AIBOC CIRCULAR NO. 72 DATED 23.07.2011

AIBOC issued its circular no. 72 dated 23.07.2011 on Banking Laws (Amendment) Bill, 2011. We are reproducing the same here for our readers.

CIRCULAR NO.72                                              23.07.2011

TO ALL AFFILIATES/MEMBERS:

BANKING LAWS (AMENDMENT) BILL, 2011

The Standing Committee on Finance, Ministry of Finance, Govt. of India, have proposed amendments to the Banking Regulations Act, 1949 and Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970/1980, as envisaged under the Banking Laws (Amendment) Bill, 2011 (Bill No.18 of 2011) and had sought our views and suggestions on the proposed amendments).

We have submitted a Memorandum, which contains our views and suggestions and the same is annexed to this letter. The Memorandum is self-explicit.

We have also been invited to make a presentation of our views in further detail before the Standing Committee on Finance.

Further developments in this regard will be informed.

With warm greetings,

Sd/-

(G.D. NADAF)

GENERAL SECRETARY

Annexure: Memorandum

MEMORANDUM SUBMITTED TO STANDING COMMITTEE ON FINANCE IN RESPECT OF PROPOSED AMENDMENTS TO THE BANKING LAWS, VIDE DRAFT BANKING LAWS (AMENDMENT) BILL, 2011 (BILL 18 OF 2011)

We have perused the draft Banking Laws (Amendment) Bill 2011, and wish to submit our views/suggestions on some of the proposed amendments in the following paragraphs.

1. THE AMENDMENT BILL ENVISAGES THE FOLLOWING CHANGES:

Amendment to the Banking Companies (Acquisition and Transfer of undertakings) Act, 1970/1980, sub-section 2(E), suggests that the ceiling on voting rights of share holders of Nationalised Banks, will be raised from the present 1% to 10%.

The argument in favour of the above amendment is that, the move:

Ø  Will make investment in Government owned Banks more attractive.

Ø  Will increase the access of the Nationalised Banks to the Capital market to raise funds required for expansion of banking business.

Ø  Will enable the Public Sector Banks to increase or decrease their authourised capital with approval from the Central Government and RBI, without the present ceiling of Rs.3000/- crores.

Ø  Will enable the Public Sector Banks to issue bonus shares and rights issues for accessing the capital market to raise capital required for expansion of business.

Our Views:

Ø  The Public Sector Banks have proved beyond doubt their intrinsic strength to stand up to the requirement of the Nation since the entire ownership was with the Government. The nominees on the Boards representing the Government and Reserve Bank have been the spokes persons on behalf of the Government and the RBI respectively. They had a tremendous contribution in ensuring the participation of the Public Sector Banks in all the developmental activities undertaken by the Government.

Ø  Over the years with the dilution of the equity and allowing the number of Private Share holders to increase, the voice of the Government representatives as well as the RBI representatives is getting choked and increased rights of voting to the Share holders will only increase the predominant participation of the Private Directors in the Boards. The recent developments in Private Banks, where these Private Investors have played havoc is all well known. The Bank of Rajasthan was the recent casualty in this respect.

Ø  There is a need to strengthen the Governments’ equity by plough back of the returns it has so far garnered. The Government’s arguments that the present amendment will give more flexibility for the Banks to raise capital, to issue bonus shares and rights issues etc., is dubious. There are a number of other avenues to achieve this objective and the Government should not try to mislead the representatives of the people through this dubious stand.

Ø  The recent experience of the Banking Industry when the Public Sector went for the raising of the capital from the market is too well known to all of us.  There is tremendous faith and trust of the common investors in the Banking Industry, due to the monopoly enjoyed by the Government.  It should continue undisturbed.

Ø  The Public Sector Banks have given good returns, some of the top Banks have given dividends up to 300%, and hence the argument of the Government that the amendment will attract more investment does not hold water.

Apart from this:

Ø  The above moves are the covert attempts of the Government to privatize the well-run Public Sector Banks and open the doors to the Private Investors and Industrial Houses to take control over these gooses laying golden eggs.

Ø  The move is also fraught with potential danger to the existence of the Public Sector Banks in the country.

Ø  The Private Share holders, who are interested only in maximization of profits, will not be interested in the Social Banking activities embarked upon by the Govt. viz., implementation of the ambitious programmes of the Government such as poverty eradication, employment generation and financial inclusion etc.

Our suggestions:

In the circumstances stated above, we would suggest that there are possibilities of other alternatives to achieve the objectives of the proposed amendment.  Hence,

Ø  We oppose the move of offering more voting rights for Bank share holders by removing the present ceiling of 1% and raising it to 10%. The status quo should be maintained in the interest of the Public Sector Banks.

Ø  We should not forget the bad experience of Commercial Banks in the USA in the wake of the devastating global recession that swept the World leading to failure of many Banking giants.

2. MERGER/CONSOLIDATION OF PUBLIC SECTOR BANKS:

Under the existing provisions of the Competition Act 2002, the Competition Commission of India has the power to regulate combination, which causes or is likely to cause an appreciable adverse effect on competition within the relevant market in India.

It is proposed to insert a new section 2A in the Banking Regulation Act 1949 so as to exempt mergers of the Banking companies from the applicability of the provisions of the Competition Act 2002. The exemption of mergers of Banking Companies from the scrutiny of the Competition Commission of India would allow the Reserve Bank to approve mergers of Banking Companies in Public or depositors’ interest, in the interest of the Banking system in India and to secure the proper Management of the Banking Company in a timely manner without waiting for the approval of the Competition Commission of India.

The argument in favour of the above amendment is that the move will:

Ø  Facilitate merger/consolidation of Public Sector Banks, which will lead to economies of scale, operational efficiency, with the formation of a few big banks in the country, who will be able to face competition from global banks.

Ø  Lead to emergence of big banks, which will be in a position to take care of the credit requirements of big infrastructural projects, with huge financial outlay.

Our Views:

Ø  The major theme of the globalization was to help the multinationals through the process of mergers and acquisition when the Government initiated the reforms in the Banking as well as other sectors over the last 2 decades.

Ø  The logic of consolidation resulting in better performance is no longer true. The present trend in the giant Private Sector is the de-mergers and spinning of the associates to enable them to perform better. In fact, it has helped them to raise their performance level through internal competition of de-merger and also creation of huge wealth.  The Private Sector in India have miserable experience which includes the big industrial houses and now they believe in dismantling whatever has happened in the name of merger and consolidation and acquisition etc.,

Ø  The cultural clashes including the units, which were dealing in the same operations, and having same objectives, was yet another bitter experience amongst the Private Sector units and a large number of industrial houses have now become averse to these exercises.

Ø  It is rather unfortunate that the Government is now trying to give a face lift to this old theory of consolidation to achieve higher performance, raising the economies of scales, operational efficiency etc.,  when these objectives are not at all solely attributed to the merger. In the Private Sector it has now been considered as a detrimental factor in the already performing units and associates and hence we see a large number of dismantling taking place through demerger and spinning of the associates in the Private Sector.

Ø  The consolidation process was kept on hold, as Banks who were expected to come up with inter merger proposals and probable partners did not comply with the required terms.

Ø  The Confederation had launched a strong resistance against the move on the ground that, the consolidation process, which may usher in Big Banks, will not be in the best interest of the country; as each individual bank has its own social, cultural background with clientele base spread in a particular geographical area. With merger/consolidation, this identity will be lost.  Besides the above, managerial merger will be difficult to achieve.

Ø  With the global economic meltdown, which leads to collapse of banking giants in the USA, Europe, Japan like house of cards, demolished the notion that, “Big is Beautiful”.

Ø  Due to stiff opposition to merger moves by us and also the stringent regulatory mechanism adopted by RBI the Banking Industry in India, especially the Public Sector Banks, were saved from the jaws of the global financial crisis.  Fortunately, our Banks were insulated from one of the worst crisis faced by them and also the Financial Institutions all over the globe.

Our Suggestions:

Ø  Set up a Tripartite Committee consisting of the Government, the Management and the Officers’ organizations/unions in the Banking Industry so that we are able to offer a number of suggestions to achieve the objectives which are being now proposed by the Government through the proposed amendments.

Ø  Our immediate suggestion would be for the purpose of achieving the above objectives by the Public Sector Banks:

Ø  Provide greater autonomy to the banks to decide in the areas of diversification, competition and restructuring of their existing structure;

Ø  To strengthen the regulatory authority by not interfering in discharge of their responsibility in particular the Reserve Bank of India;

Ø  Let there be more number of banks under public sector by Nationalization of the Private Sector Banks who are under the clutches of the Multinationals including the Old Generation Private Sector banks as the present number of Public Sector Banks are grossly inadequate to cover the growing business potential in the country;

Earlier, the Hon’ble Finance Minister had made a loud announcement that Public Sector Banks will continue to be under the Government control.

Now by reviving the move to consolidate the Public Sector Banks, there is an attempt to ignore the past upheavals in the financial sector all over the world.

The proposed amendment will certainly expose the well run Public Sector Banks to the hazards, faced by the big banks in the USA, Europe and Japan etc.

Hence, we are against the move of the Government embarking upon consolidation/merger of Public Sector Banks.

Section 5: Re-definition of securities:

“Approved Securities issued by the Government or such other securities as approved by the Government”.

This amendment will result in dilution and liberalisation of the present meaning and definition of securities.  We should not forget that it is the people’s hard-earned savings deposited in the Banks, which are basically invested in the approved securities including Government securities.  If the amendment is through, the people’s huge savings may be invested in all types of Private securities floated by unscrupulous business houses and corporate bodies.

Hence, we are opposed to the re-definition of “securities”.

Section: 12-B: New addition:

“RBI to be given powers and discretion to allow acquisition of more share holding by any one along with voting rights”.

We have already opposed deletion of section 12(2), which envisages removal of the existing ceiling of 10% on voting rights of share holders/investors, as it would result in combination, cartelization and easy control over the Banks.  This will expose the existing Private Sector Banks to the risk to take over by FDI as well as Corporate bodies.

Therefore, once if the ceiling on investment and voting rights is defined, RBI should not be given any power and discretion to allow acquisition of further capital by the same investor. If given powers and discretion, RBI may wilt under various pressures and allow capital investment upto the maximum permissible limit of 74%, which will facilitate take over by Foreign Investors.

Hence, we are opposed to this proposed amendment, which will do away with the shield against the take over bids by foreign entities.

Section 36-ACA (1): New addition:

“RBI can supersede the Board of Directors of any Bank for a period of 6 months to one year and appoint an Administrator to run the Bank”.

This amendment provides additional and over-riding extra powers to RBI.  It is pertinent to note here that the existing powers of RBI are quite adequate as in every Bank there is a nominee of RBI, who are a witness to the ongoing developments in the Bank, as without their knowledge, nothing can happen suddenly, warranting supersession of the Board of Directors.

Similarly, handing over Banks to Administrators will not be of any help, as it may lead to arbitrariness, unilateralism.

We are opposed to this undesirable amendment.

BANKING COMPANIES (ACQUISITION & TRANSFER OF UNDERTAKINGS) ACT 1970/1980:

Section 2A: Substitution:

“Minimum authorised capital to be increased to Rs.3,000/- crores and powers to RBI to allow increase in authorised capital to any amount”.

This amendment will pave the way for further public issue by the Public Sector Banks, thus may lead to reduction of Government holding as percentage of total capital, and consequently may lead to their privatisation. This amendment is intended to make Banks more capital intensive and further facilitate merger of Banks.

We oppose this change and our apprehension is justified by the fact that the Hon’ble Finance Minister has refused on the floor of the Lok Sabha to give any firm assurance that the Government holding in Public Sector Banks will not be reduced below 51% in the days to come.

The above amendments should be dropped, otherwise the Public Sector Banks which have played a very important role in the economic development of the country, will be poached by the corporate capital and foreign investors. The fallout of these amendments will be on the common people, who solely depend on the Public Sector Banks for their financial needs. Public Sector Banks withstood the devastating global financial meltdown, when the Big Banks which were the flagship of liberalised economy, perished.

There is an urgent need to strengthen the Public Sector Banks which have been playing a very important role in the economic growth of the country, financial inclusion, poverty alleviation programmes, employment generation programmes etc.

We have the confidence that the move will be put on hold and encourage the Public Sector Banks to be on the growth trajectory through competition amongst themselves for a comprehensive financial inclusion in the country.

Thanking you,

Sd/-

(G.D. NADAF)

GENERAL SECRETARY