Speculative trading at the crux of furore over banking bill

The sweet taste of victory turned a bit sour for the UPA on Monday after the BJP, Left and Trinamool Congress unanimously sought to stall another reform bill, arguing that the amendment to the banking regulations bill that allows banks to participate in commodity futures trading was not vetted by a Parliamentary panel.

While Finance Minister P. Chidambaram was successful in getting a Bill on security and debt recovery laws passed amid noisy protests and a walkout, he failed to do so with the Banking Bill as he introduced three new clauses in the bill.

As per the procedure, the government is not allowed to make changes to the legislation without referring it back to the Parliamentary standing committee.

More importantly, of the three new provisions proposed, one related to lifting the ban on banks’ proprietary trading in commodity futures. Commodity futures trading in India is highly speculative and volatile and banks’ entry into this has been opposed by the Reserve Bank of India as it believes the Forward Markets Commission (FMC), which regulates commodity futures, lacks autonomy and independence.

Under the current Banking Regulation Act, a bank is prohibited from dealing (directly or indirectly) in buying, selling or bartering of goods, but can trade in shares, bonds and currencies. But the finance ministry wants the legal norms to be changed in favour of the banks who for a while have been lobbying to enter into futures trading.

The Forward Contract Regulation Act, a billthat seeks to give more teeth to the FMC, has also been pending for long before both the Houses of Parliament. In August, the government had deferred a decision on the bill asFood and Consumer Affairs Minister K V Thomas was not present in Cabinet meeting.

The Bill also facilitates the entry of institutional investors. It also aims to pave the way for introduction of new products for trading such as options and futures.

The other two clauses in the Banking Bill related to the term of the board of directors and bringing bank mergers under the purview of the Competition Commission of India instead of the RBI, said a report in the Business Standard , quoting sources.

According to the Opposition, since the bill had a new provision which allows banks to invest in speculative trading through futures trade, it should go back to the parliamentary committee as it was not part of the original amendment .

“Three new provisions have been added after the standing committee submitted its report. It has become a new law. In the original bill, banks were not allowed to invest in futures,” BJP’s Yashwant Sinha,who heads the standing committee, had argues yesterday

“What will be the condition of the banks if they invest in speculative trade or commodity futures,” Sinha had said.

Another bone of contention is the cap on voting rights for foreign investors in private banks. The government wants to withdraw the existing 10 percent cap but the committee wants the rights capped at 26 percent. The consequent changes would lead to the issue of new banking licences.

New bank licences have been a matter of much discussion as the government and the RBI have been at the loggerheads about the issue.

In November, Chidambaram had urged the RBI to start issuing new bank licences, at it already had required powers.

But the RBI has indicated that it would be open to issuing new bank licences only when it is given more powers to regulate the sector. The Banking Laws Bill seeks to give RBI the power to supersede bank boards as well as inspect other arms of banks, such as mutual funds and insurance, to ensure that their operations do not pose any systemic risk to the lenders. It also gives the RBI a lot of power to supervise group companies.

“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,” Ashwin Parekh of Ernst & Young told CNBC-TV 18.

The bill also proposes to enable nationalised banks to increase or decrease their authorised capital with approval from the government and the RBI. These banks now have a Rs 3,000 cap on their authorised capital.

Voting rights of shareholders of nationalised banks would be increased from 1 percent to 10 percent. Hence, nationalised banks will be allowed to offer bonus shares and rights issues to raise capital needed for expanding their business.

According to Antique Broking, “the existing set of guidelines clearly eliminates chances of groups engaged in broking and real-estate activities as contender (for new bank licences) and offers adequate flexibility to RBI for ‘choosing’ the promoters of new banks.”

It is not clear if the Opposition blockade will be able to prevent a discussion again today but the drama in the House makes it evident that the ruling coalition will be kept on its toes

“The Banking Laws (Amendment) Bill 2012 in the Lok Sabha saw stiff resistance and its smooth passage in the coming days appears to be a challenge for now,” said brokerage IIFL in a note.