The Hindu Business Line : Govt in the loop on bank holding norms?

WILL the Union Budget lift the 10 per cent cap on voting rights in banks imposed by the Banking Regulation Act? The 2003-04 Budget presented by Mr Jaswant Singh did promise scrapping the restriction. "The voting rights of any person holding shares of a banking company are restricted to 10 per cent irrespective of his/her shareholding. The Banking Regulation Act, 1949, will be amended to remove this limitation, " Mr Singh told the Lok Sabha.

The chapter on "Banking policy and trends," in the Economic Survey placed on Wednesday in Parliament is silent on the issue though it refers to the 2003-04 Budget proposal raising the limit of foreign direct investment in banking companies from 49 per cent to 74 per cent. The Survey mentions the three options foreign banks have in India. A foreign bank may operate in India through only one of the three channels: a) branches; b) a wholly owned subsidiary; and c) a subsidiary with aggregate foreign investment up to a maximum of 74 per cent in a bank.

The Narasimham Committee and reportedly a Standing Committee in the last Lok Sabha had favoured doing away with the 10 per cent limit on voting rights. Dr Bimal Jalan, the previous RBI Governor, was not in favour of the legal restriction. Seemingly, Dr Y.V. Reddy, the present RBI governor, prefers status quo.

In a way the debate on voting rights may have lost substance with RBI proposing, last week, to limit individual and corporate equity stakes in private banks at 5 per cent and 10 per cent, respectively. If this proposal comes through, the 10 per cent limit on voting rights can remain unchanged in the law books. Though FDI in banks can go up to 74 per cent, the RBI has proposed "in the interest of diversified ownership" to limit the FDI percentage by single entity or group of related entities at 10 per cent. It only follows that RBI has now put a ceiling of 10 per cent on cross holdings among banks and financial institutions.

Private banks are disappointed with the central bank and one banker suspects, ineffective or rather weak regulation of the banking system is pushing RBI to hide behind tough laws.

RBI has enough powers to supersede any board of a bank if it sniffs wrong doing. Also, the RBI has decided to exercise its powers to vet any equity purchase up to 5 per cent by any entity in a private bank, going by the circular dated February 3, 2004. Few will favour RBI seeking more executive powers. A second banker believes the RBI could not have scripted the policy change without a nod from the Finance Ministry and the PMO.

Going by the Economic Survey, banks have been increasing their spreads in 2002-03. "A notable development," in 2002-03 has been the rise in the net interest income or spread of banks by 19.5 per cent. With the exception of foreign banks, "all bank groups recorded a double-digit increase in spread mainly on account of containment of interest expenditure due to falling interest rates, particularly on deposits. Expanding spread is also indicative of the fact that lending rates have remained sticky and have not fallen as much as deposit rates," the Survey admits. As all banks have made hefty profits for the year ended March 31, 2004, the trend probably continues.

In the event, banks should not be raising lending rates even if inflation tops the 5 per cent mark or when world interest rates go up. If that happens, growth could take a knock.

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