Debating Financial Services Liberalization

By Kavaljit Singh | Letters to Editor, Financial Times | July 22-August 6, 2008

Give Priority to Financial Services

Financial Times, July 22, 2008

From Sir Stephen Wright and Mr John Cooke.

Sir, Ministers from some 40 countries are meeting in Geneva to decide the fate of the Doha round of multilateral trade talks. It is vital that they achieve a breakthrough, and lay the foundation for a lasting agreement. The Doha round offers a unique opportunity to address the barriers to global trade that continue to hold back the world economy. This would bring benefits to developed and developing countries alike, and would offer some palliative to the bleak prospects facing the global economy. The focus of the negotiations so far has been on agriculture and the tariff barriers to trade in manufactured goods. These are undoubtedly important, and need to be addressed. But the services sector, which has received far less attention, comprises more than 70 per cent of gross domestic product in most Organisation for Economic Co-operation and Development countries, and a rapidly rising share of economic activity in emerging markets. It is essential, for all countries, that the Doha round enables a substantial liberalisation of trade in services, including financial services.

The development gains would be considerable. Businesses at every level in emerging markets need easier access to capital in order to enable the sustainable rates of growth and wealth creation that will address poverty over the long term. They also need modern tools to manage risk and plan for the future. Their governments need help to secure the investment in infrastructure that will be the key to the development of their economies.

What is good for development is also good for the UK economy. The financial services sector accounts for more than 10 per cent of UK GDP, generating substantial revenue and employment. Greater opportunities for UK financial services suppliers to access markets overseas will translate into real gains for the UK economy. Furthermore, Britain’s continued pre-eminence as the international financial marketplace of choice is a key asset for the whole European Union. Research indicates that access to the UK financial services hub creates €33bn a year of value for our European partners.

For all of these reasons we urge Peter Mandelson, as the EU’s negotiator in Geneva, to give high priority to securing a real breakthrough on trade in services. There are still far too many barriers to investment, restrictions on market access, and regulatory burdens in too many of our trading partners. All too often these restrictions do more to shelter domestic incumbents than to benefit local people. The prize from dismantling them is great, if ministers will grasp it.

Stephen Wright, Chief Executive

John Cooke, Chairman,

Liberalisation of Trade in Services Committee,

International Financial Services London,

London EC3V 3NF, UK


Entry of Big Foreign Banks has not Widened Access to include India’s Poor

Financial Times, July 29, 2008

From Mr Kavaljit Singh.

Sir, Stephen Wright and John Cooke (Letters, July 22) strongly advocate the liberalisation of trade in financial services under the Doha round. However, developmental gains from such liberalisation are highly debatable. In the case of India, the entry of foreign banks has not widened the access of banking services in the country.

Of a total 602 districts in India, nearly two-thirds (391) have inadequate banking cover. Banks are reluctant to open branches in “under-banked” regions because of concerns over meeting profitability criteria. According to the Reserve Bank of India, of 933 bank branches opened during between June 2005 and July 2006, just two were opened in under-banked areas. Recent studies have pointed out that 72 per cent of Indian farmers have no access to the formal banking system.

One of the important factors behind rising farmer suicides in the countryside is lack of access to cheap credit from banks and institutional sources. The traditional moneylender faces no competition in rural banking markets.

On the other hand, there has been a sharp rise in foreign and domestic big banks lending to risky and speculative businesses such as commercial real estate, derivatives trading and commodities. In terms of providing banking services and products, foreign banks typically have a bias towards wealthy customers.

The question must be asked: Are big foreign banks going to serve the 500m Indian citizens with no access to banking services? Also, do big foreign banks have the requisite expertise to provide banking services to poor farmers, landless labourers and the urban poor?

Kavaljit Singh


Further Liberalisation can Widen Indian Bank System

Financial Times, August 5 2008

From Mr Roger Brown.

Sir, Kavaljit Singh (Letters, July 29) is right to lament the scarcity of banking services to the rural poor in India, but is mistaken in suggesting that liberalisation of financial services cannot be part of the solution. What Mr Singh did not take into account in criticising Sir Stephen Wright and John Cooke (Letters, July 22) is that any foreign banks seeking to cater for the rural poor in India are severely restricted in the number of new branches and teller machines they can open.

On average, only about 15 new branches a year are authorised for all foreign banks for all India. This means foreign banks have been effectively prevented from opening up networks in rural areas to serve small and medium-sized businesses and the unbanked.

A number of British and other foreign banks are already heavily committed to microfinance and other poverty alleviation schemes in India. But they could do a great deal more ifMr Singh and others who favour the development of rural banking pressed for further liberalisation so foreign banks could expand their operations in the regions of India now so little served by existing banking services.

Roger Brown, Executive Director,

British Bankers’ Association,

London EC2N 1EX, UK


Indian banks denied market reciprocity

 Financial Times, August 6 2008

From Mr Kavaljit Singh.

Sir, Roger Brown (Letters, August 5) calls for further liberalisation of financial services to widen access to the Indian banking system. Contrary to popular perception, India has gone beyond existing international commitments to give greater market access to foreign banks. The number of branches permitted each year to foreign banks has been higher than the World Trade Organisation commitments of 12 branches a year.

During July 2006-June 2007, India allowed seven foreign banks to open 20 new branches and an additional seven foreign banks to set up representative offices. One of the key policy issues determining market access is reciprocity. How much market access are Indian banks getting in return? During 2003-07, India allowed US-based banks to open 19 branches (excluding the off-site teller machines). But, in the same period, the US did not allow a single Indian bank to open a branch or subsidiary or representative office in its territory despite many requests by Indian banks.

Further, there are no restrictions in India on the establishment of non-banking financial subsidiaries by foreign banks. Citigroup and StanChart have successfully used their finance companies to reach out to more parts of the country. Since foreign banks in India are predominantly located in metropolitan and urban areas, they could very well serve poor and low-income people residing in their neighbourhoods. There is no regulatory ban on foreign banks to serve the urban poor. Rather, India’s approximately 190m urban poor provide a huge untapped market that could be reached by foreign banks. The potential market size cannot be overlooked given the saturation of retail banking markets in several developed countries. Therefore, it is not the regulatory constraints or the lack of market that is hindering the delivery of banking services by foreign banks but primarily their business model and bias against the poor people in general.

The spread of microfinance institutions (MFIs) in India is welcome but they cannot be a substitute for the formal banking system. With just 15m clients, MFIs have reached only a fraction of the “unbanked” population in India. The penetration of MFIs is highly skewed towards a few southern states. There are several recent instances of aggressive lending byMFIs with negative outcomes.

In 2005, many poor borrowers (mostly women) landed themselves in debt in Andhra Pradesh. For these borrowers, MFIs were no better than traditional moneylenders as they charged exorbitant rates of interest (100 per cent and above). Some MFIs are also believed to have used coercive methods of loan recovery.

So lending by MFIs could also be counter-productive if not properly regulated.

Kavaljit Singh,

Director, Public Interest Research Centre,

Delhi 110092, India