Mon, Dec 10, 2012 at 14:04
New banking act to offer more power to RBI: Ernst & Young
Ashwin Parekh of Ernst & Young believes if the amendments were passed by the parliament without any modifications, it would allow the Reserve Bank of India to be able to frame the regulations clearly.
Ashwin Parekh
Ernst & Young
The passage of FDI in multi brand retail has obviously led wings in terms of expectations of what the parliament maybe able to accomplish in the winter session itself and it is already dealing with an important bill which the finance sector has been waiting for, the Banking Laws Amendment Bill. A bunch of bills have been sort to be amended by the Banking Companies Acquisition and Transfer Act 1970, 1980 as well as the Banking Regulation Act which is the mother act that comprise the rules that govern all public sector and private sector banks.
All the three have to be amended. Importantly, it gives a lot of power to the Reserve Bank of India to supervise group companies. To put it simply, if a bank is set up by Tata, the Reserve Bank of India will have the power to call on the books of Tata Steel or Tata Metaliks, although it’s not related to Tata Bank itself. The idea here is that they should be able to supervise connected lending.
Additionally, the Reserve Bank will also be able to supersede the entire board. At the moment, they can remove one director, two directors or even the CEO but, the amended rules would allow it to supersede the entire board, if the new bill is passed.
Ashwin Parekh of Ernst & Young believes if the amendments were passed by the parliament without any modifications, it would allow the Reserve Bank of India to be able to frame the regulations clearly. He added that the new rule will bring the boards of banks under the control of the central bank and if a bank is found not complying to the necessary standards, the RBI may intervene and make changes to the board. This will eventually help in making proper banking decisions, he opined.
Here is the edited transcript of the interview on CNBC-TV18.
Q: The question which first comes to the mind is how much time will be needed for seeing the first license, assuming that this bill is passed?
A: There are two aspects to this; one is as far as the preparation at the Reserve Bank of India or RBI is concerned, the regulator has got enough time. In fact, between the government and the regulator there has been a fair amount of time. The amendment was drafted in 2008 and then there were three standing committees which have gone through the provisions of the amendments.
Therefore, all the parties concerned know about it, even the two discussion papers on this subject, particularly in the area of banking licenses are out. So enough time has been given to all the parties concerned and you need to prepare for this. If all the three components of the banking regulation amendment were to go through without any modification or any change, it would be an important day in the history of the banking industry to the extent that the regulator will now be able to frame the regulations clearly.
Q: We know what the Reserve Bank of India's (RBI) purview would be for the new banks going forward, post the regulation coming through. Can you for the benefit of our viewers list down what exactly the RBI would have more control over once the banking amendment goes through and what would change from the current scenario that already exists?
A: There are three things which become very critical in this particular regard. The first and the foremost thing is the entire aspect of the amount of regulation under control that the regulator will be able to exercise on the governance and the board composition.
For instance, if the RBI believes that from the evidence obtained through supervision, through inspection of the board of a certain bank that it has not made prudent decisions with regards to lending or has not complied with some of the regulations or some of the requirements in spirit and not just in letter, then they can by the virtue of the new amendment make changes in the board. That change can last for a period of about 12 months. Therefore, what is becoming important is that the board is obligated to make proper banking decisions, failing which the RBI would have control over the board.
The second important part is if the applicant were to put out a certain business plan, the plans will have to cover a larger aspect of financial inclusion. Much later, if the RBI observes that the working of the bank is not in keeping with the original plan which was submitted at the time of the application, then once again the RBI can step down and ask the management to explain, why it is doing so.
That includes also to a certain extent the dilution of the promoter's quota. If he starts with a certain quota, the new guidelines that the RBI will now come out with whether it is 40 percent or 30 percent, in a span of about five years, three and five years, or two periods the promoters will have to dilute their equity. They will have to offer it to others. That control will also be available with the regulator
Q: I am interested more in what the share market is looking for. Since September, when the first whiff of this banking noise was made by the finance ministry, stocks like L&T Finance has run up over double with a 140 percent rise. Is banking such a profitable business? It maybe a bit profitable than NBFCs, but everyone is not so sure about that also. But, when the first bunch of licenses came, for Kotak, Yes Bank and before that IndusInd Bank, it was different. The public sector banks were not rearing to go as competitively as they are today, though you may pick a lot of fallacies in them and there are already a lot of private sector banks as well where savings rate has been deregulated and the terrain itself is now more competitive. Is a banking license going to be that lucrative?
A: There are two aspects which will make the whole thing very lucrative. One is if you read the Usha Thorat Committee Report for instance, it’s a little negative way of looking at the value creation. It clearly says that the room for NBFCs in terms of their growth and dependence on public funding is going to be reduced. There is going to be a dramatic change in regards to the fate or the future of the NBFCs.
If that working group’s recommendations are accepted or those recommendations are accepted, it will be negative. The positive part is how many licenses we are talking about. There is a certain amount of value that is ascribed to the number of licenses. It is almost like going back to the ‘license raj’ or licenses situation. If four-five people manage to get the licenses then they distinctly form a separate group of people compared to the other NBFCs who are there.
Q: In that context would takeover be a one way of growing. I don’t know what the rule says at the moment or what they will say but, let us assume there is a Tata licence out there or a Reliance licence or a Birla licence or Aditya Birla Money and other stuff like that, do you think they can buy out any of the existing banks or non-bank financial companies( NBFC) more than banks? Would that be a way to grow quickly?
A: That is a very good question. If I were to look at the second discussion paper and then associate it with the second discussion paper, you have to also look at the RBI’s paper on foreign bank subsidization. If you look at these two carefully, there is almost a suggestion that if the RBI believes in a certain set of particularly old private banks for instance, which are still there, but not growing in terms of their size on account of various reasons including promoter intervention, the RBI can evolve a plan under which the new licences can be offered in that case.
My feeling however, is that it may not help too much. Let me articulate this point. If a new applicant becomes a bank on account of the liberal branch expansion programme, he can grow from tier II to tier VI as he wants. He may not necessarily want to acquire a bank which has its own legacy issues associated with that.
So, all said and done, I would say it is one of the routes that is possible for the regulator but, at the same time new bankers would certainly want to create a bank according to their own plan, if you are looking at responsible names in the Indian corporate world today. They would like to operate it according to their wish and they would like to go to tier V and tier VI markets to also basically fulfill the inclusion requirements.
Q: A question with regards to the possibility of it even coming through because from a political standpoint do you see the winter session which has around ten days left, to pass the banking amendment regulation bill or do you expect it to be pushed to the budget session hence, the banking licenses will possibly not even surface in the next six-eight months?
A: Let us look at it this way. I am very optimistic about this amendment and I will tell you why. If you look at the standing committee recommendations, with regards to various other amendments like the ones on the insurance act, there are about four of them pending. Likewise, if you look at the standing committee recommendations on the pension bill, the standing committee has not made any adverse observation with regards to these three bills including the banking regulation and the acquisition and transfer of undertaking act, 1970 and 1981.
So there is no adverse observation made by the standing committee with regards to this and it makes me and everybody else very hopeful that it should go through in the Parliament.
No comments:
Post a Comment