STATUTORY RESOLUTION RE: DISAPPROVAL OF RESERVE BANK OF INDIA
(AMENDMENT) ORDINANCE
AND
RESERVE BANK OF INDIA (AMENDMENT) BILL
SHRI AMAR PAL SINGH (MEERUT):
THE MINISTER OF FINANCE AND MINISTER OF COMPANY AFFAIRS (SHRI P. CHIDAMBARAM): Mr. Chairman, Sir, I am grateful to my learned friend, Shri Amar Pal Singh for bringing out some points in opposition to the Bill that I will move now to replace the Ordinance. But I would most humbly request Shri Amar Pal Singh and other hon. Members of this House to hear me patiently for a few minutes because, I think, what I am moving today is an important Bill. It is an important step in order to regulate financial intermediation in this country and will, to a large extent, wipe out what is perceived as a large scale evil present in financial intermediation in India.
Financial intermediation must be efficient. Efficient financial intermediation is a sine qua non for a healthy and vibrant economy. Given the twin needs of providing adequate protection to the depositors and maintaining the stability in the financial system, financial intermediaries all over the world are subject to varying degrees of prudential regulations. In India, the regulatory framework for banks has evolved over a considerable period of time. However, attempts to regulate the working of non-banking financial companies started only in the 1960s, with the introduction of Chapter 3 B in the Reserve Bank of India Act by the Banking Laws (Miscellaneous Provisions) Act, 1963. Since then, the operations of non-banking financial companies have increased manifold. The need of a more comprehensive regulatory framework for the working of the NBFCs was therefore acutely felt.
The Joint Parliamentary Committee, which inquired into the irregularities in securities and banking transactions had recommended that the Government should examine whether the legislative framework for regulating NBFCs is sufficiently wide. The Working Group on Financial Companies appointed by the Reserve Bank of India under the Chairmanship of Dr. A.C. Shah had suggested regulatory and control measures to ensure the healthy growth and operations of these companies.
Insofar as acceptance of deposits by unincorporated bodies are concerned, to which, I believe, Shri Amar Pal Singh, refers, these have so far been governed by the provisions contained in Chapter 3 C of the Reserve Bank of India Act, which was inserted in 1984. However, despite these provisions, some of the unincorporated bodies were found to have circumvented the statutory restrictions by floating different partnership firms as and when the firm reached the level of 250 depositors.
There are reports of several finance companies and unincorporated bodies having failed to repay the deposits collected from unsuspecting depositors who have been tempted by the attractive returns and incentives offered. Concern has been expressed in several quarters on the need to take urgent steps to regulate the activities of such companies and unincorporated bodies.
It is in this background that the Reserve bank of India (Amendment) Ordinance, 1997 was promulgated. This Ordinance contains only two Chapters. One is Chapter 3 B and the other is Chapter 3 C. I do not believe that anyone has any objection to the amendment that I am making in Chapter 3(b) because that deals with Non Banking Financial Institutions. Objections have been expressed in respect of Chapter 3(c) because it is dealing with unincorporated bodies. I will deal with it presently.
The Reserve Bank of India (Amendment) Ordinance, 1997 provides several safeguards for the NBFCs so as to ensure their viability. These include compulsory registration of the NBFCs with Reserve Bank of India, stipulation of minimum net owned funds requirement, creation of reserve fund and transfer of certain percentage of profits every year to the fund and prescription of liquidity requirement. Reserve Bank of India has also been vested with powers to issue guidelines encompassing aspects such as income recognition, accounting standards, provision for bad and doubtful debts, capital adequacy etc., which are intended to ensure sound and healthy operations and the quality of assets of these companies. RBI is also empowered to issue directions to the auditors of NBFCs to order special audit of NBFCs, prohibit acceptance of deposits by NBFCs and to make application for winding up of NBFCs. Whereas earlier the only recourse available to the depositor was to approach the Court of Law for redressal of grievances, powers have been vested with the Company Law Board for directing the defaulting NBFCs to make repayment of the deposits/interest with a view to protecting the interests of the depositors.
Now, an apprehension has been expressed that this will interfere with indigenous banking or para banking as practised by money lenders and pawn brokers. I wish to meet this point quite headlong. I do not want to duck the issue. It is true that India has had a history of indigenous banking, money lending and pawn broking. It is also true that they fill a credit gap in the society. But there is no gainsaying the fact that money lending and pawn broking is based on usurious interest rates. It can be nobody's case that money lenders and pawn brokers lend money at reasonable interest rates. The law that I am making does not interfere with lending. The law that I am making concerns with the other aspect of the business, namely, the funds which he uses to lend. Let me make it very clear that money lending is not affected at all. Let me also make it very clear that pawn broking is not affected. A man may lend his own money. A man may pledge articles and lend his money. I am not affecting lending. He can lend his own money. He can lend that money which he takes from 22 categories of relatives. I will read out the 22 categories of relatives. He can lend money which he takes from any commercial bank or scheduled bank. He can lend money which does not fall within the definition of deposit in Section 45 (i)(b)(b) of the Act. Therefore, there is a lot of money that he can lend. What he cannot do is take deposit from a total stranger and lend that money because it is the stranger who has been cheated, it is the stranger who has been duped and it is the stranger who has been defrauded.
So, this Bill, Shri Amar Pal Singh , does not interfere with lending. It interferes with deposit taking. I have had discussions with a number of people. I have had discussions with BJP's floor leader, Shri Jaswant Singh and I have had discussions with a number of hon. Members from the Congress Party, principal among them being, Shri Ramesh Chennithala, Shri P.J. Kurien, Shri Sontosh Mohan Dev and Shri Sharad Pawar.
SHRI MULLAPPALLY RAMACHANDRAN (CANNANOR) Please do not mention the names because it is going on record.
SHRI P. CHIDAMBARAM: I am only saying that I have had discussions with them. I am not saying anything else.
They have expressed some practical concerns. In response to those practical concerns, I am moving some amendments officially. ... (Interruptions) Let me complete.
Now, Sir, in response to these, I have made some amendments. I am moving official amendments to that effect. But before that, let me clarify some points. What is being prohibited is six activities which are contained in Section 45(I) of the Act and Section 45(I)(ii) of the Act plus the seventh activity, namely, principal business of taking deposits and lending. Now, there is a misapprehension that if somebody is doing business in cloth or paddy or hotel or steel, then he will be prevented from taking deposits. That is wrong. He can take deposits for doing his business but if his business is lending that money, then he cannot take deposits. Let me make it clear. If I am doing, say, paddy business and I am buying and selling paddy, I am a wholesale trader in paddy or a retail trader or a small trader in merchandise, then I can take deposits from somebody and I can do business of trading in paddy or steel. But I cannot take deposits for the sake of lending that money as a money-lending activity. That is what is prohibited. So, trading is not prohibited. Taking deposits is not prohibited. Taking deposits from relatives and taking deposits from banks are not prohibited. Lending with your own money is not prohibited. What is prohibited is taking deposits from third party, strangers who are not your relatives and using that for lending purposes. That is being prohibited...(interruptions)...Let me complete. You will get a chance to speak.
Now, practical difficulties were raised about two or three aspects. I am willing to concede to them. For example, what we have said was, hereafter if anybody wants to carry on the six activities referred to Section 45(I) or the seventh activity of taking deposits and lending, that is, purely money lending, then an individual, a partnership or an association of persons cannot carry on that activity. If you want to carry on that activity, then you must convert yourself into either a company or a corporation or a cooperative society or a nidhi or a chit fund. Why is this distinction? It is obvious. It is only because a company, a corporation, a cooperative society, chit fund or nidhi are legal entities under law. They can sue and be sued by their name. They have to report and comply with various laws. An individual, a partnership and association of unincorporated persons are not legal entities. They cannot sue and be sued in their names. Therefore, we are not allowing them to carry on these activities.
Practical difficulties were raised. How do we convert Rs.50 lakhs capital? I concede that point. I am moving an amendment and reducing it to Rs.25 lakhs. So, that should take care of a substantial number of grievances of including my learned friend from Kashmir. Rs.50 lakhs has been reduced to Rs.25 lakhs.
Then a practical problem was posed that we have given two years for him to return the deposits. I again concede that point. I am now moving an official amendment to make that two years into three years and to give powers to the Governor, Reserve Bank to extend it by a further period of one year. So, the Act itself will say three years but now, it is extendable by one more year, that is, four years. I am moving these two amendments. But I think that the time has come to bring a law of this nature. There were some companies in Kerala with major scandals. Thousands of people were cheated. In Tamil Nadu, almost one thousand crore of rupees have been cheated by finance companies. In Andhra Pradesh, some cheating cases have come to light. There is a demand from Andhra Pradesh that a law should be passed. Such companies are mushrooming now even in Bihar, UP and Madhya Pradesh. Nobody is different and nobody ought to become champions of these differences. Nobody is different. We are moving towards the 21st century. Para banking must yield way to banking. But I recognise that it will take some time. We are taking the first step not in controlling lending but in controlling deposit taking. Lending will be controlled by the State Government by its own laws. Kerala has its own law on money lending and pawn broking. Let lending be controlled by local laws. Deposit taking is a nation-wide phenomenon. A man in Kerala can take a deposit in Karnataka. A man in Tamil Nadu can take deposit in Uttar Pradesh. Therefore, I have to make a national law against deposit taking from total strangers.
Sir, there is enough freedom to take deposit from relatives, from banks and your own money. In fact, the money lender must use his own money; the pawn broker must use his own money. Why is he taking somebody else's money and lending it and if he is taking somebody else's money at 36 to 48 per cent, how is he lending and making a living? It is on the premise that he would never return that capital, he would only give the interest. Thousands and thousands of people have been cheated out of their capital. Goondas have been hired in Tamil Nadu to beat away people who wanted the return of their capital.
So, the time has come, Sir, and I most humbly submit that the whole House should cooperate in this. We have spent many many months in making this law. There were two Committees; the Governor of the Reserve Bank of India has gone into this; we have gone into this and I think, the law has to be made. I am willing to deal with practical difficulties. I have dealt with practical difficulties. We would see if there are any other suggestions on this. I think, Shri Banatwalla has one amendment which I am inclined to accept if he presses for it and if he is not convinced by my reasons.
SHRI G.M. BANATWALLA (PONNANI): I think, it is logical.
SHRI P. CHIDAMBARAM: I agree.
SHRI SHYAM BEHARI MISHRA (BILHAUR): What is the position of the trader who wants deposit for his trading.
SHRI P. CHIDAMBARAM: I have said that it is allowed. Money lending is barred only for items under 45 (i) (VI). If you are trading in steel, in paddy, in turmeric, in merchandise, you can take deposits and you can use it. But you cannot use that money for money lending purposes. Let me make that very clear. Traders are not affected. A group of traders were brought to me by some hon. Member.
PROF. RASA SINGH RAWAT (AJMER): But a misunderstanding has been created amongst the trading community.
SHRI P. CHIDAMBARAM: Misunderstandings are created by us. I am clarifying so that the whole world knows about it. I think, Mr. Bhargava brought the traders to me. I have clarified to them and they were quite happy. They were satisfied.
Therefore, the time has come to make this law. I know that there are pressures. There are pressures from our constituents, from people who live in our constituencies, but we, as law-makers, must rise above these pressures. We must look to the future. We must move away to institutionalise banking rather than this kind of para-banking.
Sir, with these words, I commend this Bill and I most humbly request the hon. Members to pass this as soon as possible... (Interruptions)
I beg to move:
"That the Bill further to amend the Reserve Bank of India Act, 1934, be taken into consideration."
(ends)
MR. CHAIRMAN: Motions moved:
"That this House disapproves of the Reserve Bank of India (Amendment) Ordinancae, 1997 (No. 2 of 1997) promulgated by the President on January 9, 1997."
"That the Bill further to amend the Reserve Bank of India Act, 1934, be taken into consideration."
PROF. P.J. KURIEN (MAVELIKARA): Sir, I just want a clarification.
MR. CHAIRMAN (SHRI P.M.SAYEED): Professor, just a minute. I will allow you. Now the hon. Minister has explained everything in minute detail and he has also taken into confidence every section of the House.