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Why banking bill is crucial for markets
Last Tuesday, LokSabha cleared the Banking Law Amendment Bill. This piece of legislation is crucial for the future of banking in India. If you own bank shares, especially public sector banks, this is all the more important. In anticipation of reforms in the banking sector, investors have already pushed the Bankex index of BSE up by 60 per cent over the past one year. The BSE Sensex rose only 28 per cent during the same period.
Here are pointers that could help you comprehend the impact:
Voting rights:Investors in the banking sector would now have voting rights proportionate to their holding up to 26 per cent for private sector banks. For public sector banks, shareholders can have up to 10 per cent of the voting rights, up from the current 1 per cent. This allows investors better representation and a say in the functioning of banks. It makes their investment attractive. Foreign institutional investors could show more interest.
Capital raise: It is estimated that banks would have to raise capital to the tune of $ 90 bn to comply with new norms on capital adequacy over the next few years. A tenth of amount has to be raised by the government for injection in public sector banks if they wish to control a majority stake. The banking law amendment bill allows banks to issue new instruments to shore up capital.
Government finances: The banking amendment bill also means that the government has to make a provision for $ 9 bn to $ 10 bn for infusing capital into public sector banks over the next few years. This could strain the government finances and further increase the borrowing. The government will have to announce a plan to raise this money. So far there is no announcement on how the government will provide for this money.
New licences: The bill paves the way for the RBI to issue new banking licences to corporates or non-banking finance companies. Shares of some of the non-banking companies like L&T Finance and Shriram Transport have gained ground. Analysts expect that the RBI would prefer to hand out licences to non-banking finance companies over traditional business houses.
Rs 83,280 crore
The State Bank of India (SBI), the largest public sector bank in India, has the largest free reserves Rs83,280 crore against a paid up capital of Rs 671 crore, according to MoneyLife, an investment publication. The new banking bill allows SBI to convert a part of these free reserves into equity shares through an offer of bonus shares.