Banking reforms: The next big step

FDI

The earlier plan was to allow up to 74 per cent FDI in Indian banks. Left parties and bank unions are against such a move. Now the consensus is that the government may allow creeping FDI of 10 per cent only in a year from the current permissible FDI level of 49 per cent. But there8217;s also pressure to avoid this cumbersome route which would have stock market implications and send out a clear policy signal.

8220;The government needs to remove the confusion surrounding the promoter holding in private banks. It8217;s ironical that when the government is thinking of 74 per cent FDI in private banks, the Reserve Bank of India has issued draft norms restricting promoter holding to 10 per cent,8221; said the chief of a private sector bank who preferred anonymity.

RBI recently proposed that no single entity or a group can hold more than 10 per cent of the paid-up capital in a private Indian bank. It has also capped the holding of one private bank, including foreign ones present in India, in another private bank at 5 per cent, besides asking promoters to reduce their holding to 10 per cent in three years. If banks were to follow the first draft guidelines, a number of private banks would have to realign their shareholding pattern.

VOTING RIGHTS

The big question mark is whether the government will remove the 10 per cent voting cap in banks. As of now, voting rights of promoters or big stakeholders are restricted to 10 per cent irrespective of their holding. The thinking in the government is that such a measure will lead to huge FDI inflows. However, if banking sources are to be believed, a section of the government is against the proposal fearing a political storm.

M038;As

The government is encouraging mergers and acquisitions in the banking sector. It has not ruled out merger among PSU banks. In fact, there is speculation that four PSU banks are in talks for mergers. Also, a host of banks are planning to tap the capital market in the coming months.

8220;The goverment should also bring about legal changes in the banking sector to facilitate merger and acquistions in the sector. I also expect some changes in the rules governing the debt recovery tribunals to ensure that speedy recovery is possible for the banks,8221; said SC Gupta, CMD of IOB.

SINGLE LEGISLATION

Banking sector reforms should take a view of uniform legislation for the public and private sector banks. While public sector banks are ruled by the National Banking Act, SBI by the SBI Act and private sector banks by the Companies Act, there is a need to have one act which is applicable to all, Gupta said.

Public sector banks have been demanding more freedom in fixing wages and recruiting professionals. However, it will remain a thorny issue with bank unions having strong ideas on wages. 8220;The blueprint to the banking sector reforms should also address the issue of more autonomy to the public sector banks, especially in relation to opening of branches,8221; says S.S. Kohli, chairman and MD of Punjab National Bank.

Another issue which needs to be looked into is increasing the number of executive directors in the public sector banks.