The Telegraph
Since 1st March, 1999
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Capital hike in new-age bank law

New Delhi, Aug. 13: The government today brought a legislation before Parliament to give more teeth to the regulatory powers of the country’s central banker, extend its jurisdiction over new areas and relax business rules for banks.

The legislation, Banking Regulations Amendment Bill 2003, which was introduced in the lower house of Parliament today by finance minister Jaswant Singh, raises the minimum capital norm for banks — Indian and foreign — to Rs 100 crore, banking co-operatives to Rs 25 lakh and local area banks to Rs 5 crore. It also empowers the Reserve Bank to remove the chairman of any banking co-operative and increases the punishment for violating banking laws to five years’ imprisonment.

It also prohibits connected lending, that is, lending to related persons and associate companies by a banking company or co-operative society. This has been done after a spate of cases came out of banks lending to a group of people or companies huge amounts that could never be recovered.

Banks and banking co-operatives will also have to declare particulars of their subsidiaries in balance-sheets to bring about a greater degree of transparency.

The Bill will also empower the RBI to restrict acquisition of 5 per cent or more shares in a banking company by any individual or firm and makes it mandatory for such acquisition to be subject to its approval. Bank co-operatives will also have to take a licence to carry out banking activities from the Reserve Bank.

However, at the same time, it empowers the RBI to use its own discretion in prescribing the statutory liquidity ratio or the portion of funds a bank must compulsorily keep with the central banker as a kind of safety margin. It also seeks to set up a depositor protection fund by crediting deposits unclaimed for more than ten years.

The bill also makes it easier for amalgamations between banks and banks, and non-banking financial companies. It also allows banks to issue irredeemable and redeemable preference shares on lines, which are accepted internationally. At the same time, payment of brokerage on sale of banking stock, banned earlier, has been allowed.

It also allows banks and banking co-operatives to enter new areas, including equipment leasing, hire purchase, factoring, insurance, sponsoring of mutual funds, acting as a trustee in mutual funds, dealing in credit and debit cards, smart cards, derivatives and securitisation.

However, banks will still have to seek permission from the Reserve Bank for setting up subsidiaries to handle any of these businesses, enter new areas or for carrying on banking business outside India.

Banks were earlier supposed to dispose of non-banking assets within seven years. This rule is being relaxed and they can now continue holding these assets for five years with permission from the central bank.

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