A CRITICAL ESSAY ON INTERNATIONAL FINANCE

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 Table of Contents
Introduction ................................................................................................................................ 3

Literature Review....................................................................................................................... 3

Analysis...................................................................................................................................... 4

Future outlook ............................................................................................................................ 8

Conclusion ................................................................................................................................. 9

Reference List .......................................................................................................................... 10

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Introduction

International finance emphasises on the relation between monetary and macroeconomic

segment of financial economics. It emphasises on the monetary transaction and internal and
external exchange rate of monetary and economic transaction. This essay highlights the
examination of business scenario of banking industry of UK. Along with that it also
highlights the business operations of SBI in their London branch and evaluates the
transaction exposure of the bank in UK banking industry. Identification and evaluation of the
internal and external mechanism of exchange rate of UK banking industry and SBI has been
analysed in this essay.

Literature Review
Banking industry of UK has faced industrial threat regarding strict regulations of lending
criteria. However, flexible financial and debt management and secured access of revenues has
made banking industry of UK more diversified. In case of UK banking industry has faced
growth due to increasing rate in retail lending operations, up rise in the UK housing market
over the last 5 years. The credit flotation of UK banking industry has also increased.
Therefore, revenue of UK banking industry is estimated to rise at 4.8% annual compound rate
over the 5 years starting from the financial year 2017-2018 (ibisworld.co.uk, 2019).

Figure 1: Economic output of financial services in UK

(Source: Based on views of economicsonline.co.uk, 2019)
On the other hand, economic instability due to change in EU referendum and price hike in
stamp duty of housing market has lower the interest rate of the banking industry of UK and
expansion of UK banking industry became slow during 2016-2017 (ibisworld.co.uk, 2019).
Financial services are significantly affected by the internal and external factors of exchange rate.
According to Amicelle and Jacobsen (2016), modern banking sectors face more complexity in

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terms of evaluating internal and external factors of exchange rate. In case of UK banking
industry foreign exchange rate is affected by the risk of Transaction Risk and Economic
Risk. Economic risk of UK banking industry can be further divided into direct and indirect
risk. Internal and external mechanisms such as Inflation rate, Economic growth, Government
intervention, Government Debt, Balance of payment has impacted the UK banking industry
(As per the view of Acharya and Steffen, 2015).
In case of UK banking industry value of import has faced 7% deficit of GDP in the financial
year 2015. Thus, it negatively affected the value of GBP by declining the value of pound in
international market (Khanna, 2019). On the other hand, due to the reason of recession in UK
market, UK banking industry has faced the decreased interest rate as it was increased by
0.5% in the fiscal year 2008. However, as the inflation rate in UK is comparatively lower
than the other countries that are approximate 2.7%; therefore, UK banking industries gets the
benefits of increasing demand of Pound value. This means UK exports would become more
competitive in international market and buyers have to pay high value of pound in order to
make business transaction based on GBP (economicsonline.co.uk, 2019).
Currency risk controlling strategies of banking sector of UK requires dynamic hedging
strategies as well as currency swap and credit swap among other banks of foreign countries.
On the basis of economic exposure of UK banking industries, banks were able to overcome
the financial crisis. Therefore, the banking H-H Index increased from 1401 to 1736 during the
2007-2010 (economicsonline.co.uk, 2019).

Analysis

Banking transaction of State Bank of India in UK

State Bank of India’s UK operations is the subsidiary named as State Bank of India UK. SBI
UK gets their capital requirement from Bank of England. SBI UK has played a major role in
terms of endorsing financial capital for London initial capital investment of SBI UK is 225
Million GBP from the parent banking organisation SBI (Khanna, 2018). In case of SBI UK,
the bank adopts mechanisms of fixed exchange mechanism and low remittance charges
mechanism. In case of remittance services of SBI UK, the bank provides free remittance for
accounts holders through internet banking procedure. Remittance charges for eligible account
holders are also free. However, in other cases cash handling charges might be applied as 5
GBP. In case of non account holders payment through debit card charges 20 GBP (SBI UK,
2019). On the other hand, exchange rate of currency is very low and in case of transferring
money in India, SBI UK does not charge any services charges.

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Stable political and governmental situation of UK helped SBI in order to expand their
transaction in UK banking industry (SBI UK, 2019). Although most of the bank of UK is
negatively affected by Brexit policy but it did not hamper the economic expansion and
monetary transaction of SBI in UK as well as overall Europe. SBI UK has contributed to
increases the GDP of UK by approximate 2% of the whole UK economy (Khanna, 2019).

Figure 2: Inflation rate in UK

(Source: Based on views of Han, Zhang and Greene, 2017, p.366)
Porter’s diamond model proposes specific theory where the overall nation gets certain
benefits due to availability of some favourable factors. According to Chung (2016), this
theory helps the government to act in order to improve overall position of the country in
competitive economic market.

Figure 3: Porter’s Diamond model theory

In porters diamond model it can be seen that four components are available such as; factor
condition, demand condition as well as firm strategy-structure-rivalry and related
supporting industries .

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The Porter Diamond demonstrates that nations can have advantages for strong technology
sector, skilled labour, and government support for a country's economy.

A good example for this is the SBI banking industry with so much rivalry between players
such as Natwest , Barclay’s , Santander etc. and even foreign bankers. Because of their own
domestic competition, they have been able to easily compete in local markets as well foreign
market.
The home demand affects banking industries with a particular nation is more competitive. A
larger market means more challenges, but it also creates opportunities to grow and survive &
sustain a better as a company. The presence of soft demand conditions from local customers
also pushes companies to grow, innovate and improve the banking growth. Hungry to satisfy
a demanding domestic market boost companies to achieve new heights and gain early
benefits into the future needs of customers across the world. Countries thus gain competitive
advantage in banking where the local customers give a clearer or earlier picture of emerging
buyer of loans or credit / debit cards etc. , and where demanding customers pressure bank to
innovate faster and achieve more sustainable competitive advantages than their foreign rivals.
Competitive conditions in a certain country pretains to the nature of human being, capital
they have and ease of government policies like taxes . Some countries are for example very
rich in foreign reserve resources such as Switzerland. With human being resources, we
mean created factor conditions such as a skilled labor force, good infrastructure and a
scientific knowlegde base. Porter urges that these ‘created’ factor conditions are more
important opposed to conditions that are already present. It is important that
these created factor conditions are continiously updated through the development of banking
goods and make the bank efficient for the creation of consumer benefits as well as
bank. Competitive advantage results from the presence of local and international
competitiors. Thus bank success in market where they are particularly good at four factor
creation represented by porter diagram.

In case of SBI London it can be seen that different resource factors like; increasing capital
investment as well as human resource, developed infrastructure has enhance the demand of
banking service in UK economy. Therefore, it became more beneficial for SBI to operate in
London.
Furthermore, UK government has increased their capital investment by 5% in different
financial institutes such as; banks, investing companies, mutual funds and bond market

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(economicsonline.co.uk, 2019). Therefore, increasing investment in banking sector has
strengthened the scope of SBI in UK’s competitive market. Although, Brexit had negative
impact on UK economy and moreover, financial services sector has suffered huge loss due to
Britain’s exist from EU. Thus, as per the opinion of Khanna (2018), it can be stated that it
created a great opportunity for SBI to make entry in UK market with their internationalisation
strategy.
On the other hand, increasing demand of the banking services in UK economy by 15% has
broadened the scope of SBI London to make sustainable growth among the existing banking
sectors. SBI’s firm strategy that is market penetration strategy as well as operation in
monopoly market has enhanced the scope of the company. Thus, SBI’s market share has
increased by 22% in the last two years in UK banking industry (SBI UK, 2019). Moreover,
stable government policy along with 2.7% inflation rate in UK economy has made it easier
for SBI to cope with negative impact of Brexit in UK market. Furthermore, existence of
related supporting industries that are financial institutes, money markets and mutual funds
has increased the demand of banking services in the country (economicsonline.co.uk, 2019).

Ownership advantages, include organization information and various ownership rights of a

company. These consist of branding, copyright, trademark or patent rights, the use and
management of skills. Ownership advantages are typically considered to be physical not
present. They include or gives a competitive advantage, such as a reputation for reliability ,
efficiency and effectively.

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Location advantage is the second necessary advantage for any bank. Bank must
assess whether there is a comparative advantage from others or not. Then perform some
functions within a particular area. Often fixed in nature, these considerations apply to the
availability and costs of resources like area & land, when functioning in one location
compared to another. Location advantage refers to natural or created resources, but either
they are generally immobile, requiring a partnership with a foreign investor in that location to
be utilized to full advantage.

Internalization advantages is better for a banking organization to produce a particular or

pool of client base , versus via third-party base clients. At times, it may be more cost-
effective for a bank to operate from a different branch location while they keep doing the
branch in-house. If the bank decides to outsource the investment, it may require a huge
capital. However, taking an outsourcing route only makes financial sense but if the they meet
the organization’s needs and quality standards at a lower cost. Perhaps the foreign company
can also offer a greater degree of local market space, or even more skilled employees who
can make a better product.

Moreover, based on Dunning OLI paradigm it can be seen that SBI has the ownership under
Indian government whereas location of the bank is based on Indian banking sector. However,
due to globalization policy of SBI it has adopted the internationalisation business process in
order to make remarkable entry in foreign banking industry (Khanna, 2018).
Therefore, SBI has been able to make great impact on FDI policy of UK government through
globalization policy of the bank. Amicelle and Jacobsen (2016), stated that Dunning OLI
paradigm helps an organisation in their globalisation policy as well as in foreign investment.
Thus, it helps SBI to operate in UK on the basis of direct international investment on public
good properties. Thus, SBI UK provides approximate 3% interest on foreign currency
account (ibisworld.co.uk, 2019).

Future outlook

SBI UK would maintain stability in monetary and financial transaction in UK banking

industry. Stable political view of UK, effective governmental regulations regarding
reformation of EU law and London’s exit from EU would broaden the path of SBI UK in
order to become one of the most trusted premium financial organisationsof UK. High growth

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rate of UK’s GDP by 3% would increase future business possibilities for SBI UK. That
means SBI UK would generate enhance the employment rate of UK estimated up to 5% in
the future financial years (ibisworld.co.uk, 2019). In the contrary, low exchange rate of UK
banking industry would provide advantage to SBI UK in terms of export import policy as the
increasing value of import would increase the value of GBP.
On the other hand, increasing demand of financial services in UK economy would increase
the future scope of SBI. Along with that, rivalry of the bank would also increase among other
market leaders such as; Barclays and HSBC in terms of FDI policy (ibisworld.co.uk, 2019).
Thus, the bank must develop flexible FDI policy in order to sustain in UK financial service
industry.

Conclusion

This essay critically evaluates the international finance. It also analyses the UK banking
industry and its operational areas and emphasis on management of transaction exposure of
UK banking industry. Along with that, it identifies the internal and external mechanisms
regarding UK banking industry’s exchange rate and valuation of currency. On the basis of
identification of these mechanisms this essay evaluates economic and monetary transaction
exposure of UK banking industry. Thus, it can be concluded from the above evaluation and
analysis that stable political and government position, strong Brexit policy and modification
of EU law would provide sustainable advantage in future operations of SBI UK.

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Reference List

Acharya, V.V. and Steffen, S., (2015). The “greatest” carry trade ever? Understanding
eurozone bank risks. Journal of Financial Economics, 115(2), pp.215-236.
Amicelle, A. and Jacobsen, E.K., (2016). The cross-colonization of finance and security
through lists: Banking policing in the UK and India. Environment and planning D: Society
and Space, 34(1), pp.89-106.
Chung, T.W., 2016. A Study on Logistics Cluster Competitiveness among Asia Main
Countries using the Porter's Diamond Model. The Asian Journal of Shipping and
Logistics, 32(4), pp.257-264.
economicsonline.co.uk (2019) Banking Sector Economics Online [Online] Available at:
https://www.economicsonline.co.uk/Business_economics/Banks.html [Accessed 15/03/2019]
Han, L., Zhang, S. and Greene, F.J., (2017). Bank market concentration, relationship banking,
and small business liquidity. International Small Business Journal, 35(4), pp.365-384.
ibisworld.co.uk (2019) Banks - UK Market Research Report IBISWorld [Online] Available
at: https://www.ibisworld.co.uk/industry-trends/market-research-reports/financial-insurance-
activities/service-except-pension-funding/banks.html [Accessed 12/03/2019]
Khanna, A., (2018)
SBI launches UK subsidiary with £225 million capital commitment livemint [Online]
Available at: https://www.livemint.com/Industry/1yWUJ9Km8qh3OPRpENMh6K/SBI-
launches-UK-subsidiary-with-225-million-capital-commitm.html [Accessed 11/03/2019]
SBI UK (2019). Transfer your money, your way, 24/7 Available at:
https://www.sbiuk.com/personal-banking/personal/remittances/money-transfers [Accessed
18/03/2019]

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