CHARACTERISTICS OF FINANCIAL SERVICES: Like any other service, financial services are characterized by the following: FINANCIAL SERVICES-INTANGIBILITY:

The basic characteristics of financial services are that they are intangible in nature. For financial services to be successfully created and marketed, the institutions providing them must have a good image and the confidence of its clients. Quality and innovativeness of services are the focal points for building credibility and gaining the trust of the clients. FINANCIAL SERVICES- CUSTOMER ORIENTATION: The institutions providing financial services study the needs of the customers in detail. Based On the results of the study, they come out with innovative financial strategies that give due regard to costs, liquidity, and maturity considerations for various financial products. This way, financial services are customer - oriented. FINANCIAL SERVICES-INSEPARABILITY: The functions of producing and supplying financial services have to be carried out simultaneously. This cases for a perfect understanding between the financial services firms and Their clients. FINANCIAL SERVICES-PERISHABILITY: Financial services have to be created and delivered to the target clients. They cannot be stored. They have to be supplied according to the requirements of customers. Hence, it is imperative that the providers of financial services ensure a match between demand and supply FINANCIAL SERVICES-DYNAMISM: The financial services must be dynamic. They have to be constantly redefined and refined. On the basis of socio-economic changes occurring in the economy, such as disposable income, standard of living, level of education, etc. Financial services institutions must be proactive in nature and evolve new services by visualizing the expectations of the market Present Scenario The Indian economy is in the process of rapid transformation. Reforms ate taking place in every field / part of economy. Hence financial services sector is also witnessing changes. The present scenario can be explained in following terms

FINANCIAL SERVICES
Negotiations on financial services in the WTO are due to start in early April 1997, to intensify in November and to end in December 1997. Participants hope to improve upon the package of market-openingSee footnote 1 commitments agreed in July 1995, and to apply these commitments equally, without discrimination, among all their trading partners. This would continue the process of progressive liberalisation that is one of the stated objectives of the General Agreement on Trade in Services (GATS).

The present package, involving about 30 countries, already represents an improvement over the commitments in financial services made in Marrakesh in 1994 at the end of the Uruguay Round. The objectives of next year's talks are to make further progress, to bring the United States into the improved package, and for all countries to make their commitments non-discriminatory. At the same time, some technical issues such as definitions of types of financial services have to be sorted out, although no deadline has been set for completing work on these. Background Financial services _ banking, securities business, insurance, asset management, etc _ is one of three service sectors whose market-opening negotiations were not completed during the Uruguay Round. Like the other two (basic telecommunications and marine transport), it is a large and important sector in its own right and it is essential for the smooth and efficient functioning of all trade in goods and services. The sector is estimated to involve $1.2 trillion per day in foreign exchange transactions. International financing extended by banks around the world reporting to the Bank for International Settlements is estimated at $6.4 trillion, including $4.6 trillion net international lending. Total world banking assets are put at more than $20 trillion, insurance premiums at $2 trillion, stock market capitalization at over $10 trillion and market value of listed bonds at around $10 trillion.See footnote 2 In addition, practically every international trade deal in goods or services requires credit, capital, foreign exchange and insurance. For negotiators, financial services also have their own special characteristics and requirements. Participants in the negotiations want to see more competition in the sector both to allow their companies greater opportunities abroad, and to encourage greater efficiency. Developing countries need the capital and financial infrastructure for their development. But governments also have to ensure that the system is sound and stable because of the economic shocks that can be caused if exchange rates, interest rates or other market conditions fluctuate excessively. They also have to avoid economic crisis caused by banks' failures. Therefore government intervention in the interests of prudential safeguards is an important condition underpinning financial market liberalisation. During the Uruguay Round, the basic principles for negotiating and implementing liberalisation were agreed. The GATS deals with principles applied to all service sectors. A special GATS annex handles some of the issues arising from the special characteristics of financial services. For example, governments, central banks or other authorities have to implement effective monetary policy. They have to regulate the sector prudently in order to protect investors and depositors and to avoid financial crises, and sometimes to ensure confidentiality. The annex guarantees their rate to take prudential measures for these purposes. Many countries included financial services in their tables (or "schedules") of individual market-opening commitments in services, signed at the end of the round.

But the negotiations were incomplete and participants decided to continue talks in order to improve the financial services market-opening package. They set themselves the deadline of June 30, 1995 _ 15 months after the Uruguay Round agreements were signed in Marrakesh and six months after the agreements took effect _ to conclude the negotiations. This deadline was later extended by another four weeks to July 28, 1995. At the end of the extended negotiations, the United States concluded that offers submitted by many of its important trading partners were inadequate. The US therefore announced that its own offers would not apply to newcomers to its markets or to new activities of foreign financial companies operating in the US. This meant that the US would not apply the principle of non-discrimination between trading partners (known as "most favoured nation" or MFN and set out in Article 2 of the GATS) for these activities. In the light of the US position, the remaining participants agreed to a proposal from the European CommunitiesSee footnote 3 to implement their best offers until 1 November 1997. The most favoured nation principle of non-discrimination between trading partners would also apply to all WTO members. During a period of 60 days after that date, governments would again have an opportunity to change or withdraw their commitments. The principles of this agreement are set out in the "Second Protocol to the GATS". Altogether, 29 participantsSee footnote 4 (counting the European Communities as one) agreed to sign the protocol. They all submitted revised tables ("schedules") of market access commitments, and 13 of themSee footnote 5 also submitted revised lists of exemptions from the most favoured nation principle. In addition, three _ Colombia, Mauritius and the United States _ also submitted revised commitments or MFN exemption lists, or both, but they did not participate in the protocol. Including the countries that made commitments in the original Uruguay Round package and new members, 81 schedules from 95 members (this time, counting the European Communities as 15 members) have been submitted in financial services (as of 1 December 1996). This is more than in any other services sector except for tourism. In 1996 Because of the time needed to have the commitments ratified or approved domestically, participants agreed that the Second Protocol (which sets out the agreement reached in 1995) should be signed by June 30, 1996. This deadline for signing was later extended to November 30, 1996. The countries that signed the protocol by June 30, agreed that the protocol should take effect from September 1, 1996. It was expected that all or almost all of the 29 would sign by the November 30 deadline. The nature of financial services is changing rapidly, so that commitments need to be interpreted carefully. Two issues the Committee on Trade in Financial Services has discussed in 1996 are the distinction between two methods (in GATS officially known as "modes") of providing services _ services supplied across borders, and the consumption of services abroad _ and appropriate classification of various types of financial services.

Members hope that the discussion of these issues will help with the interpretation of existing commitments and assist future negotiations. What are financial services? During the Uruguay Round, participants listed the following activities as financial services: Insurance and related services: life and non-life insurance services; reinsurance and retrocession; insurance intermediation, such as broking and agency services; services auxiliary to insurance. Banking and other financial services (excluding insurance): acceptance of deposits; lending of all types including consumer credit, mortgage credit, factoring and financing of commercial transactions; financial leasing; all payment and money transmission services; guarantees and commitments; trading in money market instruments, foreign exchange, derivatives, exchange rate and interest rate instruments such as swaps and forward rate agreements, securities, other negotiable instruments and other assets such as gold; participation in issues of new securities; money broking; asset management such as portfolio management or pension fund management; settlement and clearing services for financial assets; provision and transfer of financial information and financial data processing; advisory and other auxiliary financial services. What has been committed? Because the commitments vary so widely, it is difficult to summarise in precise terms what they mean. But there are some common trends. In many countries, more foreign banks, securities firms and insurance companies are being allowed to operate, although various conditions may be attached and numbers can be limited. More banking, securities and insurance services can be conducted across borders by companies set up in one country supplying services to customers in another. More asset management and other financial services can be provided by wholly or partly foreign owned companies. That also means that companies ready to provide services abroad now have more opportunities to do so. For those already present in overseas markets, many find the conditions under which they do business to be improved and that they can offer more new services. As a result, developing countries can benefit from inflows of capital and financial expertise brought in by foreign investors. Emerging markets will grow in both volume and scope as foreign investment is attracted to those markets. The commitments include, in many cases, improvements in the number of licences available for the establishment of foreign financial institutions; guaranteed levels of foreign equity participation in subsidiaries or affiliates of banks, insurance companies and other financial institutions; removal or liberalisation of nationality or residency requirements for members of the boards of financial institutions; and the participation of foreign-owned institutions in asset management and other financial services such as clearing and settlement services. While the emphasis in the schedules of commitments is on opening up

markets and binding entry conditions, the WTO services agreement recognises the need for adequate prudential regulation of all banking, securities and insurance service providers. Selected Glossary Some of the terms that frequently appear in documents on financial services: binding Commitment under modes of delivery How GATT or GATS to keep market international trade in open or (in the case of GATS) services is supplied and to provide national treatment, consumed. Mode 1: Cross specifying maximum level of border supply. Mode 2: trade barriers. Requires Consumption abroad. Mode negotiation and possibly 3: Foreign commercial compensation if a trade barrier presence. Mode 4: is to be raised beyond the Movement of natural bound ceiling. persons. protocols Extra agreements attached to the GATS. The Second Protocol deals with the 1995 commitments in financial services. The Third Protocol deals with the movement of natural persons, an issue that also has an impact on financial services.

prudential An objective of GATS General Agreement on national treatment Non- market regulation by financial Trade in Services discrimination between authorities: to protect investors one's own nationals and and depositors, to avoid MFN Most Favoured Nation: foreigners. Set out in Article instability or crises. 17 of the GATS. basic non-discrimination between trading partners (each schedule ("schedule of specific partner is given the same rights offer A country's proposal commitments") List of a as any other "most favoured for binding its market country's market access and (in nation") Set out in Article 2 of access and national the case of GATS) national the GATS. treatment levels. treatment bindings.