Parliament on Wednesday passed a bill that seeks to provide a legal framework for bilateral netting of qualified financial contracts, with Finance Minister Nirmala Sitharaman asserting that the bill is critical for financial stability in the country.
Lok Sabha had passed the bill on Sunday.
The legislation allows for enforcement of netting for qualified financial contracts.
Nirmala Sitharaman said the bill brings in a firm legal basis for bilateral netting for two counterparties.
“It is just the bilateral contracts which do not have any firm legal basis. Value of bilateral derivative contracts is estimated by the Clearing Corporation of India to be Rs. 56,33,257 crore as of March 2018,” she said.
Bilateral contracts constitute 40 per cent of total financial contracts, while multilateral contracts constitute 60 per cent, she added.
“The Bill is critical for financial stability in the country. ..This bill actually brings in a firm legal basis for bilateral netting between two counterparties…Multilateral netting has already been taken care of,” she said.
The minister said the bill has been brought in to address the lessons learnt from the 2008 global financial crisis and added that if the legislation was available in 2017, banks would have had Rs 42,192 crore for onward lending, but they had to keep it locked up.
“If it was available in 2018, Rs 45,956 crore would have been available while Rs 67,792 crore would have been available in 2019 and this figure would have been Rs 58,308 crore in March 2020,” Nirmala Sitharaman said.
She said these figures have been arrived at on the basis on actual data collected from 31 banks.
“This particular legislation is so necessary for stability of financial market. Money locked up in banks is not available while economy is starved for funds. This will enhance liquidity and economy will get lubrication,” the minister said.
She added that the legislation once passed will enable banks to increase credit limits for counter parties and clients and “corporate bond market will get energised” with “buoyant bond market.”
Earlier while participating in the debate, a number of parties supported the bill and said this was needed.
Sujeet Kumar (BJD) said the bill will facilitate financial reforms and will prove a milestone in bringing in the much-needed liquidity.
Suresh Prabhu (BJP) said the bill will ensure that there is more liquidity in the financial market. He said the over the counter transactions can lead to a crisis if not regulated.
“There is a need to have a prudential oversight regulator over financial markets. The regulation brings into its ambit all regulators in the financial sector,” he said.
“Over the counter transactions are a necessary thing and need to be under vigilance so that they do not lead to problems,” he noted.
He said the Finance Minister should clarify which transactions would qualify as “qualified financial contract”.
He said the country cannot grow faster unless there are long term instruments for investment in infrastructure. He stressed the need for a vibrant bond market in the country.
“This is a good step that will lead to a vibrant, dynamic bond market in the country, which is the need of the hour in the country,” he said, adding that we should try to move towards a dynamic financial services market in India that will also help create jobs.
A Vijayakumar of the AIADMK supported the bill, while Sujeet Kumar of the BJD said this is a welcome and major financial reform step.
He called it a milestone that will improve the financial health of the nation, by bringing in the much needed liquidity, reducing transactional cost and boosting investor morale.
He said close to Rs 2,000 crore is locked up because of non-availability of such financial instruments.
K Ravindra kumar (TDP) congratulated the finance minister for bringing this instrument in the financial market.
Mahesh Poddar (BJP) said it is a futuristic bill for financial markets. The bill allows for freeing up capital in the market, which will be useful, he said.
“It is a significant step towards ensuring a financial system to expand in India,” he said, noting that a strong bond market is needed in the country and the bill will pave way for it.