Banks can now flex their muscles

As expected, Finance Minister P Chidambaram has pushed banking reforms ahead by promising a slew of legislative changes, which will enable t...

As expected, Finance Minister P Chidambaram has pushed banking reforms ahead by promising a slew of legislative changes, which will enable the Reserve Bank of India (RBI) to enjoy greater flexibility in liquidity management and supervision.

With the proposed amendments to the Banking Regulation (BR) Act, 1949 and the Reserve Bank of India Act, 1934 —— which will be tabled in the Budget session of the Parliament —— there will be no floor on statutory liquidity ratio (SLR) and cash reserve ratio (CRR).

In other words, RBI would have the flexibility to ask banks to maintain an SLR of less than 25 per cent and a CRR of less than 3 per cent.

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There is also a proposal to amend the Banking Regulation Act to allow public sector banks to issue preference shares.

‘‘A number of banks may reach the statutory ceiling of 51 per cent government holding very soon and the facility to issue preference shares will enable them to raise capital without affecting ownership complexion,’’ said Cherian Varghese, chairman, Union Bank of India.

This would also help banks maintain a healthy capital adequacy, which assumes importance against the imminent Basel-II environment.

The bond market, however, reacted negatively to these proposals. Prices of select securities fell by around 60 paise from overnight levels before recovering a tad at the close of the day.

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The Budget has also envisaged the introduction of specific provisions to enable a consolidated supervision of banks and their subsidiaries by RBI. This would be in consonance with the international best practices.

The Budget also has a proposal to amend the definition of ‘securities’ under the Securities Contracts (Regulation) Act, 1956 so as to provide a legal framework for trading of securitised debt, including mortgage backed debt.

‘‘This would allow for transfer and endorsement by delivery of pass-through-certificates (PTCs) and listing on stock exchanges, thus giving a boost to securitisation of home loans. Investors like insurance companies/ pension and mutual funds will now be willing to invest in the mortgage backed papers on account of liquidity,’’ according to P.K. Gupta, Chairman and Managing Director of National Housing Bank.