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While liberalization and banking sector reforms have paved way for competitiveness amongst banks, the GATT provisions raise the question of consolidation among Indian banks so as to face the challenges from very big foreign banks which are expected to enter India without hindrance from the year 2005 onwards. Even the biggest bank like State Bank of India will find the competition tough. There is a need for Indian banks to augment the range of services and equity base, liberalize credit decision mechanism besides improving operational efficiency in other areas.
Since 1941 several nations of the world have attempted to evolve a system under which multilateral trade among nations is carried out smoothly without any hindrance. Since the first round in 1941 at Geneva with 23 participant nations, several rounds have been conducted for this purpose ending with the now well-known Uruguay Round conducted again at Geneva between 1986 and 1993 with 117 member nations. At the end of these meetings, GATT (General Agreement on Tariffs and Trade) gave way to the establishment of a permanent organization to guide multilateral trade, namely, the World Trade Organization (WTO). Given the wide variance among member nations in the state of their economies, member nations were classified into three categories, namely, developed, developing and least developed nations.
Basically it was agreed that each member nation will extend to the other member nations, for purposes of international trade, the `MFN' status and the products of these countries will be given `National Treatment', that is, treated as if they were their own national products by each member country. The entry of goods from a member country will be without any quantitative restriction or quotas. Member countries should respect the Intellectual Property Rights (IPR) of other members. Patent rights on intellectual property will be for a period of 20 years and the patent holder will have the exclusive right to market his product/process/service for a period of five years in any member country. All exports from member countries should satisfy certain phytosanitary measures in order to protect human, animal and plant lives.
Following this agreement on agricultural, industrial and natural products, there were discussions about ensuring smooth flow of services among members of the WTO. Based on these, a General Agreement in Trade in Services (GATS), to be implemented in phases, was agreed on and came into force from 1995. This agreement recognizes four modes of trade in services among members. The modes of service transactions relating to banking are,
Similar to trade in goods, the key principles governing trade in services are a) MFN treatment which guarantees that a member country will not discriminate among members of WTO supplying a service; and b) National Treatment which guarantees that governments of member countries, through regulations and legislation will not discriminate in favor of domestic service providers at the expense of foreignowned service providers.
Basically, the agreement signed during June 1995 in Geneva gives opportunity for banks in 140 member countries to offer their banking services to Indian consumers using all or any of the four modes mentioned earlier. By the same token, Indian banks now have the freedom and opportunity to enter other member countries of WTO, to provide their services to the nationals of these countries using any of the four modes. Following this agreement, Government of India has liberalized shareholding of foreign banks in Indian banks. Foreign banks are now allowed to pick-up as much as 49%, of the equity shares of an Indian bank, against only 20% permitted earlier. As Foreign Institutional Investors (FIls) can hold another 49%, technically, it is now possible for a foreign bank to control 98% of the equity capital of an Indian bank, with the assistance of FIls. Till recently, the RBI has been restricting branch expansion of foreign banks. Under GATS, these restrictions are expected to be relaxed over a period of time and are likely to disappear by 2005. During the recent budget, the Finance Minister also reduced the income tax rate applicable to foreign banks from 48% to 40%. |
