Panel cans director linked lending norm

Banks can't lend to firms with common directors.

The Parliamentary Standing Committee on Finance has rejected an amendment to the Banking Regulation Act aimed at exempting independent directors from lending norms.

According to sources, the Reserve Bank of India (RBI) had recommended that a bank should not be barred from lending to companies in case the lender and the borrower have a common independent director.

This is because independent directors do not get involved in the operational issues of companies and are appointed in their individual capacity based on their professional expertise.

Moreover, these appointments are made so as to have an unbiased, fair opinion on the operations of the company.

Therefore, having an independent director on the board of a bank should not be a reason for the bank to stop lending to a company which also has the same person as its independent director.

Under section 20 of the Banking Regulation Act, banks are debarred from lending to their own directors or to companies having some common directors that the banks have.

The committee has, however, approved other major amendments, which are likely to be tabled in Parliament for approval.

The amendments approved include allowing shareholders to exercise voting rights in proportion to their shareholding. At present, irrespective of the shareholding, voting right of a bank or any other entity is capped at 10 per cent.

The Standing Committee has also given its go-ahead for amending the State Bank of India Act.

The amendment will allow dilution of SBI's stake in its associate banks and also the RBI's stake in SBI to 51 per cent from the current level of 59.73 per cent.

Another major Act that has been approved by the committee is the National Payments and Settlement Systems Act. In its payment systems in India "� Vision 2005-08, the RBI had said it would establish a national settlement system through which the clearing houses/ clearing organisations can settle the net position of the participating banks at the national level.

Towards this, the RBI will take steps to build a sound legal base for payments systems. These include framing of regulations for authorised payment and settlement systems, finalisation of electronic funds transfer regulations and drafting regulations for electronic clearing systems.