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India-EU free trade agreement: Should India open up banking sector?

Madhyam Books | March 2009

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: