Finance Minister P. Chidambaram proposed a new clause in the Banking Laws (Amendment) Bill allowing the entry of banks in commodity futures trading in India. The government dropped it from the bill, thanks to a strong opposition. However, this clause would be incorporated in the Forward Contract Regulation Act (Amendment) Bill, which is likely to be tabled in Parliament next year.
THE BACKGROUND
Banks in India are allowed to trade in financial instruments like shares, bonds and currencies. This is an exceptional provision of the Banking Regulation Act, 1949 as banks are prohibited from trading in goods. Section 8 of the Act states: “No banking company shall directly or indirectly deal in the buying or selling or bartering of goods, except in connection with the realisation of security given to or held by it.” In other words, banks in India can sell the securities held by it against loans and other forms of financial accommodations in order to realise any bad and doubtful debt. All other forms of trading in goods are debarred. This proposed amendment of the Finance Minister would have eased out one type trading in goods; futures trading in commodities. Although this move of the government is foiled in the present, but the future of futures trading in commodities is not that dark. It is already thriving and funds held by banks are being utilised in this trading; indirectly if not directly. Banks are allowed to finance commodity business and provide fund and non-fund-based facilities to commodity traders to meet their working capital requirements. They are also providing clearing and settlement services for commodities derivatives transactions.
THE OVERVIEW
Trading in commodities is not at par with futures trading in commodities, as such. They are not of the same genre. The former is a prudent economic activity that every economy requires for growth whereas the latter is a casino for speculators that erodes the health of an economy. One is a healthy phenomenon while the other is unhealthy, if not filthy. Nobody likes to talk about the ill-effects of futures trading particularly its role in food inflation in India. The story is same in the international economies too, like the speculative market of oil resulting in its price volatility which is not related to demand and supply economics. The irony is that the casino of futures trading in India, like most other countries, is legally protected. We are not behind other nations in encouraging the speculative market like securities and currencies in commodities too under the umbrella of Forward Contract Regulation Act.
The other issue worth mention at this stage is that the government of India has not yet responded positively to the demand of bringing in changes in the banking regulations so that participation of banks in participatory finance may become possible and gates for Islamic banks may be opened in India. The stand of Reserve Bank of India is understandable that the needed regulatory changes can be brought in by the central government, till then participatory finance by banking and non-banking corporations is not possible. Hope that the FM is within the hearing range!