Banking on passing

The cabinet has given its assent to the Banking Regulation Amendment Bill,which is one of the six bills that Finance Minister Pranab Mukherjee announced in the budget speech that the government would focus on passing. The success of the reform push in the coming year and especially in this session depends not just on the nature of the budget,but on the passing of these bills,which are meant to deepen and broaden Indias financial sector. An insufficiently effective financial sector hurts Indias growth; further mobilisation of private saving and its direction into profitable growth-creating avenues are essential. The other reason why a more modern financial sector is required is that it increases the effectiveness of monetary policy. A monetary policy transmission mechanism that stutters means that inflation,which hurts both investors and the poor,cannot be adequately addressed.

The bill that the cabinet has cleared will reportedly make several major changes to banking law. One is that it will bring voting rights into correspondence with ownership. This is not only something that is sensible from the point of view of the principles of corporate governance,it will be crucial in attracting new investment into the banking sector. With new investment,the sector will be able to grow,and expand their reach,moving out of saturated areas into under-banked areas. That,one aspect of the non-partisan reform agenda to increase financial inclusion,will help bring more of Indias aspirational rural population closer to the benefits of growth,and put their savings to work. Another important aspect of the bill is that it liberalises how banks can raise capital through preference shares. That,too,will boost investment in the financial sector,increasing its institutional strength.

There are more such reforms that are needed,several of which are pending in the other five bills the FM mentioned. The UPA must ensure that it takes the opposition along,and gets these bills passed. The last time the banking bill was suggested,in 2005,UPA 1 was dependent on the Left,which vetoed it. It must show better political management this time round.