SCENARIO OF FOREIGN BANK IN INDIA

Project on:

SCENARIO OF FOREIGN BANKS IN INDIA

Submitted By-

ASHWINI PAWAR.
MCOM-II BANKING ! FINANCE" RO## NO: -$% &$'(-&$')

Submitted *o-

+NI,ERSI*- OF M+MBAI

Project Guide:

Pro./ Arc01n1 N1ir/

VPMs K.G. Joshi College of Arts & N.G. Bedek r !ollege of !o""er!e C0end1ni bunder ro1d2 *01ne 3" - )$$4$' *e5: &%((&)'&

SCENARIO OF FOREIGN BANK IN INDIA

ACKNOWLEDGEMENT

First and foremost, I would like to thank Almighty god for energy, strength, guidance and help that has always been with me throughout my work.

While presenting this project at this project at this juncture, I feel deeply obliged to our Mumbai Uni ersity for pro iding me with an opportunity to do this project.

!his project could not ha e seen light of the day without the inspiring " e#hortati e support of our principal, coordinator and professors beacon in the dark.

$ast but not the least% I am thankful to all my friends and colleagues for their moral support and encouragement.

!o sum up I would like to thank all those who ha e helped me in some or other way in successfully completing this project. It has been a warming e#perience for me, which will surely help me in the future.

SCENARIO OF FOREIGN BANK IN INDIA

DECLARATION

I Ashwini &awar the student of 'oshi (edekar college presently studying in M)*M+II (A,-I,. " FI,A,)/ hereby declare that I ha e completed the project on 01cenario *f Foreign (anks In India 2 in the academic year 3456+3457. !he information submitted is true and original to the best of my knowledge.

1I.,A!U8/,

(ASHWINI PAWAR.) ROLL NO.05

SCENARIO OF FOREIGN BANK IN INDIA

Index 1r. ,o.

5 3

!opic
I,!8*9U)!I*, !* (A,-1 I,!8*9U)!I*, !* F*8/I., (A,-1

&g. ,o. : ; 54 55 34 35 3>

6 7 : > ?

<I1!*8= *F F*8/I., (A,-1 .UI9/$I,/1 F*8 &8/1/,)/ *F F*8/I., (A,-1 I, I,9IA FU,)!I*,1 *F F*8/I., (A,-1 8*$/ *F F*8/I., (A,-1 I, I,9IA

/FF/)!1 *F F*8/I., (A,-1 *, I,9IA, /)*,*M= ; &/8F*8MA,)/ *F F*8/I., (A,-1

3? 65 63 67 6> 6;

@ 54 55 53 56

)*M&/!I!I*, F8*M F*8/I., (A,-1 1<*8!FA$$1 I, W*8-I,. *F F*8/I., (A,-1 W<= A8/ F*8/I., (A,-1 /,!/8I,. I,9IAA FU!U8/ *F F*8/I., (A,-1 I, I,9IA

)*,)$U1I*,1

SCENARIO OF FOREIGN BANK IN INDIA

C6AP*ER ' IN*ROD+C*ION *O BANK
0(anking2 means the accepting, for the purpose of lending or in estment, of the deposits of money from the public, repayable on demand or otherwise, and withdraw able by cheBue, draft, order or otherwise. A (ank is a financial institution that ser es as an intermediary. It is a profit seeking (usiness firm dealing in money and credit. It is a financial institution dealing in the money in the sense, that it accepts deposits of money from the public to keep them in its custody for safety. 1o, also, it also deals in credit, i.e. it creates credit by making ad ances out of funds recei ed as deposits to needy people. It thus, functions as mobiliCe of sa ings in the economy. )ommercial (anks are the main important sources of institutional credit in the money market. A (ank is therefore, like a reser oir into which flow the sa ings, the idle surplus money of households and from which loans are gi en on interest to businessmen and others who need them for in estment or producti e uses. A (ank is an important institution of the money market as it gi es short+term loans to its customer (anks pro ide an array of ser ices and benefits such as checking accounts and sa ings accounts, credit cards, A!M machines, home loans, business loans, and eBuity lines of credit. (anks are in business to offer general ser ices to indi iduals, corporations, and to other businesses, whether the business is large or small.

SCENARIO OF FOREIGN BANK IN INDIA

IN*ROD+C*ION *O BANKING SEC*OR
!he Indian (anking system has a large geographic and functional )o erage. &resently the total asset siCe of the Indian (anking sector is U1D 3?4 billion while the total deposits amount to U1D 334 (illion with a branch network e#ceeding >>,444 branches across the country. 8e enues of the (anking sector ha e grown at > percent )A.8 o er the past few years to reach a siCe of U1D 5: billion. While commercial (anks cater to short and medium term financing reBuirements, national le el and state le el financial institutions meet longer+term reBuirements. !his distinction is getting blurred with commercial (anks e#tending project finance. !he total disbursements of the financial institutions in 3445 were U1D 57 billion. In India the (anking sector is segregated as public or pri ate sector (anks, cooperati e (anks and regional rural (anks. Foreign (anks has been gi en a different head followed by upcoming foreign (anks in this section (anking today has transformed into a technology intensi e and customer friendly model with a focus on con enience. !he sector is set to witness the emergence of financial supermarkets in the form of uni ersal (anks pro iding a suite of ser ices from retail to corporate (anking and industrial lending to in estment (anking. While corporate (anking is clearly the largest segment, personal financial ser ices is the highest growth segment. !he recent fa orable go ernment policies for enhancing limits of foreign in estments to 7@ per cent among other key initiati es ha e encouraged such acti ity. $arger (anks will be able to mobiliCe sufficient capital to finance asset e#pansion and fund. !oday, (anks ha e di ersified their acti ities and are getting into new products and ser ices that include opportunities in credit cards, consumer finance, wealth management, life and general insurance, in estment (anking, mutual funds, pension fund regulation, stock broking ser ices, custodian ser ices, pri ate eBuity, etc. Further, most of the leading Indian (anks are going global, setting up offices in foreign countries, by themsel es or through their subsidiaries. /mployment 1cenario in the (anking 1ector. As reported in the /conomic !imes, the countryEs leading public sector (ank, 1tate (ank of India has plans to recruit 3:,444 employees in the year 344@. (esides, its life insurance enture, 1(I $ife, has plans to hire 56,444 agents and 344 sales managers. Also, &unjab ,ational (ank, the countryFs second largest public sector lender, and Union (ank of India ha e plans of hiring :,444 people each. !he financial year 344;+4@ has already shown the (anking sector to be among the largest job pro iders in the country with o er :4,444 acancies being notified and filled up in the public sector (anks alone.

SCENARIO OF FOREIGN BANK IN INDIA

C6AP*ER & IN*ROD+C*ION *O FOREIGN BANK
!he foreign banks in India are slowly but steadily creating a niche for themsel es. With the globaliCation hitting the world, the concept of banking has changed substantially o er the last couple of years. 1ome of the foreign banks ha e successfully introduced latest technologies in the banking practices in India. !his has made the banking business in the country more smooth and interesting for the customers. After the set up foreign banks in India the banking sector in India has also become competiti e andaccurti e. !he concept of foreign banks in India has changed the pre ailing banking scenario in the country. !he banking industry is now more competiti e and customer+friendly than before. !he foreign banks ha e brought forth some inno ations and changes in the banking industry of the country. !he 8eser e (ank of India G8(IH is the supreme monetary authority of the country and tops the entire banking hierarchy. !he scheduled banks under the authority of 8eser e (ank of India are further categoriCed into two segments + commercial banks and co+operati e banks. !he commercial banks are then again subdi ided into two classes + pri ate sector banks and public sector banks. In the year 5@@7, the .o ernment of India allowed the new pri ate banks to operate in the country and this changed the face of banking in the country. According to the new rules set by 8eser e (ank of India in the new budget, some decisions regarding foreign banks in India ha e been taken. !he steps taken by the central monetary authority pro ide some e#tent of liberty to the foreign banks and they are hopeful to grow unshackled. !he foreign banks in India are now allowed to set up local subsidiaries in the country. !he policy also states that the foreign banks are not allowed to acBuire any Indian bank unless the Indian bank is listed as a weak bank by the 8(I. !he Indian subsidiaries of the foreign banks are not allowed to open branches freely in the country. 1tandard )harted (ank, the oldest foreign bank that came to India 5:4 years ago, that is in the year 5;:; and is also the first foreign bank in India now operates ma#imum number of branches i.e. @>. It is followed <1() which entered in 5;>? with :4 branches. &resently there are 6? G'une 64, 3455H foreign banks in India with 634 branches. $ist of foreign bank in India as *n 'une 64th 3455 isI+

SCENARIO OF FOREIGN BANK IN INDIA

Sr/no/ 5 3 6 7 : > ? ; @ 54 55 53 56 57 5: 5> 5? 5; 5@ 34 35 33 36 37 3: 3> 3? 3; 3@ 64 65 63 66 67 6: 6> 6?

N1me O. B1n7 A( (ank $td. !he 8oyal (ank *f 1cotland Abu 9habi )ommercial (ank $td. American /#press banking )orporation Antwerp 9iamond (ank , J (ank Internasional Indonesia (ank *f America (ank *f (ahrain" -uwait (1) (ank *f )eylon (ank *f ,o a 1cotia (arclays (ank &Ic. (,& &aribas )redit Agricole )orporate " In estment (ank )hinatrust )ommercial bank )itibank , A 9(1 (ank $td 9eutsche (ank <1() $td. ' & Morgan )hase (ank , A '1) J!( (ank -rung !hai (ank &ublic )o. $td MashreB (ank &1) MiCuho )orporate (ank $td. *man International (ank 1A*. 1hinhan (ank 1ociete .enerale 1onali (ank $td. 1tandard )harted (ank 1tate (ank *f Mauritius !he (ank *f !okyo+Mitsubishi UF' $td. U(1 A. First 8and (ank $td. United * erseas (ank $td. )ommon Wealth (ank *f Australia 1berbank )redit 1uisse A . Australia " ,ew Kealand (anking .roup $td. !otal ,o. of (ranches

Country O. Incor8or1tion (angladesh ,etherland UA/ U1A (elgium Indonesia U1A (ahrain 1ri $anka )anada United -ingdom France France !aiwan U1A 1ingapore .ermany <ong -ong U1A 8ussia !hailand UA/ 'apan 1ultanate of *man 1outh -orea France (angladesh United -ingdom Mauritius 'apan 1witCerland 1outh Africa 1ingapore Australia 8ussia 1witCerland Australia

No/ o. br1nc0e9 in Indi1 5 65 3 5 5 5 : 3 5 : 54 ; > 5 73 53 5> :4 5 5 5 3 3 3 6 3 3 @> 6 6 5 5 5 5 5 5 5 634

8

SCENARIO OF FOREIGN BANK IN INDIA

C6AP*ER ( 6IS*OR- OF FOREIGN BANKS
(anking in India started with setting up two banks in last decade of 5; th century. !he banks were !he .eneral (ank of India G5?;>H and (ank of <industan G5?@4H both of them are known defunct. !hen came bank of )alcutta G'une 5;4>H which finally became 1tate (ank of India. !he Allahabad bank established in 5;>: and still functioning today is the oldest joint stock bank still functioning in India. At the time of bank nationaliCation in 5@>@, the entry of foreign banks in Indian was banned. !he (an was howe er lifted in 5@;4.!he (ank of !okyo, the chartered (anks, the first ,ational )ity (ank *f ,ew =ork, the .rind lays (ank, !he $loyds (ank, !he Mercantile (ank In India, etc. are some of the prominent foreign banks which are presently operating in India Foreign banks too started to arri e, particularly in )alcutta, in the 5;>4s. !he )omptoire dE/scompte de &aris opened a branch in )alcutta in 5;>4, and another in (ombay in 5;>3% branches in Madras and &ondicherry, then a French colony, followed. <1() established itself in (engal in 5;>@. )alcutta was the most acti e trading port in India, mainly due to the trade of the (ritish /mpire, and so became a banking center. 1tandard )harted (ank started its operation in 5;:; and citi bank opened its branch in India in 5@43. 1imilarly <ong -ong and 1hanghai (anking )orporation started functioning in India since 5@:6. <owe er globaliCation and economic policies were implemented in late 5@;4Es. Which encouraged many international banks to open there branches in India. At present almost all the international banks are operating in India. At the end+March 5@;?, there were 35 foreign banks with 56> branches in India. 9uring 5@>4+ ;4, the total assets of foreign banks ha e increased o er fi e times from 81.755.7 corers to 8s.3, 3>5.4 corers. In 5@;4, their assets growth rate was 33.: percent as against 7 percent in 5@>:.Initially these banks were started merely to finance IndiaEs foreign trade. As on 'une 64th 'une 3455 there are 6?.

SCENARIO OF FOREIGN BANK IN INDIA

C6AP*ER ) G+IDE#INES FOR PRESENCE OF FOREIGN BANKS IN INDIA

!he guidelines for setting up of wholly owned subsidiary by foreign banks and con ersion of e#isting branches of foreign banks into wholly owned subsidiary are gi en belowI+ '" GENERA# RE:+IREMEN*S aH Foreign banks applying to the 8(I for setting up a W*1 in India must satisfy 8(I that they are subject to adeBuate prudential super ision in their home country regulator% the 8(I will ha e regard to the (asel standards bH !he setting up of a wholly+owned banking subsidiary in India should ha e the appro al of the home country regulator. cH *ther factors Gbut not limited toH that will be taken into account while considering the application are gi en belowI /conomic and political relations between India and the country incorporation of the foreign bank Financial soundness of the foreign bank *wnership pattern of the foreign bank International and home currency ranking of the foreign bank 8ating of the foreign bank by international rating agencies International presence of the foreign bank. CAPI*A#:-

aH !he minimum start+up capital reBuirement for a W*1 would be 8s. 6 billion and the W*1 shall be reBuired to maintain a capital adeBuacy ratio of 54 percent or as may be prescribed from time to time on a continuous basis, from the commencement of its operations. bH !he parent foreign bank will continue to hold 544 percent eBuity in the Indian subsidiary for a minimum prescribed period of operation. CORPORA*E GO,ERNANCE:-

aH ,ot less than :4 percent of the directors should be Indian nationals resident in India. bH ,ot less than :4 percent of the directors should be non+e#ecuti e directors

10

SCENARIO OF FOREIGN BANK IN INDIA

cH A minimum of one+third of the directors should be totally independent of the management of the subsidiary in India, its parent or associates. dH !he directors shall conform to the LFit and &roperE criteria as laid down in 8(IEs e#tant guidelines dated 'une 3:, 3447. eH 8(IEs appro al for the directors may be obtained as per the procedure adopted in the case of the erstwhile $ocal Ad isory (oards of foreign bank branches. ACCO+N*ING2 PR+DEN*IA# NORMS AND O*6ER RE:+IREMEN*S:-

aH !he W*1 will be subject to the licensing reBuirements and condition, broadly consistent with those for new pri ate banks. bH !he W*1 will be treated on par with the e#isting branches of foreign banks for branch e#pansion. !he 8eser e (ank may also prescribe market access and national treatment limitation consistent with international practices and the countryEs reBuirements. cH !he banking subsidiary will be go erned by the pro isions of the )ompanies Act, 5@:>, (anking 8egulation Act, 5@7@, 8eser e (ank *f India Act, 5@67, other rele ant status and the directi es, prudential regulations and other guidelinesMinstructions issued by 8(I and other regulators from time to time. CAPI*A# RE:+IREMEN*S:-

aH !he minimum net worth of the W*1 on con ersion would not be less than 8s. 6 billion and the W*1 will be reBuired to maintain a minimum capital adeBuacy ratio of 54 percent of the risk weighted assets or as may be prescribed from time to time on a continuous basis. While reckoning the minimum net worth the local a ailable capital including remittable surplus retained in India, as assessed by the 8(I will Bualify. bH 8eser e (ank will cause an inspectionMaudit to assess the financial position of the financial position of the branches operating in India and arri e at the aggregate net worth of the branches. 8(IEs assessment of the net worth will be final.

11

SCENARIO OF FOREIGN BANK IN INDIA

&" ROAD MAP FOR PRESENCE OF FOREIGN BANKS IN INDIA !he banking sector in India is robust and its standards are broadly in conformity with international standards. In further enhancing its efficiency and stability to the best global standards a two+track and gradualist approach will be adopted. *ne track is consolidation of the domestic banking system in both public and pri ate sectors. !he second track is gradual enhancement of the presence of foreign banks in a synchroniCed manner. !he policy decisions announced on March :, 3447 on F9I, FII and the presence of foreign banks will be implemented in a phased manner. !his will also be synchroniCed with the two+track approach and will be consistent with IndiaEs commitments to the W!*. In this background, the road map for the implementation of the policy decisions is as followsI P019e I: M1rc0 &$$% to M1rc0 &$$;" ,ew banks N first time presence

Foreign banks wishing to establish presence in India for the first time could either choose to operate through branch presence or set up a 544O wholly owned subsidiary GW*1H, following the one+mode presence criterion. G!he guidelines are in the Anne#H. /#isting banks N (ranch e#pansion policy

For new and e#isting foreign banks, it is proposed to go beyond the e#isting W!* commitment of 53 branches in a year. !he number of branches permitted each year has already been higher than the W!* commitments. A more liberal policy for under banked areas will be followed. (ranch licensing procedure will continue to be as per current practice. )on ersion of e#isting branches to Wholly *wned 1ubsidiaries

In the first phase, foreign banks already operating in India will be allowed to con ert their e#isting branches to W*1 while following the one+mode presence criterion. G!he guidelines on con ersion of e#isting branches into W*1 are in the countryFs reBuirements. AcBuisition of 1hareholding in 1elect Indian &ri ate 1ector (anks

In order to allow Indian (anks sufficient time to prepare themsel es for global competition, initially entry of foreign banks will be permitted only in pri ate sector &olicy and &romotion. (anks that are identified by 8(I for restructuring. In such banks, foreign banks would be allowed to acBuire a controlling stake in a phased manner.

12

SCENARIO OF FOREIGN BANK IN INDIA

In considering an application made by a foreign bank, for acBuisition of : O or more in the pri ate bank, 8(I will take into account the standing and reputation of the foreign bank, globally as well as in India, and the desired le el and nature of presence of the foreign bank in India. 8(I may, if it is satisfied that such in estment by the foreign bank concerned will be in the long+term interest of all the stakeholders in the in estee bank, permit acBuisition of such percentage as it may deem fit. !he 8(I may also specify, if necessary, that the in estor bank shall make a minimum acBuisition of 5: per cent or more and may also specify the period of time for such acBuisition. !he o erall limit of ?7 per cent will be applicable. Where such acBuisition is by a foreign bank already ha ing presence in India, a time bound plan co ering a period not e#ceeding si# months to conform to the Fone form of presenceF concept will ha e to be submitted by the foreign bank along with the application for acBuisition. Appropriate amending legislation will be proposed to the (anking 8egulation Act, 5@7@, in order to pro ide that the economic ownership of in estors is reflected in the oting rights. 1imultaneous amendments will be proposed to pro ide for regulatory appro als from the 8(I. P019e II: A8ri5 &$$; According Full ,ational !reatment to Wholly *wned 1ubsidiaries of Foreign (anks

In the second phase, the remo al of limitations on the operations of the W*1 and treating them on par with domestic banks to the e#tent appropriate will be designed and implemented after re iewing the e#perience with &hase I and after due consultations with all stakeholders in the banking sector. 9ilution of 1take in Wholly *wned 1ubsidiaries

In this phase, the W*1 of foreign banks on completion of a minimum prescribed period of operation will be allowed to list and dilute their stake so that at least 3> per cent of the paid up capital of the subsidiary is held by resident Indians at all times consistent. !he dilution may be either by way of Initial &ublic *ffer or as an offer for 1ale. Mergers and AcBuisition of any &ri ate 1ector (ank in India

In the second phase, after a re iew is made with regard to the e#tent of penetration of foreign in estment in Indian banks and functioning of foreign banks, foreign banks may be permitted, subject to regulatory appro als and such conditions as may be prescribed, to enter into merger and acBuisition transactions with any pri ate sector bank in India subject to the o erall in estment limit of ?7 percent.

13

SCENARIO OF FOREIGN BANK IN INDIA

(" PROPOSED FRAME<ORK FOR PRESENCE OF FOREIGN BANKS

IN INDIA
!here are currently 67 foreign banks operating in India as branches. !heir balance sheet assets, accounted for about ?.>: percent of the total assets of the scheduled commercial banks as on March 65, 3454 as against @.46 per cent as on March 65, 344@. In case, the credit eBui alent of off balance sheet assets are included, the share of foreign banks was 54.:3 per cent of the total assets of the scheduled commercial banks as on March 65, 3454, out of this, the share of top fi e foreign banks alone was ?.53 per cent. !he policy on presence of foreign banks in India has followed two cardinal principles of GiH 8eciprocity and GiiH 1ingle Mode of &resence. !hese principles are independent of the form of presence of foreign banks. !herefore, these principles should continue to guide the framework of the future policy on presence of foreign banks in India. Following factors seem rele ant for any framework for future policy on presence of foreign banks in IndiaI &rima facie the branch mode of presence of foreign banks in India pro ides a ring+fenced structure as there is a reBuirement of locally assigned capital and capital adeBuacy reBuirement as per (asel 1tandards. )ertain pro isions of the (8 Act5 also delineate the separate legal identity of branches of foreign banks in India. Further, under section :;7 of the )ompanies Act, though the company incorporated outside India is dissol ed, if it has ceased to carry on the business in India, it may be wound up as an unregistered company. <owe er, e#cept for the assets specifically ring+fenced under 1ection 55G7H of the (8 Act, the claim of domestic depositors and creditors o er other assets is yet to be legally tested. -eeping the abo e in iew, on balance, the subsidiary model has clear ad antages o er the branch model despite certain downside risks. <owe er, under the e#tant policy as laid down in 344: 8oadmap, no foreign bank has approached 8(I, for setting up a subsidiary, may be due to lack of incenti es. <ence there may be a need to incenti iCe subsidiary form of presence of foreign banks. While deciding the approach towards con ersion of e#isting foreign bank branches, IndiaEs commitments to W!* will ha e to be kept in mind. It may not, therefore, be possible to mandate con ersion of e#isting branches into subsidiaries. <owe er, the regulatory e#pectation would be that those foreign banks which meet the conditions and thresholds mandated for subsidiary presence for new entrants or which become systemically important by irtue of their balance sheet siCe would oluntarily opt for con erting their branches into W*1 in iew of the incenti es proposed to be made a ailable to W*1. !he branch e#pansion of both the e#isting foreign banks and the new entrants present in the branch mode would be subject to the W!* commitments.

14

SCENARIO OF FOREIGN BANK IN INDIA

)" #ICENSING OF FOREIGN BANKS India issues a single class of banking license to banks and hence does not place any undue restrictions on their operations merely on the ground that in some countries there are reBuirements of multiple licenses for dealing in local currency and foreign currencies with different categories of clientele. (anks in India, both Indian and foreign, enjoy full and eBual access to the payments and settlement systems and are full members of the clearing houses and payments system. &rocedurally, foreign banks are reBuired to apply to 8(I for opening their branches in India. Foreign banksE application for opening their maiden branch is considered under the pro isions of 1ec 33 of the (8 Act, 5@7@. (efore granting any license under this section, 8(I may reBuire to be satisfied that the .o ernment or the law of the country in which it is incorporated does not discriminate in any way against banks from India. *ther conditions as enumerated are reBuired to be fulfilled. Unlike the restricti e practices of certain foreign countries, India is liberal in respect of the licensing and operation of the foreign bank branches as illustrated by the followingI

India issues a single class of banking license to foreign banks and does not place any limitations on their operations. All banks can carry on both retail and wholesale banking. 9eposit insurance co er is uniformly a ailable to all foreign banks at a non+discriminatory rate of premium. !he norms for capital adeBuacy, income recognition and asset classification are by and large the same. *ther prudential norms such as e#posure limits are the same as those applicable to Indian banks.

%" OPENING OF BRANC6ES IN INDIA B- FOREIGN BANKS !he policy for appro ing foreign banks applications to open maiden branch and further e#pand their branch presence has been incorporated in the L8oadmap for presence of Foreign banks in IndiaE indicated in the &ress 8elease dated February 3;, 344: as well as in the liberaliCed branch authoriCation policy issued on 1eptember ;, 344:. !he branch authoriCation policy for Indian banks has been made applicable to foreign banks subject to the followingI

Foreign banks are reBuired to bring an assigned capital of U1 D3: million up front at the time of opening the first branch in India. /#isting foreign banks ha ing only one branch would ha e to comply with the abo e reBuirement before their reBuest for opening of second branch is considered. Foreign banks may submit their branch e#pansion plan on an annual basis.
15

SCENARIO OF FOREIGN BANK IN INDIA

In addition to the parameters laid down for Indian banks, the following parameters would also be considered for foreign banks I Foreign banks and its groupEs track record of compliance and functioning in the global markets would be considered. 8eports from home country super isors will be sought, where er necessary. Weight age would be gi en to e en distribution of home countries of foreign banks ha ing presence in India. !he treatment e#tended to Indian banks in the home country of the applicant foreign bank would be considered. 9ue consideration would be gi en to the bilateral and diplomatic relations between India and the home country. !he branch e#pansion of foreign banks would be considered keeping in iew IndiaEs commitments at World !rade *rganiCation GW!*H. $icenses issued for off+site A!Ms installed by foreign banks are not included in the ceiling of 53.

In terms of IndiaEs commitment to W!*, as a part of market access, India is committed to permit opening of 53 branches of foreign banks e ery year. As against these commitments, 8eser e (ank of India has permitted up to 5?+ 5; branches in the past. !he (ank follows a liberal policy where the branches are sought to be opened in unbankedMunder+banked areas. *ff+site A!Ms are not counted in the abo e limit. Including off+site A!Ms, foreign banks are ha ing G as on *ctober 5:, 344?H place of business at @66 locations G 3?6 branches P >>4 off site A!MsH. !he procedure regarding appro al of proposals for opening branches of foreign banks in India has been simplified and streamlined for the sake of e#peditious disposal. A license under the pro isions of (.8. Act, 5@7@ enables the foreign banks to carry out any acti ity which is permissible to a bank in India. !his is in contrast with practices adopted in many countries, where foreign banks can carry out only a limited menu of acti ities. As against the reBuirements of achie ing 74 per cent of net bank credit as target for lending to priority sector in case of domestic banks, it has been made mandatory for the foreign banks to achie e the minimum target of 63O of net bank credit for priority sector lending. Within the target of 63O, two sub targets in respect of ad ances GaH to small scale sector Gminimum of 54OH, and GbH e#ports Gminimum of 53OH ha e been fi#ed. !he foreign banks are not mandated for targeted credit in respect of agricultural ad ances. !here is no regulatory prescription in respect of foreign banks to open branches in rural and semi+urban centers.

4" BRANC6 E=PANSION B- FOREIGN BANKS IN INDIA

16

SCENARIO OF FOREIGN BANK IN INDIA

With a iew to creating an en ironment for encouraging foreign banks to set up W*1, a less restricti e branch e#pansion policy, though not at par with domestic banks may be en isaged. Accordingly, differentially fa orable treatment to W*1 of foreign banks as compared to the branches of other foreign banks may be put in place on the grounds of regulatory comfort that subsidiaries would pro ide. !herefore, with a iew to incenti iCe setting up of W*1Mcon ersion of foreign bank branches into W*1, it is proposed that the branch e#pansion policy as applicable to domestic banks as on 'anuary 5, 3454, may be e#tended to W*1 of foreign banks also. !his would mean that the W*1 would be enabled to open branches in !ier 6 to > centers e#cept at a few locations considered sensiti e on security considerations. !heir application for setting up branches in !ier 5 and !ier 3 centers would also be dealt with in a manner and on criteria similar to those applied to domestic banks. !he e#pansion of the branch net work of foreign banks in India N both e#isting and new entrants that are present in branch mode would be strictly under the W!* commitments of 53 branches or as may be modified from time to time. !he withdrawal of the current stance of permitting larger number of branches than the commitment under W!* of 53 branches each year is to incenti iCe the foreign banks with branch mode of presence to mo e to W*1 structure.

>" CORPORA*E GO,ERNANCE OF FOREIGN BANK Any global entity would manage its in estments on the basis of their assessment of the risk M return trade+off and allocate resources across arious subsidiaries. !he interest of the shareholders of the parent is the dri ing force for such decisions. )oncerns may arise when the decisions taken for a subsidiary affect domestic depositors Gand domestic shareholders, if the subsidiary is listedH. Independent board members play an important role in protecting the interests of all stakeholders. (anks must include independent directors on their boards in order to make sure that management acts in the best interest of the local institution. Independent directors
17

SCENARIO OF FOREIGN BANK IN INDIA

also ensure sufficient separation between the board of a bank and its owners to ensure that the board does not ha e unfettered ability to act in the interests of the owners where those interests di erge from those of the bank. In some countries foreign bank subsidiaries operate like branches focusing abo e all on sales, with decision making powers being locally limited and risk Nmanagement being located abroad. !o address these tendencies 8eser e (ank of ,ew Kealand reBuires locally incorporated large entities conduct substantial portion of their business in and from ,ew Kealand. As the international e#perience shows, some of the important factors to be taken into account before a foreign bank is allowed to set up a subsidiary is the commitment of its parent to support the subsidiary, the ability of the subsidiary to operate on a standalone basis e en when the parent faces crisis and also that the subsidiary is managed from the host country with most of the systems and controls residing within its jurisdiction and not managed remotely from the <ead *ffice. In order to ensure that the board of directors of the W*1 of foreign bank set up in India acts in the best interest of the local institution, 8(I may, in line with the best practices in other countries, mandate that GiH not less than :4 percent of the directors should be Indian nationals resident in India, GiiH not less than :4 percent of the directors should be non+e#ecuti e directors, GiiiH a minimum of one+third of the directors should be totally independent of the management of the subsidiary in India, its parent or associates and Gi H the directors shall conform to the LFit and &roperE criteria as laid down in our e#tant guidelines contained in 8(I circular dated 'une 3:, 3447, as amended from time to time. !his would be in line with our roadmap released in February 344:.

18

SCENARIO OF FOREIGN BANK IN INDIA

C6AP*ER % F+NC*IONS OF FOREIGN BANK FINANCING FOREIGN *RADE: !hey primarily finance IndiaEs foreign trade. !hey under take two+way operationsI+ Financing of e#ports and imports of India% and Financing of mo ement of goods from and to Indian portsMto or from the distributing or collecting centers in the interiors parts of the country. In this conte#t, they discount or purchase foreign bills

BANKING B+SINESS: !he e#change bank conducts all types of banking business. !hey accept 9eposit from the public, grant loans, discount trade bills and pro ide remittance facilities. And thus compete with Indian banks.

FINANCING IN#AND *RADE: -

!hey also finance trade in many up country centers, as they opened a number of branches in the main ports and trading centers of the country.

AGENCIES SER,ICES:

$ike other commercial banks, foreign e#change bank render se eral agencies ser ices to their customers.

MERC6AN* BANKING: -

1ome e#change bank has opened merchant banking di ision to pro ide banking ser ices. For e.g.I + !he ,ational and .rind lays banks first started merchant banking ser ices in 5@>?, followed by the first ,ational )ity banking5@?4. !he e#change banks ha e been doing a profitable business in the country. !heir financial ratio. i.e. &rofit+to Income ratio is more than double that of the Indian commercial bank. !heir high profitability may be attributed to their non+fund business, such as commission, brokerage, etc. Further they mostly finance multinational corporations, and their returns are higher. Moreo er, they minute their risk in lending also.

19

SCENARIO OF FOREIGN BANK IN INDIA

C6AP*ER 4 RO#E OF FOREIGN BANK IN INDIA

Foreign (anks in India always brought an e#planation about the prompt ser ices to )ustomers. After the set up foreign banks in India, the banking sector in India also become competiti e and accurti e. Foreign banks play a relati ely minor role in the Indian economy% this fact is rele ant right now for two reasons. First, the 8eser e (ank of India is likely to open up the Indian banking market further. !wo, the global credit crisis has shown how problems in Western banks can re erberate through financial systems in emerging markets. !he ad antages of greater foreign bank participation are clearI !hey tend to increase the efficiency of the local banking system, bring in more sophisticated financial ser ices and ha e the ability to nurse weak banks back to health. !hat underlies the case for greater freedom for foreign banks. !he credit crisis has brought the dark underside into focus. .lobal banks that boast of the best practices in the way they allocate capital and manage risks are also prone to make elementary mistakes, partly because of the imperfect nature of regulations and partly because bankers ha e per erse incenti es to be loose with other peopleEs money. ,ew rules announced by the 8eser e (ank of India for the foreign banks in India in this budget ha e put up great hopes among foreign banks which allow them to grow unfettered. ,ow foreign banks in India are permitted to set up local subsidiaries. !he policy con eys that foreign banks in India may not acBuire Indian ones Ge#cept for weak banks identified by the 8(I, on its termsH and their Indian subsidiaries will not be able to open branches freely the options for foreign banks in India ha e increased. !hey ha e much more fle#ibility ies+a+ ies the nature of their operations in India. (anks will take a choice on what option they would follow depending on their strategies and the way they operate in other markets. 1ome banks are comfortable operating as subsidiaries while some are comfortable with the merger and acBuisition route. 1ome on the other hand, may prefer to stick to the branch operation route since this would maintain a status Buo and not entail some of the additional burdens like increase priority sector lending and adhering to the )ompanies Act. !his is the route that is likely to be followed by the smaller foreign banks who are niche players in the Indian banking sector. It is really difficult to gi e an opinion about what to e#pect from the new rules for setting up subsidiaries by foreign banks. It will be up to indi idual banks to take a call on the route that they want to take. Assessment is that some of the bigger foreign banks in India, especially the ones who ha e indicated they may want to take up a 7@ per cent stake in a pri ate bank, may go in for a subsidiary. (ut the smaller foreign banks will not go in for this kind of a set+up and will prefer to continue operating the way they ha e been.
20

SCENARIO OF FOREIGN BANK IN INDIA

!he option of setting up a subsidiary will ha e its own pros and cons. It will allow foreign banks to raise subordinate debt in the local market. (ut it would also mean adhering to the pro isions of the )ompanies Act, changes in the Buantum of directed lending and in the remuneration of senior bankers in tune with guidelines of the Indian law. It will be up to indi idual banks to use the subsidiary option. <owe er, it may not affect the taking o er of 7@ per cent in an Indian pri ate sector bank. Foreign bankers are of the iew that one of the major draws for setting up a subsidiary would ha e been the ability to set up branches without reBuiring a 8eser e (ank of India G8(IH license Glike other Indian banksH, but now getting a license for a branch from the central bank has also become much easier. Foreign banks in India now, ha e three options before them. !he first, of course, is to continue as a branch operation with the necessary 8(I appro als and grow the business organically. !his option would ha e ramifications for tier+5 and tier+3 capital and they will ha e to either bring in capital or retain their profit to carry on the same le el of business. 1ome banks may decide that it is better to be a bank in this category i.e. is a better but different bank and grow its business. !he second option is to continue in India and then take a stake of 7@ per cent in a pri ate bank in India. (ut this option is not an easy option since it would entail two brands in the same country and dilute the brand eBuity. It may be a good option for a bank from outside, since it can take control of a local bank with an e#isting infrastructure. (ut the bank will ha e to take the third option is local incorporation. (ut a network will still ha e to be build since an e#isting network will not be present. (ut the bank will ha e access to capital with the choice of raising tier+3 capital in the local market like the Indian banks. Finance minister in the (udget had allowed foreign banks the option to function as a subsidiary as against a branch set up in India, which is what the foreign banks ha e at the moment. (ut foreign banks will ha e to adhere to the rules and regulations which the pri ate and state run banks follow. !he operational guidelines ha e not yet come out and the 8(I is said to be in the process of formulating the same. 1ome economists are of the iew that Foreign (anks should, not be allowed to operate in the country. (ut permission to such banks to operate in the country is una oidable on the basis of reciprocity. !his is certainly the iew of the 8eser e (ank of India, and it is justified by the success of Indian (anks operating in foreign countries. Indian (anks ha e been rapidly e#panding their o erseas operations. (etween 5@?: and 5@?;, the number of offices of Indian (anks in foreign countries had increased by 7;, from ?? to 53:.

21

SCENARIO OF FOREIGN BANK IN INDIA

!his is in contrast with the stagnant number of Foreign (ank *ffices in India. As a conseBuence, the growth of business of Indian (anks has been phenomenal as compared to that of the branches of their foreign counterparts in India. 9eposits and ad ances of Indian (anks abroad ha e increased by 57O and 5;O respecti ely, whereas the corresponding figures of Foreign (anks in India are 3;O and 64O respecti ely. In terms of remittances of the present banks also, Indian banks are ahead. In 5@?>, they remitted 8s. @4 millions to India, where their counterparts remitted 8s. ?4 millions only. Indian (anks abroad are in ol ed in many new banking acti ities. 1tate (ank of India and (ank of (aroda, the two leaders in the sphere, are raising foreign currency funds, for both pri ate and public sector concerns. In addition, these banks are funding many joint entures in 1outh /ast Asia. For instance, 1(I is funding joint entures in 1ingapore, Indonesia and Malaysia. !he (ank has arranged finances to the tune of D ?:4 million dollars we can see clearly that Indian (anks are indeed generating a lot of business o erseas. At present they are operating in as many as 3> countries of which only eight countries ha e their own bank branches in India. !hus, the Buestion of reciprocity does indeed ha e rele ance, because, if we want to seek profitable opportunities o erseas, we must be prepared to open our own gates also. In short, the operation of foreign banks in India is fully justified. It is in our own national interest.

22

SCENARIO OF FOREIGN BANK IN INDIA

C6AP*ER > AD,AN*AGES OF FOREIGN BANKS
!here is no denying the fact that the foreign banks are playing a pi otal role in Indian economy. !hey help the economy by financing the import and e#port trade of the country. !hey also recei e deposits from the public as fi#ed deposits and )urrent account deposits. !hey also gi e $oans and ad ances to the traders and (usinessmen. !hey also issue bank drafts, cheBues and Mail !ransfers to the )ustomers. Further, they also help in internal trade, by gi ing credit facilitiesQ to their customers for the procurement of raw materials for transporting goods between manufacturing and trade centers in the country. In this way, they are offering a stiff competition to the Indian commercial banks. Foreign banks ha e opened upF se eral options for the de elopiF5g countries to attain economic growth. !he achie ement of this objecti e has been made possible partly by foreign e#changes transactions. $ike e ery other facility, the foreign banks also create both ad antages and disad antages. !he ad antage is that the foreign banks help finance e#ports and imports under letter of credit, the medium of 9.A. (ills and 9.&. (ills, and by promoting internal trade. In this way they help in earning foreign e#change. As the foreign banks ha e branches in almost all the other countries of the world, they are able to maintain business links with all those countries for arious purposes. !hus, through these banks, Indian businessmen are also able to maintain their contacts with. !heir counterparts in other countries. 1o far as standard of performance is concerned foreign banks are considered toF be moreF efficient and more competent than their Indian counterparts. <owe er, one great disad antage of foreign banks is that their attitude towards Indian businessmen is discriminatory. !hese banks ha e more or less monopoliCed the financing of IndiaFs e#ternal trade through which they earn large sums of money as commission or brokerage, etc. !hey also e#tend preferential treatment to foreign institutions in the matter of grant of loans and ad ances. !hey also charge e#cessi e commission for the currencies of those countries which do not ha e their own bank branches in India. !he Indian capital in ested in these banks is misused in the sense that their capital, instead of being utiliCed for the benefit of Indian business, is used for the purchase of shares and bonds from road, thus diminishing the profit share of India. Foreign banks are reBuired to obtain license from the 8eser e (ank of India but the 8(I has failed to e#ercise an effecti e control o er these banks, with the result that these banks ha e acBuired large amounts of money in the $ondon money market, thus rendering the Indian money market ineffecti e. It will thus be seen that the foreign banks ha e played a significant role in the growth of Indian economy during the post+Independence period. (ut at the same time, it is also a fact that in
23

SCENARIO OF FOREIGN BANK IN INDIA

conditions of political and financial instability, especially in de eloping countries including India, foreign banks, with their ast resources and political in fluency abroad, can hold the national currencies and economies to .ransom. !he banking scams of the harsh ad Mehta fame could not ha e been made possible Fwithout the manipulation of foreign banks operating within the country. !he Indian commercial banks ha e neither the resources nor the freehand to finance such gigantic and scandalous transactions and deals. In the /ast+Asian countries also, when the foreign banks found the national economies in a state of confusion, they played ha oc with the economies of the host countries by suddenly withdrawing huge amounts of money from the national economies thereby engineering economic disasters in those countries. Foreign banks are ery helpful in the de elopment of India. It is necessary and desirable for us to maintain and encourage foreign balances in India to promote in estments and finance international trade. (ut we should utiliCe their loans properly in the producti e way as after economic de elopment we ha e to repay their loans in time. It in eBually important to e#ercise strict igilance and control o er their acti ities lest they should create another Indonesia or !hailand in India.

C6AP*ER ?
24

SCENARIO OF FOREIGN BANK IN INDIA

EFFEC*S OF FOREIGN BANKS ON INDIAN ECONOMForeign banks ha e brought latest technology and latest banking practices in India. !hey ha e helped made Indian (anking system more competiti e and efficient. .o ernment has come up with a road map for e#pansion of foreign banks in India. !here are arious ad antages and disad antages of ha ing foreign banks in India. 1ome of them are gi en belowI+ G5ob15i@1tion:

!he entry of foreign banks in India has made India to be at an international le el. It has gi en India an international status. !hus India is mo ing towards globaliCation. Com8etitiAene99:-

After the set up foreign banks in India, the banking sector in India also become competiti e and accurti e. Em85oyment:-

As new foreign banks are doing business in India and the number of branches of foreign banks is increasing day by day. 1o it creates job opportunities for many people. !hus it makes a lot of educated unemployed people employed. Incre19e in 9t1nd1rd o. 5iAinB:-

As foreign banks ha e created job opportunities the standard of li ing of people ha e impro ed. !hey ha e become aware of the international standards. Im8roAed tec0no5oBy:-

!he foreign banks ha e brought in new and more sophisticated technology. !his has impro ed the working of banks and the work can be now done within few seconds

25

SCENARIO OF FOREIGN BANK IN INDIA

C6AP*ER ; PERFORMANCE OF FOREIGN BANKS

,et profit to total assets ratio Greturn on assets G8*AHH across the bank groups showed that the ratio ho ered around 5 per cent for 1)(s during the period 3443+46 to 344;+4@. While &1(s and &r1(s witnessed a ratio of 4.@ per cent and 5.5 per cent, respecti ely at end+March 344@, F(s reported a higher ratio of 5.? per cent during the same year. It may be noted that the net profit to total assets ratio of F(s ho ered around 5.> per cent and were considerably higher than other bank groups during the period 3443+46 to 344;+4@ G)hart 5H. *n the income side, the interest income was the major component of the total income of 1)(s comprising more than ;4 per cent of the total income. !he bank group wise data depicted that in case of F(s the percentage of interest income in total income declined during the recent years. !his is in contrast to the trend obser ed in case of other bank groups. As at end+March 344@, while 1)(s as a whole raised ;6.; per cent of their total income through interest, F(s raised only >?.5 per cent of their total income through interest G!able 5H. !he net interest income G,IIH Gdifference between interest income and interest e#pensesH as a ratio to total assets is obser ed to be higher for foreign banks than the other bank groups, though the interest income as a per cent of total income was witnessing a declining trend in case of them. At end+March 344@, F(s as a group registered a ,II to total asset ratio of 6.@ per cent as compared with the ratio of 3.7 per cent for 1)(s as a whole. !he higher ,II for F(s indicated that either they were able to access sufficiently low cost funds or were able to deploy funds with higher returns or both.

26

SCENARIO OF FOREIGN BANK IN INDIA

*1b5e ': Intere9t Income 19 1 8er cent to *ot15 Income Gper centH -e1r 3443+46 3446+47 3447+4: 344:+4> 344>+4? 344?+4; 344;+4@ FB9 ?7.7 ?4.3 ?4.6 >@.> ?5.; >@.; >?.5 PSB9 ;6.: ?@.> ;3.? ;>.6 ;?.7 ;>.? ;>.> Ne3 PrSB9 O5d PrSB9 ?>.4 ?>.3 ?>.@ ?;.6 ?;.4 ?@.3 ;5.7 ?@.5 ?;.@ ;;.5 ;@.: ;;.4 ;?.4 ;?.5 SCB9 ;5.? ?;.: ;5.@ ;7.4 ;7.6 ;6.> ;6.;

F(s N Foreign (anks, &1(s N &ublic 1ector (anks, &r1(s N &ri ate 1ector (anks, 1)(s N1cheduled )ommercial (anks. SourceI !he 8eport on !rend and &rogress on (anking in India, arious issues. An analysis of return on funds indicated that the return on funds for F(s was higher than other bank groups. As at end+March 344@, F(s registered a return on funds at @.@ per cent as compared with the ratio of ;.: per cent registered by 1)(s. <owe er, it is important to note that new &r1(s as well as old &r1(s did ha e higher return on funds which was close to F(s G!able 3H. !his pointed to differences in cost of funds faced by different bank groups. !rends in cost of funds faced by the different bank groups indicated that the cost of funds was considerably lower for F(s as compared with other bank groups. While the cost of funds was 7.3 per cent for F(s at end+March 344@, it was :.: per cent for 1)(s as a whole.

*1b5e &: Return on Fund9 Gper centH -e1r 3446+47 FB9 ;.7 PSB9 ;.3 Ne3 PrSB9 O5d PrSB9 ?.? ;.: SCB9 ;.3
27

SCENARIO OF FOREIGN BANK IN INDIA

3447+4: 344:+4> 344>+4? 344?+4; 344;+4@ ?.6 ?.> ;.3 ;.? @.@ >.@ ?.: ?.: ;.4 ;.3 ?.6 >.> ?.7 ;.? @.: ;.4 ?.? ;.4 ;.: @.5 ?.5 ?.7 ?.> ;.3 ;.:

Note: 8eturn on funds is calculated as Ginterest on ad ances P interest on in estments HMGtotal ad ances P total in estmentsH. F(s N Foreign (anks, &1(s N &ublic 1ector (anks, &r1(s N &ri ate 1ector (anks, 1)(s N 1cheduled )ommercial (anks. SourceI !he 8eport on !rend and &rogress on (anking in India, arious issues. ,otably, new &r1(s as well as old &r1(s registered considerably higher cost of funds at end+ March 344@ !he decomposition of cost of funds of 1)(s indicated that F(s had the lowest cost of deposits of 7.6 per cent as at end+March 344@ as compared with the cost of deposits of 1)(s at :.? per cent during the same year. It may be noted that &r1(s registered the highest cost of deposits of >.6 per cent at end+March 344@. <owe er, deposits were costlier than borrowings for all bank groups including F(s. In this conte#t, it is interesting to note that the dependence of F(s on costly funds, iC., deposits was relati ely less. In contrast, deposits were the major source of funds for other 1)(s. !hus, it is clear that the lower dependence on deposits as well as access to low cost deposits enabled F(s to register higher profits than other bank groups in India

28

SCENARIO OF FOREIGN BANK IN INDIA

!his study probed the BuestionI why F(s are more profitable than other bank groups in IndiaA !he analysis in the study indicates that the access to low cost funds by F(s is the most important factor which is making a difference to the profitability of F(s is+R+ is other bank groups in India. !he cost of deposits for F(s is the lowest among the bank groups in India. <owe er, the deposits were costlier in comparison with borrowings for all the bank groups including F(s. In this conte#t, it is important to note that the dependence of F(s on deposits is relati ely lower than the other bank groups. Another major factor determining the profitability of F(s is di ersification of income achie ed by them. !he other income to total income ratio is higher for F(s than other bank groups. F(s raised almost @ per cent of their total income through net profit on e#change transactions. As a result, F(s are able to meet their entire operating e#penses through their other income. !o ascertain the determinants of &rofitability in the banking sector, the study has done a panel data regression analysis. !he regression results showed that efficiency of fund management measured as the amount of interest e#penses reBuired for generating one rupee interest income determined profits to a large e#tent. !he operating e#penses and other income are other important factors determining profitability in the banking sector. In terms of fund management and other income, F(s were well ahead of domestically owned banks in India, thus, pro iding a cue about the higher profitability of F(s in comparison with domestically owned banks. <owe er, profitability is only one factor which is important while preparing the roadmap for the presence of F(s in India. !he roadmap may take a holistic iew by considering aspects such as soundness of F(s, financial performance of their parent banks, global financial inter+linkages and also their contribution in achie ing social objecti es of banking in India.

29

SCENARIO OF FOREIGN BANK IN INDIA

C6AP*ER '$ COMPE*I*ION FROM FOREIGN BANK

!he presence of foreign banks does not imply negligence of particular sectors of the economy. In India, foreign banks are reBuired to comply with priority sector lending norms, where the commitments are lower than those applicable to domestic banks under a tailor+made structure suitable to them. !he e#perience is that foreign banks adhere to the 8eser e (ank prescriptions. .enerally, howe er, due to their limited knowledge of the local industry and branch network, foreign banks are ery conscious about their asset Buality and a major shift in the share of foreign banks may result in neglect of the credit reBuirements of small and medium+siCed businesses, whose de elopment is crucial for emerging markets, but which are percei ed as carrying relati ely higher risks. Foreign banks constantly e aluate the political, economic and financial climate in financial markets and ary their in estmentMlending decisions. While the credit risk management processes and practices ary among banks, all internationally acti e banks ha e centraliCed policies and country and transfer risk monitoring, reporting and limiting mechanisms. While the traditional scope encompassed only so ereign and transfer risk, large flows of loans to non+.54 countries commercial entities ha e induced banks to broaden the scope of country and transfer risk management to incorporate the potential default of foreign pri ate sector counterparties arising from country+specific economic factors. In response to the Asian crisis and more recent e ents, banks in India are reBuired to strengthen their country and transfer risk monitoring and analysis in an effort to identify incipient problems and to adjust e#posures more promptly and systematically. While entry of foreign banks is bound to affect the o erall competiti e situation in the market, much depends on the policy of the so ereign in regard to their entryMe#pansion, the e#isting share of domestic banks, etc. *ne of the main thrusts of the banking sector reforms in India has been to introduce more competition in the banking industry. With regard to mergers, only ery few foreign banks operating in India ha e gone through the process of global mergers. !he impact of megamergers taking place at the global le el on the competiti e position of the Indian banking system has been minor, in iew of foreign banks limited share in the financial system. At the same time, foreign banks ha e the potential, e en without megamergers, to impro e their market share, gi en their use of sophisticated technology and capability of introducing inno ati e products

30

SCENARIO OF FOREIGN BANK IN INDIA

C6AP*ER '' S6OR*FA##S IN <ORKING OF FOREIGN BANKS
Many complaints ha e been made against the functioning of the e#change bank in India. 1e eral defects ha e been noticed in the working of the e#change banks. 1ome of them ha e been stated belowI NO #EGA# RES*RIC*IONS:-

For se eral years in the past, they where no subject to legal restrictions or statutory obligations. FOREIGN DIREC*ORS:-

!heir directors, go erning bodies and shareholders were entirely foreign. INADE:+A*E CAS6 RESER,E: -

For se eral years in the past, e#change bank did not maintain adeBuate cash reser e. MONOPO#-:

!ill recently, the e#change bank enjoyed a substantial monopoly in financing foreign trade of the country. !hey e#ploited their ad antage and earned high profits. !hey also forced Indian e#porters and importers to gi e business to the foreign shipping companies, insurance companies, while accommodating them. !his restricted the scope of growth of Indian enterprises in shipping and insurance. +NFAIR COMPE*I*ION:-

!hey ha e entered into unfair competition with the Indian bank by attracting 9eposits in India by under Buoting Indian bank DIFFEREN*IA# *REA*MEN*:

/#change banks gi e differential treatment in financing the e#port trade of the country by 9MA bills Gi.e. documents against acceptanceH and the import trade by 9M& bills GGi.e. documents against paymentsH.!hey, thus discriminate between Indian and foreign firms. !hey gi e foreign importers the benefits of lower rates of interest pre ailing in the $ondon money markets, which is denied to Indian importers.

31

SCENARIO OF FOREIGN BANK IN INDIA

NO PROPER INFORMA*ION:

!hey do not pro ide any guidance information regarding foreign market, prices, etc. to the Indian e#porter. 6AMPERING *6E DE,E#OPMEN* OF INDIAN BANKS: -

(y e#tending their business from financing of foreign trade to banking in the upcountry centers, they restrict the growth of Indian commercial banks. SP#**ING *6E MONE- MARKE*: -

!he e#change bank due o their monopolistic in the financed of foreign trade ha e split the money market into /uropean and Indian. #ACK OF INDIANISA*ION:-

1till, now the e#change bank did not ha e any Indian in the higher posts, e#pects on the clerical side.

32

SCENARIO OF FOREIGN BANK IN INDIA

C6AP*ER '& <6- ARE FOREIGN BANKS EN*ERING INDIAC
Foreign banks ha e been in India for more than 5:4 years but more o erseas lenders are now Bueuing up to set up operations, amid signs that tough restrictions on entry may be eased. Fi e to eight foreign banks are seeking to come to India, a source familiar with the industry said, with the country iewed as attracti e because of gaps in the market and a buoyant economy that has created wealthier clients. 0India is in focus. It is a high+growth market,2 added AbiCer 9iwanji, head of financial ser ices at consultancy -&M. India. 0Foreign banks are building their base here, focusing on high+net+ worth clients2. (ritainEs 1tandard )hartered (ank raised D:64 million in a no el share sale through Indian 9epository 8eceipts, which gi es Indians an opportunity to get a global e#posure to banking. !he $ondon+based lender, which as !he )hartered (ank opened its first o erseas bank in the eastern city of )alcutta in 5;:;, called the fund+raising issue S which was o ersubscribed by more than double S a 0homecoming.2 AustraliaEs third+largest bank, A,K, has been gi en the go+ahead for retail and wholesale banking operations. )redit 1uisse, which already has an Indian in estment banking, wealth management and mutual fund arm, is following suit. /mbattled bank .oldman 1achs is also keen to enter India. 0India is a real market of substance,2 A,KEs chief e#ecuti e for Asia &acific, /urope and America, Ale# !horsby, has said. !he presence of foreign banks has brought changes to the way India banks. !hey were instrumental in bringing automated teller machines GA!MsH and credit cards to India. (ut they ha e still played a limited role in IndiaEs ast lending space, which has traditionally been dominated by state+run banks, mainly due to restrictions and entry barriers in place until economic liberaliCation in the early 5@@4s. *perations still cater to a niche market of wealthy clients in big cities, offering specialised products, fore# and financial transaction facilities, ad isory and wealth management ser ices. !hirty+four foreign banks are currently operating in India with )itibank, 1tandard )hartered and <1() currently accounting for ?4O of their total business.

33

SCENARIO OF FOREIGN BANK IN INDIA

In the last fi e years to March 344@, foreign banks ha e seen a net profit compounded annual growth of 3?O, led by interest and fee+based income, a report from Mumbai+based <9F) 1ecurities shows. India has concentrated on consolidating its domestic banking system o er the last fi e years but the 8eser e (ank of India says the ne#t phase of e#pansion will see foreign banksE role 0gradually enhanced in a synchroniCed manner2. A spokeswoman declined to comment on how many o erseas banks are looking to set up but said they would clear applications as they come in. !he 8(I has appro ed an a erage 5: bank+branch licenses e ery year for the past few years, which is abo e its commitment of 53 to the World !rade *rganiCation. *ne issue that could delay entry is the current trouble in the euro Cone, which could affect strategic decision+making. 0!ypically, foreign banks are dependent on the fortunes of their head office,2 said one banking analyst. Foreign banks could also face stiff competition from Indian lenders, despite the country ha ing a relati ely low penetration of financial ser ices, as more pri ate banks ha e come into the sector in the last decade. Interest margins for banks ha e been falling since 3444, according to a report by in estment bankers and securities firm /#ecution ,oble, as banks fight for market share across the board. In the decade to 1eptember 344@, pri ate banks doubled their market share to 34O, while foreign banks slipped from ;O to >O, said /#ecution ,obleEs Aditi !hapliyal.

34

SCENARIO OF FOREIGN BANK IN INDIA

C6AP*ER '( F+*+RE OF FOREIGN BANKS IN INDIA
More Foreign (anks 8ush to India, a large number of foreign banks are now keen on opening shop in India to gain a critical mass by April 344@, when pri ate banking space is e#pected F to open up for foreign players . !he latest addition to the list of foreign banks wishing to set foot in India is the 8oyal (ank of 1cotland, which has total assets of o er D;4> billion. !he sudden interest in India follows the 8eser e (ank of IndiaFs roadmap for according foreign banks greater freedom in India. 1witCerlandFs U(1, ranked the worldFs best pri ate bank by /uro Money magaCine, and has been preparing itself for India launch. Merrill $ynch and .oldman 1achs too are belie ed to be showing interest. !he 8(I roadmap said the remo al of limitations on the operations of wholly+owned subsidiaries of foreign banks and treating them on a par with domestic banks to the e#tent appropriate will be designed and implemented after re iewing the e#perience till April 344@. A totalF of 66 foreign banks are present in India and had total assets of 8s 5, 6>,65: cores G8s 56>6.5: billionH as at end+March 3447. 8oughly they account for about ? per cent of the total banking space. !he list of foreign players includes banks like )itibank, (ank of America, and (ank of ,o a 1cotia, A(,+AM8* (ank, 9eutsche (ank and '&Morgan )hase (ank, which figure in the top 3: global banks ranked by !he (anker magaCine !he other top banks like )redit 1uisse .roup, Industrial and )ommercial (ank of )hina, are still to start banking business in India. India is e#pected to find a place in the strategy of these banks gi en the countryFs growth prospects. !here ha e been cases of foreign banks closing shops in India too. 9resdner (ank and )ommerC bank fall in this category. IndiaFs .9& is seen growing at a robust pace of around ? per cent o er the ne#t few years, throwing up opportunities for the banking sector to profit from. !he credit of banks in India has risen by o er 3: per cent in 3447+4: and the growth momentum is e#pected to continue o er the ne#t few years. &articipation in the growth cur e of the Indian economy in the ne#t four years will pro ide foreign banks a launch pad for greater business e#pansion when they get more freedom after April 344@.!he foreign banks in India are slowly but steadily creating a niche for themsel es. With the globaliCation hitting the world, the concept of banking has changed substantially o er the last couple of years. 1ome of the foreign banks ha e successfully introduced latest technologies in the banking practices in India. !his has made the banking business in the country more smooth and interesting for the customers.

35

SCENARIO OF FOREIGN BANK IN INDIA

!he concept of foreign banks in India has changed the pre ailing banking scenario in the country. !he banking industry is now more competiti e and customer+friendly than before. !he foreign banks ha e brought forth some inno ations and changes in the banking industry of the country. Q !he 8eser e (ank of India G8(IH is the supreme monetary authority of the country Fand tops the entire banking hierarchy. !he scheduled banks under the authority of 8eser e (ank of India are further categoriCed into two segments + commercial banks and co+operati e banks. !he commercial banks are then again subdi ided into two classes + pri ate sector banks and public sector banks. In the year 5@@7, the .o ernment of India allowed the new pri ate banks to operate in the country and this changed the face of banking in the country. !he foreign banks in India are now allowed to set up local subsidiaries in the country. !he policy also states that the foreign banks are not allowed to acBuire any Indian bank unless the Indian bank is listed as a weak bank by the 8(I. !he Indian subsidiaries of the foreign banks are not allowed to open branches freely in the country.

+PCOMING FOREIGN BANKS IN INDIA

(y 344@ few more names is going to be added in the list of foreign banks in India. !his is as an aftermath of the sudden interest shown by 8eser e (ank of India pa ing roadmap for foreign banks in India greater freedom in India. Among them is the worldFs best pri ate bank by /uro Money magaCine, 1witCerlandFs U(1 he following is the list of foreign banks going to set up business in IndiaI Roy15 B1n7 o. Scot51nd S3it@er51ndD9 +BS +S-b19ed GE C18it15 Credit Sui99e Grou8 Indu9tri15 1nd Commerci15 B1n7 o. C0in1 Merrill $ynch is ha ing a joint enture in Indian in estment banking space N 91& Merrill $ynch. .oldman 1achs holds stakes in -otak Mahindra arms ./ )apital is also ha ing a wide presence in consumer finance through ./ )apital India. IndiaFs .9& is seen growing at a robust pace of around ?O o er the ne#t few years, throwing up opportunities for the banking sector to profit. !he credit of banks has risen by o er 3:O in 3447+4: and the growth momentum is e#pected to continue o er the ne#t four to fi e years. &articipation in the growth cur e of the Indian economy in the ne#t four years will pro ide foreign banks a launch pad for greater business e#pansion when they get more freedom after April 344@.

36

SCENARIO OF FOREIGN BANK IN INDIA

C6AP*ER ') CONC#+SION
!he banking system is one of the institutions that impinge on the economy and affect its performance for better or worse. (anks as the de elopment agency are the source of hope and inspirations to the masses. Indian banking system is increasingly becoming competiti e " is getting integrated with global baking. Foreign banks started doing business in India as there are many business opportunities a ailable. India is potential of business. Foreign banks ha e great impact on the Indian economy. !hey ha e brought in new and sophisticated technology. !he Indian scenario of banking is changed with the e olution of foreign banks in India. !he ser ices of foreign banks are ery sophisticated. <owe er, it would be ad isable to allow the foreign banks to continue their operations within the framework of the restrictions imposed on them by the 8eser e (ank *f India in such a manner that they do not encroach upon the fields allocated to Indian banks. Foreign banks in India ha e significantly impro ed the Indian foreign e#change market. 9uring 344:+4> foreign +banks registered a turno er of 75 O where as in 344?+4; their share raised to :3 O. Foreign banks in India ha e brought competition among public sector banks in terms or efficiency and customer ser ice. &articipation in the growth cur e of the Indian economy in the ne#t four years will pro ide foreign banks a launch pad for greater business e#pansion when they get more freedom. Indian banks are far behind their foreign counterparts in disclosing information to the public. !here is lot of talk about corporate go ernance in the banking industry which reBuires banks to be more transparent in their operations and make disclosures which can help in estors in making informed decisions. <owe er the study shows that new disclosures mandated by 8(I do not really ha e any significant impact on the share prices of these banks. 1till, in the wake of increased competition from foreign banks disclosure norms can ser e to be important differentiating factor to attract and retain big corporate clients. !hus I would like to conclude that India is better off with its current policy of caution about the entry of foreign banks. While we agree that banking markets tend to be prone to crises and, hence, need tighter regulation than markets in goods and ser ices, India needs more foreign bank participation.

37