‘Allow local firms to offer fin services’

MUMBAI: When the Tata Corus deal was struck, major losers were local financial sector firms, primarily banks. The deal was structured outside the country, partly due to the fact that Indian banks and institutions do not have the regulatory leeway to offer products or services which could offer a competitive advantage to the Tatas.

Now, there’s hope on the horizon. A high-powered expert committee with a mandate to make recommendations on making Mumbai as a global financial hub has said that the door should be opened to make Indian firms providers of international financial services not just for firms and households here, but also for the global market.

The Indian market does not offer derivatives on rupee interest rates, or credit derivatives besides many currency derivatives. For instance, a home buyer, who has taken a 20-year variable interest rate loan, is unable to hedge his risk considering that there is no such product available. This has to do, of course, with the fact that there is no benchmark long-term interest rate structure to be guided by or a long-term bond market to arrive at a pricing.

Corporates, on the other hand, are constrained from accessing many other hedging products owing to regulatory constraints. Bankers say that Infy, for instance, has an exposure to a range of global currencies. But, it has to depend on foreign banks located outside the country to hedge its exposure to these currencies. Indian banks are in no position to offer these products.

The result: a large amount in the form of fees flows into overseas entities. The committee estimates that close to $13 billion of purchases of such international financial services products has been made by Indian firms in 2005. Purchases of such products by Indian households and firms could well rise to $ 48 billion by 2015 and by 2025, respectively, it could top $120 billion, the committee reckons. The gainers would be global banks and institutions, and of course, other global financial centres.

India’s financial services industry, the committee says, has the potential to acquire the required skills and expertise to exploit economies of scale to emerge as a major exporter of such products and also as a provider for local firms.