Mr Speaker, Sir, I beg to move, "That the Bill be now read a Second time." Since the introduction of the Banking Act in 1971, Singapore has developed into a financial centre of international importance. This is demonstrated by the presence here of a large number of financial institutions of international standing and reputation, the advent of new financial instruments, the rapid development of the Asian Dollar Market, the extensive nature of the financial transactions that are entered into and the numerous financial services that are now being provided. The liberalization of exchange controls and the development of the capital market have also played their part in making the banking scene in Singapore vastly different from what it was at the time of the passing of the Banking Act. In the last three years, 1981 to 1983, the contribution of the financial sector to our GNP was large, $1.6 billion, $1.8 billion and $2.1 billion respectively. Growth rates registered were 25.0%, 16.7% and 14.3%. These growth rates were exceeded only by Construction. As on June 1983, the industry employed 38,268 persons, mostly in well-paid occupations. It is, then, hardly surprising that these developments have had a considerable impact on the effectiveness of the existing Act to deal with the many changes that have occurred since 1971. Some of the concepts in the existing Act have to some extent become outdated, other concepts are in need of refinement to meet rapidly changing financial conditions. Thus the decision was taken to conduct a comprehensive review of the provisions of the existing Act to make it a more efficient and flexible instrument for regulating the industry in the long term interests of both the banks and their depositors and other creditors. It is against this background that the proposals in the Bill now before hon. Members should be viewed. The Banking Act provides for the organization, structuring, control and supervision of banks in general. The control and supervision of banks is, as Members know, the responsibility of the Monetary Authority of Singapore. It is well recognized that the supervision of banks is a difficult and often complex operation. Too lax a supervision can lead to abuse and fraud; too strict will stifle growth and enterprise. Since there is no perfect form of supervision, there must be a constant striving to make this form of control as effective as possible, without overdoing it. A wise Mandarin of the ancient Chinese Imperial Civil Service said that governing a country is like frying small fish. It must not be overdone. This dictum applies to bank supervision, for there are limits to what it can achieve. It cannot, of course, ensure that banks will not make loans or investments that turn out to be bad. The responsibility for making loans and investments must rest squarely on the heads of the directors of banks and that is why it is so important that directors should be persons of integrity and competence who exercise great care and skill in controlling their loans and investment business. A mere examination of returns of banks by the Authority can be no substitute for proper internal control by bank managements. With these introductory comments, I will now deal with the main provisions in the Bill. The proposals in the Bill, in general terms, will:- i) improve supervisory powers of MAS over banks; ii) ensure that control of domestic banks would not pass into undesirable hands; iii) set limits of credit facilities that a bank may grant to its customers; iv) enable the Authority to have stricter control over the audit of banks; v) rectify the anomaly in the provision for priority of deposit liabilities by giving deposit liabilities that have been subject to prudential requirements prior claim; and vi) replace the existing administrative control over the operation of an Asian Currency Unit by statutory provision. The first major group of amendments that are proposed in this Bill is concerned with the passing of control of domestic banks to other persons. These appear in clause 5 of the Bill which introduces new sections 14A, B, C and D. These amendments would enable the Authority in relation to a bank that is incorporated in Singapore to control - a) a take-over of such a bank by the intended acquisition of not less than 20% of its shares; b) arrangements by which outside persons would be able to determine the policy of such a bank; and c) the acquisition of substantial holdings, that is, interests in 5% of the voting shares of such a bank. The purpose of these amendments is to ensure that domestic banks, which form a key sector in the economy, should not pass into undesirable hands. The proposals do not prevent, it will be noted, a take-over by acquisition of shares or the acquisition of substantial holdings in domestic banks but they do seek to ensure that the Authority will be in a position to decide whether the potential new controller or substantive shareholder, as the case may be, is a suitable person to be exercising control or to be having a substantial shareholding in a domestic bank. The proposals will only apply to persons seeking to obtain control of or have substantial holdings in a domestic bank after the coming into force of this proposed legislation. They do not affect past changes of control or past acquisitions of substantial shareholdings. The provisions in new sections 14A and 14B that deal with potential changes of control of domestic banks are, it will be noted, widely drafted so as to embrace not only situations where a person is acting alone to obtain control but also where he is acting in concert with associates. The amendment proposed by the new section 14D would enable the Authority to obtain from a bank that is incorporated in Singapore information as to the beneficial ownership of shares in that bank. This proposal is closely linked to the function of the Authority in exercising control over take-overs and substantial shareholders for it will enable the Authority to ascertain the ownership of shares held, for example, in nominee names and thus make it more difficult for persons to place themselves in a position so as to obtain control of a domestic bank through such nominees. The second group of amendments is concerned with the need to ensure that banks in their lending or investment activities conduct their business in a prudential manner and thus avoid over-committing their financial resources. Accordingly, the amendment proposed to section 25 would have the following effect of:- a) changing the existing limit in which a bank may grant credit facilities to a single customer or group of connected customers by lowering the aggregate percentage from an amount in excess of 60% of the capital funds of the bank to 30% of those funds; and b) limiting substantial loans to an aggregate amount which does not exceed 50% of its total credit facilities. A substantial loan means, in general terms, a credit facility granted to a single customer or group of connected customers which in the aggregate exceeds 15% of the bank's capital funds. These amendments are designed to promote prudential banking and at the same time take into account that the capital bases of all the domestic banks have grown very substantially since the original 60% limit was fixed in 1971. The total capital funds of domestic banks have increased more than 11 times, from S$325 million to S$3,849 million during the period 1971 to 1982. The lower limit of 30% should therefore not interfere with participation by banks in major loan projects or interfere with their competitiveness in their domestic and international business. The limitation on the granting of substantial loans is to ensure that banks do not concentrate their commitments too much by lending only to a few big customers and thus increasing their risk exposure. In other words, it discourages them from putting too many of their eggs in one basket. Clause 8 which introduces a new section 27A has much the same objective in mind. This provision, however, is designed to exercise a measure of control over banks which seek to diversify, for example, into commercial or industrial undertakings to an undesirable extent. Accordingly, it provides that banks shall not enter into agreements to acquire interests of 20% or more in any company, whether incorporated in Singapore or not, without the approval of the Authority. This provision would not apply, however, to a bank's acquisition of such assets in satisfaction of debts due to it so long as, upon making the acquisition, the bank obtains the approval of the Authority to retain these assets as an investment. To ensure that the prudential limits of section 25 and other sections of the Act dealing, in particular, with the lending and investment activities of banks are not circumvented by the use of subsidiaries or related companies, the Authority may require a bank to aggregate its assets, liabilities or profits, as the case may be, with those of any of such subsidiaries or other related companies. This will enable the Authority to exercise prudential supervision on a group basis. This provision is in line with the practice in Switzerland, and the German bank regulators are contemplating a similar policy. I now move on to the amendments that are proposed to section 42 which provides for banking secrecy. These proposed amendments have been found by experience in administering the Act to be necessary to relieve the existing rigidity in section 42(3) which deals with the requirement of maintaining banking secrecy. In the main, they are intended to extend the existing exceptions to banking secrecy to cover civil proceedings arising between a bank and the guarantor of a customer or where the bank has been served with a garnishee order attaching monies in the account of a customer or where the information to be disclosed relates to credit facilities granted by a bank incorporated outside Singapore and the information is required by its head office for supervisory purposes. However, other amendments are intended to tighten up the existing exceptions to banking secrecy. The exception that enables a bank to give information about the credit worthiness of a customer has been restricted to the giving of information which is of a general character and not related to details of a customer's account. Again, the exception in section 42(4)(a) providing for a customer of a bank to give permission for disclosure of his bank affairs may be interpreted as meaning that the customer's oral permission is sufficient. The amendment will now make clear that he has to give his written permission. The Bill proposes new provisions in clause 11 in relation to audits of banks. The new provision will enable the Authority to, in addition to the duties at present imposed on an auditor and largely dictated only by the Companies Act (Cap. 185), call upon the auditor to extend the scope of his audit to give additional information, to carry out other examinations, and to submit a report to the Authority on the results of his work. In addition, the Authority must also be immediately informed if the auditor in the course of his audit discovers serious offences or major losses or serious irregularities that jeopardize the security of creditors or that claims of creditors are not covered by the bank's assets. Equally important, the conditions that the Authority will lay down for an audit will ensure that the auditor is entirely independent of the bank which he is going to audit. Furthermore, the Authority can insist that a much more rigorous and searching audit is conducted, These amendments, when implemented, should result in external auditors of banks playing a greater role than hitherto in supporting the Authority in the discharge of its supervisory functions over banks. They are clearly designed to give greater protection to depositors and creditors of banks and minimize the likelihood of fraud and other crimes of dishonesty being perpetrated or going undetected. These provisions are based on existing practices of bank regulatory authorities in Germany and Switzerland. The next major amendments to which I would like to draw the attention of Members appear in clauses 13 and 14 of the Bill. These amendments are concerned with the priority of deposit liabilities in the event of a winding up of a bank that is insolvent or is unable to meet its obligations. Clause 13, which amends section 56, provides that the deposit liabilities of a bank shall have priority over all other unsecured liabilities other than those specified in section 292(1) of the Companies Act. The existing section 56 is far too wide-ranging for it could be construed as giving priority over secured debts and over the preferential unsecured debts that are spelt out in section 292(1). The effect of the amendment is, therefore, that in a winding up, though the claims of the depositors of a bank will rank after the claims of, for example, the liquidator for his costs in the winding up, employees of a bank for their wages, and the tax authorities for taxes owed by a bank, their claims will rank above those of the ordinary creditors of a bank. This question of priority of debts, it should be stressed, is only of importance if the assets of a bank are not sufficient to meet the claims of the creditors of a bank. Clause 14 inserts a new section 56A which provides that amongst the depositors themselves some depositors will have a higher priority ranking in a winding-up than other depositors. Thus first preference will be given to non-bank customers of a bank if the deposit liabilities of the bank are included in the computation of the reserve and liquidity requirements in sections 34 and 35. The second preference will be given to interbank deposit liabilities if they are included in the abovementioned reserve and liquidity requirements. The third preference will be given to deposit liabilities with non-bank customers where the deposit liabilities are not included in the reserve and liquidity requirements. This, as I have explained earlier, will ensure that deposits that have been subjected to stricter prudential requirements be given priority of claim accordingly. The new section 56B is designed to facilitate the winding up of a bank caused by the liquidator by notice to require every debtor of a bank to redeem any securities he has deposited with a bank within three months of the date of the notice. Finally, as Members may know, foreign and domestic financial institutions have been operating the Asian Currency Units for many years. The operators of these Asian Currency Units know that though they are subject to the provisions of the Act but, depending on their status as companies incorporated in Singapore or outside Singapore, they have been, under administrative arrangements with the Authority, exempted from certain provisions of the Act. These exemptions have been an integral part of our efforts in developing our offshore market. The purpose of clause 15 is to put these administrative arrangements on a statutory basis. Subsection (4) of new section 69A now expressly lays down the sections of the Act from which persons operating the Asian Currency Unit will be exempted. Such exemptions from regulatory and other requirements are a general practice in the off-shore banking business. The other amendments made by the Bill do not warrant any special mention in addition to what has been stated in reference to them in the Explanatory Statement. While many of the new provisions merely give the force of law to administrative procedures, several are important innovations. It is my intention to keep the situation under observation for about a year during which time we can assess their impact on the banking industry and, if need be, return to the House for another revision. Mr Speaker, Sir, I beg to move. Question proposed.