Friday, March 4, 2011

Banking Regulation Act Amendments Approved By Cabinet

Praveen Dalal
Finance Ministry of India and Reserve Bank of India (RBI) have been working in the direction of bringing many good Financial and Banking Sector Reforms in India. In this direction RBI has already issued two good policy documents that would streamline use of Information Technology to enhance core banking practices in India.

The first document is a report of its Working Group on information security, electronic banking, technology risk management, and cyber frauds. In this report, the RBI mandated cyber due diligence for banks in India.

The second document is known as Information Technology Vision Document for 2011-17 (IT Vision 2011-17). The vision document has recommended many good suggestions including requiring that all banks in India now would have to create a position of CIOs as well as steering committees on information security. These requirements must be fulfilled at the highest level of Board of Directors.

Further, RBI has shown its willingness to allow big industrial houses to set up banks in India. However, it would not allow them to open the banks unless RBI gets the “Power to Supersede” Boards of banks that are not being run properly. RBI also wants the right to oversee the operations of the promoting company and any affiliates that will have business relationships with the bank. RBI has been suggesting bringing suitable Amendments in the Banking Regulation Act, 1949 (BRA 1949) in this regard.

Reacting immediately the Cabinet approved the long-pending amendment to the BRA 1949. The proposed amendments align voting rights of shareholders in proportion to the equity held and provide more regulatory teeth to the RBI. These powers now include the power to supersede bank boards.

Finance Minister Pranab Mukherjee would bring the proposed amendments in the BRA 1949 in current session of Parliament (March 2011) to carry forward the proposals made by RBI in this regard. Mukherjee said RBI proposes to issue guidelines for new private bank licences by the end of March. RBI has also made it clear that it would consider issuing fresh licences for private banks only after getting more regulatory powers, including supersession of bank Boards.

These are the much needed Banking and Financial Sector Reforms that were long pending. By including the contemporary issues of Information and Communication Technology, RBI has also covered a wide area. Hopefully Parliament of India would approve the amendments as soon as possible.