14 Dec 2011

Integrated Modern Banking Law For India In Pipeline

Banking laws of India are scattered largely unrelated to each other. This not only makes them difficult to implement but at times that also pose contradictory situations, especially with the corporate laws of India. Further, banking laws in India are also in conflict with other laws in many cases.

For instance, mergers and acquisitions in banking sector of India is a bone of contention these days. Till now the Competition Commission of India (CCI) has a say in the M&A pertaining to banking companies. However, with the recent proposed amendments in the Banking Regulations Act, 1949, only Reserve Bank of India (RBI) would have power to regulate M&A pertaining to banking sector. In fact, the proposed amendments have already been approved by Cabinet of India.

Now the parliamentary standing committee on finance has also endorsed this viewpoint upon M&A of banking pertaining to banking sector though interpretation of the same differs from person to person. However, the most important suggestion by the parliamentary committee pertains to formulation of an integrated modern banking law of India.

The committee has suggested that the government should consider the formulation of an integrated modern banking law, consolidating the provisions of other statutes that cover various aspects of banking. It believes that such a holistic law would be in conformity with other existing statues and proposed legal frameworks like the Direct Taxes Code and the Companies Bill 2011. These points were suggested while submitting the committee’s report on the Banking Laws (Amendment) Bill, 2011, tabled in Parliament on Tuesday.

The committee also stressed upon employee-friendly measures in the integrated banking law. These include the introduction of employee stock options, deterrent safeguards against “wilful default' by a borrower in repaying loans, etc.

However, the committee has failed to address the techno legal issues of banking industry of India. For instance, issues pertaining to electronic banking in India  have been added to the bill. Similarly, Internet and e-banking risks in India have also not been addressed by the committee.

While RBI has acknowledged risks of e-banking in India still the proposed bill has not addressed the issues of online banking risks in India and their redressal. Although RBI has recently directed that all banks would have to create a position of chief information officers (CIOs) as well as steering committees on information security at the board level at the earliest yet these recommendations have not been implemented by the banks. Indian banks are poor at cyber security implementation.

Further, crucial issues like encryption standards for banks of India have also been ignored.  Further ATM frauds in India and their techno legal prevention has also been missed by the committee. Cyber law due diligence for banks in India and Internet intermediary liability for banks of India have also skipped the attention of the committee. It would be better if the parliament of India also considers the techno legal issues and add them to the proposed Banking Laws (Amendment) Bill, 2011 before passing the same.