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RBI moves Centre to lift 10% voting rights cap in pvt banks

BS Banking Bureau in Mumbai

The Reserve Bank of India has moved the Centre asking it to abolish the 10 per cent cap on the voting rights of foreign shareholders in private banks. RBI deputy governor G P Muniappan said though the foreign direct investment limit in private sector banks has been raised, the cap on voting rights has proved a dampner in attracting foreign investments.

Muniappan was speaking on the sidelines of a Federation of Indian Chambers of Commerce and Industry seminar on banking in Mumbai on Wednesday.

To remove the cap, the Banking Regulation Act, 1949, needs to be amended. The Centre is currently reviewing the amendments.

According to the deputy governor, doing away with the 10 per cent limiting factor will be go well with the government's intention of raising the foreign direct investment limit from the present 49 per cent to either 74 or 100 per cent.

The cap on voting rights was perceived as a roadblock by foreign banks in taking stakes in Indian private banks as it did not give them rights commensurate with their shareholding. This move to do away with the cap on voting rights is to attract the best of foreign banks into the country, bankers said. ING which had earlier a 20 per cent stake in Vysya Bank routed its investment through two subsidiaries because of the 10 per cent cap.

Muniappan also added that there was a poor response from foreign banks to setting up subsidiaries in the country. The Union Budget for 2002-03 had allowed foreign banks operating in India to come in through the subsidiary route too.

The government had given an option to foreign banks to either operate as branches of their parent banks or to set up subsidiaries. None of the major foreign banks was enthused by this as there are no major gains for them while coming in through the subsidiary route.

Referring to the fungible nature of finance, Muniappan said banks have the responsibility to monitor the end use of funds so that the banking system is not faced with the chronic problem of defaults and non-performing assets. In this context, he pointed out that banks and financial institutions would be subject to risk-based supervision from January 2003.

To ensure the systemic stability of the banking system, Muniappan said that the government had accorded its approval to put in place a prompt corrective action regime for commercial banks.

Under PCA, banks are monitored based on the three parameters of capital adequacy, NPAs and return on assets. Any slippage below a certain threshold would attract the remedial attention of the central bank. The RBI will have powers to remove a bank's board of directors.

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