In a major step to implement much-needed financial sector reforms, the Union Cabinet on Friday may approve a proposal to introduce the Bilateral Netting of Qualified Financial Contracts Bill, 2020. As per sources, the Finance Ministry has circulated a draft of the proposed Bill and the same is expected to get the Cabinet’s nod.
Once the Bill gets Cabinet approval, it will be introduced in the ongoing session of Parliament, sources said. As of now, bilateral netting for financial contracts is not allowed in India. This has negative impact on banks and other financial market participants.
The Finance Ministry’s move comes barely one and a half months after the Economic Survey 2019-20 advocated the “Benefits of Enabling Bilateral Netting for Financial Contracts in India.”
According to the Survey, “A bilateral netting agreement enables two counterparties in a financial contract to offset claims against each other to determine a single net payment obligation due from one counterparty to the other.”
“Hence, establishing a legal framework for bilateral close-out netting in India would help: (a) reduce credit risk and regulatory capital burden for banks, freeing up capital for other productive uses; (b) reduce hedging costs and liquidity needs for banks, primary dealers and other market-makers, thereby encouraging participation in the OTC derivatives market to hedge against risk…” it said.
“According to RBI estimates, bilateral netting arrangements could have helped 31 major banks participating in India’s OTC derivatives market save about Rs 22.58 billion in regulatory capital during FY2017-18.
“At present, major jurisdictions such as the US, U.K., Australia, Canada, Japan, France, Germany, Singapore and Malaysia have legal provisions in place for netting agreements”, it added.
Sources also said the Cabinet may clear the draft of the National Commission for Allied and Healthcare Professions Bill, 2020. This Bill will replace the Allied and Healthcare Professions Bill, 2018 which the Centre wants to withdraw. The Allied and Healthcare Professions Bill, 2018 was introduced in Rajya Sabha in December 2018 and sought to provide a legal framework for regulation and maintenance of standards of education and services by allied and healthcare professionals.