Global financial development report

Why in news?

World Bank’s has released its annual Global Financial Development Report 2017-18, Bankers without Borders.

What is the global financial development report?

• Global Financial Development Report 2017/2018: Bankers without Borders is the fourth in a World Bank series. 
• It provides a unique contribution to financial sector policy debates, building on novel data, research, and wide-ranging country experience, with emphasis on emerging markets and developing economies.
• The report’s findings and policy recommendations are relevant for policy makers, staff of central banks, ministries of finance, and financial regulation agencies.
• The report tracks financial systems in more than 200 economies before and during the global financial crisis.

Why this report is globally relevant?

• After the global financial crisis of 2007-08, as governments and regulators recognised and began to address the dangers of large and complex banking and financial structures.
• But they largely missed the argument that opening up the financial sector to foreign players was important to boost efficiency and bring sophisticated products to local customers.
• Many global banks were hard at work trying to beef up capital and restructure businesses, shutting operations in some countries, and generally maintaining a relatively low profile.

What are the findings of the report?

• Restrictions imposed on foreign banks in developing countries are hampering prospects of growth by limiting the flow of much needed finance to firms and households.
• International banking does create risks of exporting instability especially for countries with poor regulations and institutions, and those risks need to be mitigated.
• But without a competitive banking sector, the poor will not be able to access basic financial services.
• Many businesses will be locked out of markets, and growth in developing countries will stall.

What are the implications for India?

• Indian banking has become more competitive over the last couple of decades has largely to do with the opening up of this sector to local private banks in 1993-94.
• The larger policy goal that the government and the central bank had in mind could not perhaps be achieved immediately because of the public ownership and governance structure of state-owned banks.
• Besides public and private banks, Non-Banking Financial Companies (NBFCs) and Microfinance Institutions (MFIs) too have rapidly enlarged their footprint over the past decade.

What measures India had taken so far?

• India adopted a guiding principle of consolidating public and private banks before opening up to foreign banks in a synchronised manner.
• The approach has been to have foreign banks form fully owned subsidiaries, or to convert existing branches into a subsidiary.
• Foreign banks at various growth cycles have shrunk their businesses in a downturn or when there is turmoil, and the need for credit is acute.
• India has sought to limit the share of foreign banks in the total assets of banks in the country to less than a fourth.

Source: Indian Express