bill may not help much to make banking more inclusive but it can make the sector stronger.