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Khan panel suggests legal changes in banking laws

The Khan Working Group on harmonising the role of development financial institutions and banks has recommended several changes, including changes in the regulatory and legal framework.

Committee chairman S H Khan said the overall objective of regulations should be to facilitate free competition. Khan, who is also the chairman and managing director of the Industrial Development Bank of India, pointed out that the concept of neutrality should be applicable to both local and foreign entities.

The committee, which was appointed by the Reserve Bank of India in December 1997, submitted the report to the Reserve Bank governor Dr Bimal Jalan yesterday.

In view of the increasing overlap in functions being performed by various participants in the financial system, the group feels that a measure of coordination among regulators is desirable.

The group recommended establishing a super regulator' to supervise and coordinate the activities of these multiple regulators in order to ensure uniformity in regulatory treatment.

The group also called for legal reforms in the debt recovery areas of banks and financial institutions. The group suggested the revamping of the 1993 Act on recovery of debts from banks and development financial institutions (DFI) on the suggested lines.

In addition, there was need to redraft other codified laws impacting operations of DFIs/banks, enacted earlier, on the grounds of redundancy and incompatibility.

The suggesting changes in the supervisory practices, the supervisory authority should undertake off-site supervision based on a periodic reporting by banks or DFIs as the case may be. Another essential element for the improved supervisory frame work should be the ability to supervise the DFIs and banks on a consolidated basis.

For meaningful consolidated supervision -- both domestic and global -- the group recommended the development of a risk-based supervisory framework. This should be along the lines of the report of the Task Force on Conglomerate Supervision, published by the Institute of International Finance in February 1997. The report addresses concerns among international financial regulators of banking, insurance, and securities markets.

The Khan Committee also made several recommendations on the reorganisation of state-level institutions including corporatisation of these entities to improve competitive efficience.

During the restructuring process, the state government's holdings in these corporation should be brought down below 50 per cent.

Since the credit requirements of small-scale industries are being taken care of by the Small Industries Development Bank of India since its establishment in 1990, it would be desirable to transfer the present shareholding of IDBI in these state-level institutuions to SIDBI.

UNI