TWN Info Service on Free Trade Agreements

15 March 2009

India-EU FTA: Should India Open Up Banking Sector?

The negotiations on the India-EU free trade agreement covers among others, liberalization of cross-border trade and investment in banking services.

A new report questions the policy framework and objectives of opening up the banking sector under the FTA pointing out that it is not likely to benefit most Indians especially those in the rural areas. It also debunks several myths that foreign banks in India are associated with higher efficiency and productivity.

The report, published by Madhyam, a research and public policy organization based in New Delhi is available for download at: http://www.madhyam.org.in/Special%20Report%20on%20India-EU%20FTA.pdf

The EU is also negotiating an FTA with ASEAN countries and similar concerns
expressed in the report would likely apply in the ASEAN context.

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SPECIAL REPORT


India-EU Free Trade Agreement: Should India Open Up Banking Sector?

by Kavaljit Singh

Since 2007, India and European Union (EU) are negotiating a free trade agreement (FTA). The negotiations not only cover trade in goods but also services, rules pertaining to intellectual property rights, cross-border investments, competition policy, government procurement and regulatory issues. One of the key themes under negotiation is the
liberalization of cross-border trade and investment in banking services.

The 70-page Special Report questions the policy framework and objectives of opening up banking sector under the FTA. The report argues that the liberal entry of European banks is likely to further constrict the access of banking services in the country: geographically, socially and functionally. The report reveals that urban-centric European banks are primarily interested in serving three niche market segments in India: up-market consumer retail finance, wealth management services and investment banking. Not a single
EU-based bank has opened a branch in the rural India despite several of them (such as Standard Chartered, BNP Paribas and HSBC) have been operating in India for more than 140 years, points out the report.

With the help of statistical data and case-studies, the report debunks several myths associated with the higher efficiency and productivity levels of foreign banks in India. It also debunks the popular conception that foreign banks are discriminated in India. The report observes that no reciprocity in market access has been observed in other trade agreements signed by India.

The report documents important developments in the Indian banking sector since Independence and maps out several disturbing trends (such as growing financial exclusion, decline in bank lending to agriculture and small enterprises, etc.) in the post-liberalization period.

The report questions the much-touted benefits of opening up banking sector under the India-EU FTA. Are big European banks going to augment the reach of the banking system to millions of Indians citizens who have no access to basic banking services? What specialization and experience do European banks have when it comes to providing basic banking services to landless rural workers and urban poor dwellers?

Will the India-EU FTA reduce the domestic regulatory space?

In the wake of severe crisis gripping many European banks, the report calls upon trade negotiators to rethink about opening up banking sector under the FTA.

The Report is available for download at online:

(http://www.madhyam.org.in/Special%20Report%20on%20India-EU%20FTA.pdf)

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TABLE OF CONTENTS

1. The Background

2. EU is India's Largest Trading Partner

3. Services Take the Cake

4. Financial Services: The Modes and Models of Liberalization

5. EU's Wish List

6. The Burgeoning Financial Services Trade

7. The Lure of Niche Banking Markets

8. Banking Services Market Access: A One-way Street?

9. India: A Bank-Based Financial System

10. Foreign Banks in India

11. The Rationale Behind Nationalization of Indian Banking Sector

12. The Positive Outcomes of Bank Nationalization Regime

13. The Introduction of Priority Sector Lending

14. Banking Sector Liberalization in India

15. Trade Agreements and Banking Sector Liberalization

16. No Reciprocity in Market Access

17. Are Foreign Banks Discriminated in India?

18. The Branch Licensing Policy Favors Foreign Banks

19. The Stark Anomalies in Banking Assets Ownership

20. The Extent of Financial Exclusion in India

21. Financial Inclusion and Foreign Banks

22. Foreign Banks: More Frills, Less Banking

23. Decline in Bank Branches in Rural India

24. The Rise in Unbanked and Underbanked Regions

25. Sharp Decline in Agricultural Credit

26. Decline in Bank Lending to SMEs

27. Steep Rise in Bank Lending to Retail and Sensitive Sectors

28. The Limitations of Microcredit Programs

29. Global Financial Crisis and India-EU FTA

30. Some Pertinent Questions

31. Rethinking Banking Sector Opening Up

32. Who Benefits? Who Loses?

For hard copies of the report, please contact us.

Sudheer Rawat
Madhyam
148, Maitri Apartments
Plot No.28
Patparganj
I.P. Extension
New Delhi: 110092
Phone: 91-11-22243248
Email: madhyamdelhi@gmail.com
Website: www.madhyam.org.in