challenges in finance

7/29/2019 Challenges in Finance

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Challenges in Finance


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The approach of developingcountries to the General

Agreement on Trade in FinancialServices (GATFS) under WorldTrade Organisation (WTO) is

marked by caution and care. Inthis connection questions are:Are there genuine reasons for this

approach ?


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Last question which, one is eager to know

is: what are the commitments of Indiaunder the Financial Services Agreement ?

And what are the ensuing challenges tothe Banking Industry in India consequentupon commitments.

Here an attempt is made to address inbrief these three questions.


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Capacity

-Transparency & information-Regulation & Supervision

-Infrastructure & market dev.,risk management

Capital flows

-Quantity-Structure (term,

instrument)-Volatility

Efficiency

-Competition-Technology transfer-Skill transfer &

development

FinancialServicesTrade

FinancialSectorStability

The Links between FinancialServices Trade, Capital Flows& Financial Sector Stability


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Purely Theoretical Plane

An existence of vast literature both empirical andtheoretical dealing with merits of openness of thefinancial sector.

Broadly the studies discuss

(a) the impact of financial sector liberalization on growth

and development of the economy(b) the link between openness of the financial sectorand financial sector overall development(c) link between productivity efficiency and financialsector deregulation.

(d) Financial stability and relaxation in financial sector.


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The theoretical predictions andconclusions based on set of assumptions.

Not applicable universally.

Relationship between optimal benefits offinancial sector liberalization andprevailing conditions in the financialsector.

Deregulation without adequatesupervisory forces might causedestablisation and disaster in the

financial sector.


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The developing countries approach marked

by caution and care with respect to their

commitments to GATFS seems to be justifiedto a great extent.

A need for a country to tread cautiously in

respect of some sub-sector services likebanking and insurance.

Precisely against this background, theframework of GAFTS as accepted bythe countries is sufficiently flexible andadoptable.


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FRAMEWORK OF GATFS

Liberalisation is incremental. Governments are free to decide

which sector they open, guaranteethe right of foreign supplier and the

extent of the rights. WTO does not require the members

to offer unrestricted access to their

markets. Commitments are accompanied by

stipulations relating to accessibilityand regulations.


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The financial services negotiationsconcluded in December 1997 under the

auspicies of WTO bear the followingcharacteristic features:

a) Negotiations are not concernedwith the liberalization capitalaccount convertibility.

b) They relate to the terms andconditions of foreign suppliers

business, subject to capitalaccount controls in force.


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c) Nothing in the service agreement

that affects adversely thegovernments ability to pursuesound economic andregulatory policies. Governments

are free to take necessarymeasures to preserve stability inthe financial system andnon-discriminatory

restrictions on trade in services.


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d) Under the services agreement, thecommitment in the WTO provides

guarantee that the terms andconditions on which investmentsare made are not going to changeovernight. This requirement is

not an additional threat but is ananswer to the crisis.


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The framework of GATFSreflects

a) Sufficient flexibility

b) Accommodating for substantialadjustments in commitments dependingon the level of financial sectordevelopment and macro-economic

situation in the country.

C) Basic principle underlying the WTOcommitments: progressive liberalization.


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Frame of Commitments under GATFS

Two types of Commitments in respect of market

access and national treatment:

a) Sectorial schedule of commitments and

b) Horizontal schedule of commitments.

The former refer to commitments for negotiationsrelating to specific individual sector, while the latterpertains to all sectors of the economy.


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The Commitments Structure

a) Full freedom in making choice ofservices for negotiations.

b) Scope for specifying theschedule of limitations.

C) Design of four modes of supplyof services i.e.,


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i) Cross Border Supply.

ii) Consumption on abroad.

iii) Commercial presence and

iv) Movement of natural person.These have been devised in the

light of the basic approachunder WTO namelyProgressive Liberalisation inServices Trade.


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Historical Perspective

Restrictive Policy

Central Banking Enquiry Committee (1931):

suggested for confining operations of theforeign banks to port towns.

Relaxation in Policy 1959

Needed goodwill of the internationalcommunity for success of developmentplans. Thus, liberalization of licensing policy.


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Opposition to the Relaxation

No country in the world openeddoors to foreign banks except U.K.Foreign banks offered the services

which Indian banks could notprovide.

Restoring Restrictive Policy

Principle of Reciprocity Basis for

licensing policy.


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INDIAS COMMITMENTS UNDER

WTO GATFS

* Market accesses are broadly limited to

mode 3 of trade in servicescommitments i.e., commercial presenceonly

* The commitments on market accessunder mode 3 include:


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* The ceiling on licenses is twelvelicenses per year.

* Investments in other financialservices companies by branches offoreign banks individually not toexceed 10 percent of owned funds or

30 percent of the invested capital of

the company whichever is less.


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* Foreign banks have options to

operate either as branches or set

up as subsidiaries of their parentbanks and to adhere to all bankingregulations including prioritysector lending.

* Foreign banks having branches inIndia have been permitted toacquire upto 49 per cent of stake in

any private sector bank and upto 20percent in the case of publicsector banks including State Bank ofIndia.


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* Transfer of existing banking

Company from residents to non-residents the foreign investment

through automatic route is notpermitted.

* Most favoured nation (MFN Article II)exemption sought in the originalschedule for negotiation was

abandoned. The committment wasmade for offering MFN treatmenton a reciprocal basis.


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Proposals

A ceiling on the share of assets offoreign banks in the total assets ofbanking industry including fundedand non-funded assets to be raised

from present 15 percent to 20percent.

Raising foreign bank brancheslicences from 12 a year to 15 to 18.


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* Allowing foreign banks to havetheir stake upto 74 percent

in the private banks.

* Thinking to allow the foreign

banks for bringing morefunds for expansion inorder to ease passage for

Indian banks intending toexpand their presence indeveloped markets.

challenges in finance

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