India-EU FTA: Rethinking Banking Services Liberalization
One of the major underlying themes in the ongoing negotiations on India-EU FTA is the liberalization of trade and investment in banking services. With the help of FTA with India, EU is seeking greater market access and export gains for its banks through cross-border
supply and direct investments. Some of the key demands emanating from Europe include removal of all barriers to market access (commercial presence, cross-border supply and consumption) and grant of national treatment commitments. The EU banks and powerful lobby groups such as European Services Forum (ESF) have put forward a slew of demands including removal of all restrictions pertaining to branch licenses, foreign ownership (of both public and private banks), numerical quotas, equity ceilings, differential taxation, and voting rights. The ESF is seeking removal of priority sector lending on locally incorporated EU-owned banks besides removal of current restrictions under which branch licenses may be denied if foreign banks’ aggregate share of the banking market exceeds 15 percent.
Another key demand of ESF relates to the removal of restrictions on foreign banks to participate in exchange traded commodity products. Currently, Indian commodity exchanges do not allow direct participation by foreign banks. The ESF has also
demanded free access to deposits made by the state-owned companies.
This paper critically examines the potential costs and benefits of liberalization of trade and investments in banking services under the proposed India-EU FTA. The paper calls upon trade negotiators to rethink the policy framework and objectives of opening up India’s banking sector, particularly in the light of current global financial crisis.