Mumbai: The United Progressive Alliance on Monday tried to push through a critical amendment to the country’s banking laws, as it sought to ride on the momentum generated by winning the vote on allowing foreign investment in retail stores, and keep its economic reforms agenda alive.
Shares of most Indian banks, especially associates of the country’s largest lender State Bank of India (SBI) and old private banks, soared in anticipation of the legislation that most analysts said would go through on Tuesday and pave the way for new bank licences, give shareholders more voting rights, and help state-owned banks raise capital.
Passage of the Enforcement of Security Interest and Recovery of Debts Laws (Amendment) Bill, 2011, which will help banks recover bad debts faster, too, fuelled the rally, analysts said.
However, Parliament was adjourned without passing the Banking Laws (Amendment) Bill, 2011, after the opposition protested against some new provisions added in the Bill that had been studied by the standing committee on finance. Finance minister P. Chidambaram said later that a new clause sought to allow banks to enter into forward trading and that there was nothing wrong in including additional provisions.
Shares of Lakshmi Vilas Bank Ltd led the rally, rising 19.81%. State Bank of Mysore (17.39%), State Bank of Travancore (14.53%), State Bank of Bikaner and Jaipur (13.66%) and Karnataka Bank Ltd (11.38%) were other significant gainers. State Bank of Mysore, State Bank of Travancore, and State Bank of Bikaner and Jaipur are associates of SBI.
During the day, shares of both Lakshmi Vilas Bank and State Bank of Mysore touched the upper circuit (20%) on BSE, while the other two SBI associates rose beyond 19%.
Overall, out of 42 listed banks, only four bank stocks declined on Monday, that too marginally, by less than 1%.
Shares of Dhanlaxmi Bank Ltd, Punjab and Sind Bank, United Bank of India, Oriental Bank of Commerce and Corporation Bank, too, rose by at least 5% on Monday.
The Bankex, the index of 14 leading bank stocks, ended 0.31% up on Monday. Bank shares surged even as BSE’s bellwether equity index, the Sensex, edged down 0.07% to close at 19,409.69 points.
“The provisions proposed by the new regulations have pushed up the stocks,” said Vaibhav Agrawal, vice-president (research) at Angel Broking Ltd.
The Banking Laws (Amendment) Bill proposes to increase the voting rights of shareholders in public and private sector banks, and allow issuance of bonus shares and rights shares.
The legislation seeks to accord higher regulatory powers to the Reserve Bank of India (RBI) to supersede the boards of banks and control associate companies of banks engaged in financial business. RBI has been seeking such powers as a precondition for licensing a set of new banks that then finance minister Pranab Mukherjee had proposed in the February 2010 budget.
The amendment to the debt recovery Act will help banks manage bad loans better and allow asset reconstruction companies to convert “any part of debt into shares of a borrower company”. It will also permit banks to accept immovable property to realize their claims. Besides, it proposes to include multi-state cooperative banks in the definition of banks in the existing Act.
The Indian central bank has been maintaining that it can award new banking licences to private industrial houses and non-banking firms only after crucial amendments are made to the banking law, despite the finance ministry’s aggressive push for starting the process earlier.
RBI issued a discussion paper on new bank licensing norms in August 2010 and released the draft guidelines in August 2011. It is yet to release the final guidelines.
“There is an expectation that once the banking law is amended, RBI will commence the process of issuing new banking licences, which can, in turn, trigger a few acquisitions of existing small private banks by new entrants,” Agrawal of Angel Broking said.
The new Bill offers to increase the voting rights in nationalized banks from 1% to 10% and remove the existing ceiling of 10% in private sector banks. Analysts said this will give more confidence to investors looking at potential acquisitions.
“The Banking Laws (Amendment) Bill has boosted bank stocks on hopes the amendments could give them higher amount of voting rights,” said Deven Choksey, managing director and chief executive of Kisan Ratilal Choksey Shares and Securities Pvt. Ltd.
“State Bank subsidiaries have lower amount of floating stocks and restricted voting rights. The amendment could be a step leading to eventual merger of the associate banks with their parent,” he said.
Liz Mathew in New Delhi contributed to this story.