Speech by the Commercial Secretary to the Treasury.
Thank you for inviting me to speak today, I’m very pleased to be speaking on banking and finance in the context of such an important relationship as that between the UK and India.
In particular, because it’s an issue that is very much in my blood. My family lived in Mumbai in the 19th Century. We were merchants and bankers, trading across much of Asia. And it’s just over 150 years since my great-great-grandfather set out to London to open the first branch of our family business outside Asia.
But my family story of modest innovation and exploration is one that is mirrored in a much bigger way throughout India’s history.
The further back we look, the clearer we see India’s role as one catalyst of modern finance, through the critical role that Indian scholars played in laying the foundations of modern mathematics.
Because, it was Indian scholars that absorbed and built on lessons from their Greek, Roman and Babylonian counterparts, and provided the decisive mathematical break through - the tenth numeral, zero. We in the West may refer to Arabic numerals, but in the Arab world they rightly, of course, talk of Indian numerals.
It was a fundamental development. It was an innovation that enabled mathematicians, astronomers, financiers to expand the domain of knowledge, exploration and indeed commerce… applying Hindu mathematics to problems like the calculation of interest.
It’s a development that places India at the heart of financial history.
But it’s a story that also demonstrates the vital importance of openness and global interactions in India’s history and progress. It’s a history of ideas and practice learnt from Europe, and of innovation and progress exported back across the continents.
And this openness and interaction with global partners is more important than ever in today’s world. Globalisation has rendered obstacles to ideas, capital, labour, increasingly obsolete. It brings with it a wealth of opportunities and we have seen India capitalise on these in the last two decades. For instance, from 2000 to 2006, Foreign Direct Investment jumped from $3 billion to $43 billion , India’s foreign exchange reserves continue to grow, and last year alone, Indian exports jumped over 34% to $24 billion.
And, the UK and India share a strong bond within this globalised market. Based on our shared interests, values, and personal and business ties.
Only last year our Prime Minister and Chancellor of the Exchequer visited India with the strongest and most high-profile delegation to visit India in modern times. And as George Osborne, the Chancellor, said, the Coalition Government is committed to renewing and strengthening the partnership between our two countries.
And when it comes to financial services, we have a strong base from which to start.
London remains the world’s leading global financial centre and offers the support and skills that continue to attract the world’s leading financial companies. The likes of Deutsche Bank, BNP Paribas, UBS, JP Morgan all jostle for business alongside the likes of Barclays Capital and Royal Bank of Scotland. Though we are an island, in financial services we are inseparably connected to all nations, including India.
Only last year, the State Bank of India announced that it had decided to make London its European headquarters. And we fully welcome the India Infrastructure Company’s decision to base itself in London as well.
And that bond is replicated in the retail banking sector. Reflecting the ease with which foreign banks can open a branch or subsidiary in the UK, there are already 10 Indian banks in operation in the UK. The UK is now home to more Indian banks than any other country in the world. And all of them are growing and have plans to open more branches.
And the relationship is reciprocal. Indeed, as you well know, some UK banks have been in India for over 150 years. Standard Chartered, HSBC and RBS are three of the four biggest foreign retail banks in India.
They provide an extensive network of over 100 branches between them covering over 30 cities in India.
And as committed as we are to encouraging the growth of Indian banks in the UK, we are eager to see UK banks play a bigger role in India’s economic development.
As it is, foreign banks have only a 8% share of the Indian banking market by assets, despite the fact there are more private international banks than private Indian banks in the market.
There is huge potential and appetite for foreign banks to provide the capital and investment to spur greater growth in India; and to support development in some of the more remote and unbanked sectors of the Indian economy.
I fully commend the Indian Government’s financial inclusion agenda, to provide finance to poor communities in rural areas and smaller towns and cities… but I also say, if you grant foreign banks, the likes of Standard Chartered and HSBC, with licences to bank in these towns, they will jump at the chance. They can play a huge part in bringing modern banking services to millions across India.
In fact, we can already see the strong UK-India partnership in action, bringing technology solutions to address financial inclusion. Last year, on his visit to India, the Chancellor launched Vodafone’s solar powered mobile phone, Monitise’s software platform for mobile phone banking and Standard Chartered bank’s mobile ATM.
As well as innovation, liberalising the financial sector encourages greater competition which has always been the best way of improving consumer choice, driving down costs and increasing innovation.
Indeed, India has already benefitted hugely from liberalisation of the financial sector. The dynamism of India’s capital and equity markets is evidence of that. Already the Bombay Stock Exchange is the 4th largest stock exchange in Asia, and the 8th largest in the world. But I should add, before I get into trouble with my friends in Mumbai, that the National Stock Exchange of India is larger in traded values!
If India were to liberalise other areas of its financial sector, it could provide a sizeable engine for growth. You won’t be surprised to hear me say that implementing the reforms of the Reserve Bank of India’s 2005 Roadmap would go a long way to that end.
This includes offering foreign banks more licences to set up branches in India, and in particular, rewarding those banks which represent a very low risk to financial stability by giving more licenses for branches. It also means providing greater clarity to foreign banks looking to form a local subsidiary in India, and greater clarity on the conditions to market access.
In the insurance sector, we welcome India’s commitment to raise the cap on foreign investment from 26% to 49%. India’s plans to invest a trillion dollars in its infrastructure requires vast investment from financial institutions including the insurance sector, and international companies, British companies, are well placed and eager to contribute to these plans.
But of course, this is not a one way flow of money and ideas. Just as the early European mathematicians shared their knowledge across the continents, so Europe had much to learn from India. The same is true today.
And this has been most clearly the case in the recent financial crisis. Because, though globalisation brings opportunities, it also brings risks. A more interconnected global financial system means that risks and instability can spread quicker than ever before. In fact it’s 140 years since the telegraph link between London and Bombay was completed, and when the cables were first tested, the Daily Telegraph, its name a tribute to the changing epoch, ran a headline reading “Time itself is telegraphed out of existence.”
It may have been an exaggeration 140 years ago, but it’s an accurate reflection on today’s financial system where trades are executed in nano-seconds. And when the American sub-prime market began to default, the shockwaves fired across the global system. As the crisis spread, UK regulators and a number of UK banks were found desperately wanting.
In contrast, Indian banks fared much better through the crisis. A credit to the RBI’s attention to macro-prudential risks in its regulatory function. And this is a lesson that we have learnt in the UK.
We are in the process of fundamentally reforming our approach to financial regulation which includes stronger regulation of individual firms by the Bank of England, enhanced consumer protection, and a stronger focus on macro-prudential risks to the financial system as a whole through a new Financial Policy Committee. The job of that Committee, sitting within the Bank of England, will be to monitor overall risks in the financial systems, identify bubbles as they develop, spot dangerous inter-connections and stop excessive levels of leverage before it’s too late. We are bringing an unprecedented level of judgment and foresight to UK financial regulation rather than mere box ticking.
But as the Chancellor said in his visit to India last year, there is much that we can learn from each other by sharing our experiences and expertise.
And it’s the same at the international level as we pursue consistent implementation of the Basel reforms to increase system wide stability. We are strongly arguing across Europe and internationally that Basel must be the minimum that all countries subscribe to, not a maximum.
Instead, national authorities should retain the right to apply higher levels of regulation to ensure financial stability and to reflect the distinct characteristics of their home markets. This includes the ability to apply macro-prudential tools to tackle risks unique to their markets.
As a member of the G20, and as a signatory to the G20 agreement to fully implement Basel, I welcome the integral role that India is now playing in banking and financial multilateralism.
The crisis has fundamentally reshaped financial markets and the balance of the world economy. How we react to these events will shape our mutual prospects for recovery and renewed growth.
One option would be to turn inwards and raise the protective walls. But we saw in the 1930s the dire consequences of that approach.
Instead, it’s only if we embrace open markets but also implement credible, effective and consistent international regulation that we can capitalise on the new opportunities for mutual growth.
Of course, we have some way to go to get back to the situation in London in 1858 when my 26 year old great-great-grandfather arrived from Bombay and could open up a bank branch here within a couple of weeks. We may never achieve that again but there is much we can do.
The UK is determined to do all it can to be a partner in India’s growth, to build closer ties between our economies. Next week, the Chancellor and Finance Minister Pranab Mukherjee will be meeting as part of the UK-India Economic and Financial Dialogue. Part of this dialogue will of course focus on financial services to strengthen the links that exist between our financial sectors, share our expertise to secure effective and proportionate financial regulation, and ensure that we realise the full potential of the UK-India economic relationship.
And I personally, look forward to working with many of you here today to realise this goal for our mutual benefit.