Impact of WTO commitments on Indian banking Industry
Faculty – Banking and Finance, Bangalore Management Academy (BMA).
Naman Kumar Gupta, MPFB II, Bangalore Management Academy (BMA) Kartheek Yerolla, MPFB II, Bangalore Management Academy (BMA) Mahesh Bondili, MPFB II, Bangalore Management Academy (BMA)
India had a deep rooted and well structured banking system since independence. After nationalization of the banks, the focus of the Indian banking System has been two fold - commercial and social. While meeting their commercial considerations like profitability, viability of operations and financial stability the banks have also been focusing on social considerations like poverty alleviation, employment generation, balanced regional growth and such others. However, on account of economic liberalization in 1991 and the need to adhere to various prudential norms laid down by the Basel committee, the focus of Indian banks has been predominantly on the commercial aspects of banking. In 1997, India has made certain commitments to the WTO in providing market access to the foreign banks that intend to operate in India. These commitments would assume operational character in 2009. As the banking industry has been at the forefront of Indian economic resurgence, the WTO commitments have become a matter of concern to many sections and sectors of our economy.
The purpose of this paper is to provide a proper perspective on the impact of WTO commitments. Firstly, this paper would deal with exact nature of commitments made by India to WTO regarding the banking industry. Secondly, this paper seeks to evaluate the impact of foreign banks on the Indian economy. Thirdly, this paper seeks to highlight the major issues and challenges that Indian banking system would encounter if they have to effectively compete with foreign banks. Fourthly, this paper attempts to lay down a time bound road map for the Indian banking industry as they march to 2009.
In conclusion this paper would answer the following question - Can Indian banks sustain competition from foreign banking institutions?
A. Commitments made to WTO
The Financial services sector is governed by the General Agreement on Trade and Services (GATS) under the World Trade Organization. As per the 5th protocol of the GATS agreement, India has made a commitment to the WTO to permit establishment of branch operations of foreign banks subject to an annual limit of 12 branches per year. However, India reserves the right to deny entry to the foreign bank if its market share exceeds 15%.The ceiling of 12 branches does not include off-site ATM counters. Further, the foreign banks are required to constitute a local advisory board which comprises of only Indian nationals. In addition, public sector banks can park their surplus funds only with other scheduled commercial banks in India and not in foreign banks.
As per the existing policy of RBI that allows FDI in the banking sector, foreign banks can get into mergers and acquisitions of Indian private sector banks with an equity ceiling of 49 %. This equity participation would be increased to 74% by 2009.
1. As against the commitment to open 12 branches on an annual basis, the RBI had already issued licenses to foreign banks to open 75 branches in the period 2003-07 other than offsite ATMs. (Refer exhibit 5 of Appendix 1). During the same period, USA has declined to give authorization to any Indian bank to open their offices in that country.
2. RBI’s licensing of foreign banks has been non discriminatory in nature. There have been no restrictions placed on the scope of the activities of foreign banks. On the other hand, USA places restrictions on the scope of banking activities that can be carried on by Indian banks in USA. For example, USA disallows financial brokerage and certain specialized foreign exchange business.