New Delhi: In a major step to reform India's banking sector, the Lok Sabha Tuesday passed a bill paving way for foreign investments in the sector and establishment of new private banks.
The Banking Laws (Amendment) Bill, 2011 was passed by the Lower House after two short adjournments and withdrawal of clauses allowing banks to trade in futures and keeping the sector outside the purview of Competition Commission.
"Since the bill is too important for me to pass, therefore I am bringing the Bill dropping the controversial clauses," Finance Minister P Chidambaram said, winding up the discussion on the Banking Laws (Amendment) Bill, 2011.
The Bill, which seeks to strengthen banking regulation, was passed by the voice vote after amendments proposed by the Left Parties were rejected by the House.
"The Banking Bill aims to raise the voting rights of investors in private sector banks to 26 percent, from 10 percent and will encourage foreign investment...It is a game changer to achieve financial inclusion by opening new banks," said Jagannadham Thunuguntla, head of research at brokerage firm SMC Global Securities.
The Bill will allows RBI to supersede boards of private sector banks and increase the cap on voting rights of private investors in PSBs to 10 percent, from 1 percent.
RBI wanted the government to amend the banking laws before starting the process towards issuance of new banking licences.
The Bill, along with proposed legislations on pension and insurance, was one of the five key reforms measures on the government's agenda during the current session of Parliament.
The passage of the Bill, Shinjini Kumar, Director PWC India said, "Creates necessary condition for some of the important steps forward, the sufficient conditions will be known after RBI issues final guidelines".
The government dropped the controversial changes in the Bill in deference to the wishes of Opposition, Chidambaram said, adding it has accepted all major recommendations of the Standing Committee on Finance.
On the proposal to allow banks to participate in the commodity futures trading, he said, it was based on the recommendations of the Standing Committee on Food and Consumer Affairs and report of the Reserve Bank's working group.
As regards other issues, he said, while RBI would regulate the banking sector, the Competition Commission of India (CCI) would look into competition practices in the banking sector.
Reacting to the passage of the Bill by Lok Sabha, FICCI President Naina Lal Kidwai said it is an important piece of legislation that will lay the foundation for many reforms in the banking sector.
"This will help expand the reach of banking services to the financially excluded," she said.