A study on scope of foreign banks in india


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A study on scope of foreign banks in india

  1. 1. A STUDY ON SCOPE OF FOREIGN BANKS IN INDIASubmitted in partial fulfillment of the requirements of Mumbai University for the Award of the DegreeMASTER OF MANAGEMENT STUDIES ACADEMIC YEAR 2011 – 2012 Under the Guidance of Dr. Aditi Mahajan ATHARVA INSTITUTE OF MANAGEMENT STUDIES
  2. 2. INTRODUCTIONA foreign bank is a type of bank that is obligated to follow the regulations of both the home and hostcountries. Because the foreign branches of those banks‘ loan limits are based on the parent banks capital,foreign banks can provide more loans than subsidiary banks. A) ABOUT FOREIGN BANKS:The foreign banks in India are slowly but steadily creating a niche for themselves. With the globalizationhitting the world, the concept of banking has changed substantially over the last couple of years.Some of the foreign banks have successfully introduced latest technologies in the banking practices inIndia. This has made the banking business in the country more smooth and interesting for thecustomers. After the set up foreign banks in India the banking sector in India hasalso becomecompetitive and assertive.The concept of foreign banks in India has changed the prevailing banking scenario in the country. Thebanking industry is now more competitive and customer-friendly than before. The foreign banks havealong with them brought forth some innovations and changes in the banking industry of the country.The Reserve Bank of India (RBI) is the supreme monetary authority of the country and tops the entirebanking hierarchy. The scheduled banks under the authority of Reserve Bank of India are furthercategorized into two segments - commercial banks and co-operative banks. The commercial banks arethen again subdivided into two classes - private sector banks and public sector banks. In the year1994, the Government of India allowed the new private banks to operate in the country and thischanged the face of banking in the country.According to the new rules set by Reserve Bank of India in the new budget, some decisions regardingforeign banks in India have been taken. The steps taken by the central monetary authority providesome extent of liberty to the foreign banks and they are hopeful to grow unshackled. The foreignbanks in India are now allowed to set up local subsidiaries in the country. The policy also states thatthe foreign banks are not allowed to acquire any Indian bank unless the RBI lists it as a weak bank.The Indian subsidiaries of the foreign banks are not allowed to open branches freely in the country.Foreign banks like Citibank, HSBC, Standard Chartered Bank, etc. are the branches of those banks,which are incorporated in foreign countries. Most of them perform essentially the same range of services aslocal banks, except that their focus in terms of product and customers may be different due to their limitedbranch network.They bring in new technology and facilitate in the introduction as well as assimilation of internationalproducts into the domestic markets. They help the local banking industry keep pace with developments inthe financial centers abroad. They also help provide Indian corporations access to foreign capital markets. Inkeeping with the general trend towards liberalization, the Government has introduced several measures forwidening the scope for foreign banks to enter and operate in India. 1 Scope of Foreign Banks In India
  3. 3. B) DEFINITION OF FOREIGN BANK:Investopedia Says:Banks often open a foreign branch in order to provide more services to their multinational corporationcustomers. However, operating a foreign branch bank may be considerably complicated because of the dualbanking regulations that the foreign branch needs to follow.For example, suppose the Bank of America opens a foreign branch bank in Canada. The branch would belegally obligated to follow both Canadian and American banking regulations.In the past two decades the world has seen an unprecedented degree of globalization, especially in thefinancial sector. Many banks from both advanced and developing countries, have ventured abroad andestablished presence in other countries. As a result, foreign banks have become important in domesticfinancial intermediation. C) HISTORY OF FOREIGN BANKS IN INDIA:Banking in India started with setting up two banks in last decade of 18th century. The banks were TheGeneral Bank of India (1786) and Bank of Hindustan (1790) both of them are known defunct. Then camebank of Calcutta (June 1806), which finally became State Bank of India. The Allahabad bank established in1865 and still functioning today is the oldest joint stock bank still functioning in India.At the time of bank nationalization in 1969, the entry of foreign banks in Indian was banned. The Ban washowever lifted in 1980.The Bank of Tokyo, the chartered Banks, the first National City Bank Of New York,the Grind lays Bank, The Lloyds Bank, The Mercantile Bank In India, etc. are some of the prominentforeign banks which are presently operating in IndiaForeign banks too started to arrive, particularly in Calcutta, in the 1860s. The Comptoired‘Escompte deParis opened a branch in Calcutta in 1860, and another in Bombay in 1862; branchesin Madras and Pondicherry, then a French colony, followed. HSBC established itself in Bengal in 1869.Calcutta was the most active trading port in India, mainly due to the trade of the British Empire, and sobecame a banking center.Standard CharteredBank started its operation in 1858 and citi bank opened its branch in India in 1902.Similarly Hong Kong and Shanghai Banking Corporation started functioning in India since 1953.However globalization and economic policies were implemented in late 1980‘s. Which encouraged manyinternational banks to open their branches in India. At present almost all the international banks areoperating in India.At the end-March 1987, there were 21 foreign banks with 136 branches in India. During 1960-80, the totalassets of foreign banks had increased over five times from RS.411.4 corers to Rs.2, 261.0 corers. In 1980,their assets growth rate was 22.5 percent as against 4 percent in 1965.Initially these banks were startedmerely to finance India‘s foreign trade. As on June 30th June 2012 there is 34 foreign banks in India with273 branches. 2 Scope of Foreign Banks In India
  4. 4. INTRODUCTION TO ROYAL BANK OF SCOTLANDABN AMRO BANKThe history of ABN Amro Bank dates back to the year 1924, when King Williem – I issued a Royal Decreedeclaring the establishment of the Nederlandsche Handel-Maatschappij (Netherlands Trading Society,NTS). The NTS had been established with an aim to promote the trade between the Netherlands and theDutch East Indies.On the 3rd of October 1964, NTS merged with the Twentsche Bank, and the new name it was given wasAlgemene Bank Nederland (ABN Bank). Further, on the 22nd of September 1991, ABN Bank merged withthe Amro Bank in Amsterdam. Henceforth, the new entity came to be known as ABN AMRO Bank.Recent DevelopmentsIn the month of October 2007, a consortium of RBS, Fortis and Santander acquired ABN AMRO, which istermed as the biggest banking acquisition ever happened in the financial history of the world. Because of theworldwide financial crisis of the year 2008, the Dutch state decided to nationalize the Fortis stake in theABN AMRO, and according to an announcement made by the state on the 3rd of October 2008, the Dutchstate acquired Fortis Bank Nederland. This acquisition includes the stake of Fortis in ABN AMRO.As of April 2009, the ABN AMRO is being owned by RFS Holdings B.V., which comprises of the Dutchstate, BancoSatander and the Royal Band of Scotland Group (RBS). The financial crisis being faced by thebank led the RBS to announce its plans to fire over 9000 staff members of ABN AMRO. Thisannouncement was made by the RBS on the 7th of April 2009. The total assets of the bank stood at 912Billion Euros in June 2008, while it churned a profit of 10 Billion Euros in the year 2007. The workingstrength of the ABN AMRO Bank was 102,556 employees at the end of the year 2007.Presence in IndiaThe ABN AMRO Bank registers a comprehensive presence in India, with its offices located in all theprominent cities of the country. Its office located at Nariman Point, Mumbai, while the Personal andBusiness Banking related its New Delhi office located at Barakhamba Road governs matters manages theCorporate and Institutional Banking and Private Banking services of the bank. The bank also offersspecialized services to international diamond and jewellery merchants, and its Mumbai office serves as theregional office for catering to the needs of diamond and the jewellery merchants in the Indian Sub-continent.The bank also provides a diverse range of high quality Portfolio Advisory Services along with acomprehensive transaction execution platform in India. ABN AMRO (India) has branches in many cities ofIndia, such as Bangalore, Baroda, Chennai, Delhi, Gurgaon, Hyderabad, Kolkata, Lucknow, Mumbai,Noida, Pune and Surat.Microfinance ProgramThe ABN AMRO Bank has also initiated its Microfinance program in India, which is the largest one amongthe same being offered by foreign banks in the country. Under the program, the bank deploys intermediaryagencies called microfinance institutions for delivering micro loans less than USD 200 to its target consumergroup of poor women with rural background. Till the month of April 2009, more than 390,000 customersspanning across 16 states in India were receiving micro financing small loans through its 26 Micro FinanceInstitutions. 3 Scope of Foreign Banks In India
  5. 5. The Royal Bank Of ScotlandThe Royal Bank of Scotland was founded in 1727 and has a history of over three hundred years. With itsrich history, it has become one of the largest financial service groups in the world. It provides bankingservices for individuals, corporate houses and institutions. The headquarters of Royal Bank of Scotland is inEdinburgh, Scotland. The bank is a part of retail banking subsidiaries of the Royal Bank of Scotland Groupand along with NatWest and Ulster Bank, provides branch-banking facilities in the United Kingdom. TheRoyal Bank of Scotland and the Royal Bank of Scotland Group are completely separate from the Bank ofScotland, which was established in 1695 and is also based in Edinburgh, Scotland.The Royal Bank of Scotland has around 700 branches, mainly in Scotland. The bank has a number ofbranches spread in many large towns and cities throughout England and Wales. The Royal Bank of ScotlandGroup provides a strong support to large enterprises, including multi-national corporations (MNC) andfinancial institutions. It offers integrated consumer and business banking services including transactionbanking, risk management, investment banking, private banking and asset management. In the year 2007,the Royal Bank of Scotland Group strengthened its global presence through purchasing several parts of theDutch bank, ABN AMRO, including their businesses in India. Presence in India:The history of Royal Bank of Scotland in India goes back to 1921. Since then, the bank has expanded significantly across the country, with more than 3,000 staff in Kolkata, Mumbai, New Delhi, Chennai, Pune, Baroda, Hyderabad, Bengaluru, Noida, Gurgaon and Surat branches. There are total of 28 branches throughout the country with 1.3 million customers. Products and Services:The Royal Bank of Scotland has several extensive operations in Mumbai, Delhi and Chennai and plans to be a major competitor in the Indian market. Using its global reach and expertise of research team, sales and trading, equity capital market and mergers & acquisitions (M&A) advisory professionals, the bank has made some of the biggest and most innovative landmark transactions in India for the corporate and institutional clients. The bank is also providing a wide range of services such as transaction banking, fixed income and foreign exchange products and services, including sales and trading, fixed income origination, derivatives, structured lending and commodity financing.Apart of these services, the Royal Bank of Scotland is providing a diverse range of product offeringsincluding personal loans, credit cards, savings accounts, financial planning, investment and insuranceservices, which will significantly meet the daily financial needs of over a million personal banking clients inIndia. The banks asset management segment in just two years of its initial operations in the country hasemerged to be amongst the fastest growing asset managers. The bank is looking forward to being a leadingplayer in the Indian asset management industry. With the help of its comprehensive research and diverserange of investment products, the bank is offering clients investment options in fixed income, equities,money markets and structured products. 4 Scope of Foreign Banks In India
  6. 6. NRI Oriented Services:The Royal Bank of Scotlands NRI Services provides premium and exclusivebanking service to its customers in India. It offers a personalized service based on careful understanding ofneeds as a Non Resident Indian (NRI), helping you before leaving India, while you are abroad and when youplan to return to India.  MARKETS AND INTERNATIONAL BANKING:Markets & International Banking is the wholesale banking division of RBS Group. It provides market-leading fixed income, risk management, foreign exchange, rates and transaction banking services. RBShas a deep-seated commitment to excellence and service, with a strong and sustainable bankingmodel to meet the evolving market and regulatory backdrop.Combining Global Banking & Markets (GBM) operations with the international arm of GlobalTransaction Services (GTS) in early 2012 formed M&IB division. It contains two businesses, ‘Markets’and ‘International Banking’, which report their finances separately but work closely together to serveclients. RBS is committed in supporting its client’s need globally with world-class debt financing, riskmanagement and transaction services.Markets International Banking Foreign exchange (FX) Payments and cash management Rates & inflation Trade finance Structured finance Liquidity and deposits Emerging markets Lending Prime services Corporate advisory Debt capital markets (DCM) and credit All Markets products Investor products and equity derivatives Risk solutions Asset backed securities Counterparty exposure management Fixed income / FX research & strategyClients include: Companies Financial institutions Governments Public sectorM&IB helps clients to: Raise money Invest money Protect themselves against financial risksRECENT DEVELOPMENTS:RBS is focusing on trading and investment banking in India after agreeing last July to sell its commercialand retail banking business in the country to HSBC Holdings Plc. (HSBA)The Edinburgh-based lender wasranked 12th in stock tradingon India‘s exchanges in the first quarter of 2011, according to data compiled byBloomberg. RBS plans to sell its Indian commercial and retail banking unit to HSBC for $95 million morethan tangible net asset value, HSBC said in July. 5 Scope of Foreign Banks In India
  7. 7. THE INDIAN ECONOMYOVERVIEW:India‘s rate of economic growth over past decade has been one of the most significant developments in theglobal economy. India is one of the worlds fastest growing significant economies. "Today India is amongthe most attractive destinations globally, for investments and business and FDI had increased over the lastfew years," according to Mrs.PratibhaPatil, President of India. The Indian economy has continuouslyrecorded high growth rates and become an attractive destination for investments, highlighted Mrs. Patil.The World Economic Forum (WEF) plans to establish permanent physical presence in India by setting up anoffice in the next twelve months. "Today, India is amongst the most important G-20 economies and thisunderscores Forums commitment to the country as a partner," according to Mr. SushantPalakurthiRao,Senior Director, WEF.GROSS DOMESTIC PRODUCT (GDP): Chart showing the growth in GDP in India: Chart 1 Country 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 India 5.5 6 4.3 4.3 8.3 6.2 8.4 9.2 9 7.4 7.4 8.3 Table 1: GDP in IndiaThe economic scenario in India has been pretty stable over the last 5 years. Despite the economic downturnthree years back the Indian economy has managed to remain stable. The India GDP recorded for the periodDecember 2010 stood at 7.4 percent. However according to the CMIE (Centre for Monitoring IndianEconomy) India will record a GDP of 7.6% percent in the current fiscal year (2012 – 13). Indias GDPgrowth 2010 - 2011 has not been phenomenal but is certainly encouraging.Effects on the Banking sector: GDP has an impact on the banking sector, higher GDP means that there is agreater economic activity leading to higher demand for loans, overdraft and credits and vice versa for lowerGDP. This affects the banking industry. Hence if the country will have higher GDP foreign banks would beattracted towards India. 6 Scope of Foreign Banks In India
  8. 8. INFLATION:The inflation rate in India was recorded at 6.87 percent in July of 2012. Historically, from 1969 until 2012,India Inflation Rate averaged 8.0 Percent reaching an all time high of 34.7 Percent in September of 1974 anda record low of -11.3 Percent in May of 1976. Inflation rate refers to a general rise in prices measuredagainst a standard level of purchasing power. The most well known measures of Inflation are the CPI, whichmeasures consumer prices, and the GDP deflator, which measures inflation in the whole of the domesticeconomy. Chart 2: Chart showing Inflation rate in IndiaEffects on the Banking Sector:As the inflation in the economy rises the banks change their interest ratesaccordingly. As a result of which the treasury income of the banks is impacted. HigherThe inflation lower is the treasury income of the banks.FDI IN INDIA:India has been ranked at the second place in global foreign direct investments in 2010 and will continue toremain among the top five attractive destinations for international investors during 2010-12, according toUnited Nations Conference on Trade and Development (UNCTAD) in a report on world investmentprospects titled, World Investment Prospects Survey 2009-2012.India attracted FDI equity inflows of US$ 1,274 million in February 2011. The cumulative amount of FDIequity inflows from April 2000 to February 2011 stood at US$ 128.642 billion, according to the datareleased by the Department of Industrial Policy and Promotion (DIPP).The services sector comprising financial and non-financial services attracted 21 per cent of the total FDIequity inflow into India, with FDI worth US$ 3,274 million during April-February 2010-11, whiletelecommunications including radio paging, cellular mobile and basic telephone services attracted secondlargest amount of FDI worth US$ 1,410 million during the same period. Housing and Real Estate industrywas the third highest sector attracting FDI worth US$ 1,109 million followed by power sector whichgarnered US$ 1,237 million during April-December 2010-11. The Automobile sector received FDI worthUS$ 1,320 million.During April-February 2010-11, Mauritius has led investors into India with US$ 6,637 million worth of FDIcomprising 42 per cent of the total FDI equity inflows into the country. The FDI equity inflows fromMauritius is followed by Singapore at US$ 1,641 million and the US with US$ 1,120 million, according todata released by DIPP. 7 Scope of Foreign Banks In India
  9. 9. Chart 3: The source of FDI into India between April 2000 and March 2011Effects on The banking Sector:As more corporates are attracted towards India, and India is ranked amongtop five destinations for FDI among the world, foreign banks would have a greater advantage over otherbanks in India. Foreign banks have their branches across various countries in the world hence for an MNCbanking with these banks becomes easier and good relations develop between the client and the bank in thelong term which is beneficial for both. If FDI increases the credit demand in the market increases and hencemore banks would be required to fulfill the demand.In case of a foreign bank an MNC operating in India, who wants to raise funds in the foreign market. Thecompany would prefer a MNC bank as the bank has greater access to international market. 8 Scope of Foreign Banks In India
  10. 10. THE BANKING SECTOR:High growth of Indian Economy: The growth of the banking industry is closely linked with the growth ofthe overall economy. India is one of the fastest growing economies in the world and is set to remain on thatpath for many years to come. This will be backed by the stellar growth in infrastructure, industry, servicesand agriculture. This is expected to boost the corporate credit growth in the economy and provideopportunities to banks to lend to fulfill these requirements in the future.Rising per capita income: The rising per capita income will drive the growth of retail credit. Indians have aconservative outlook towards credit except for housing and other necessities. However, with an increase indisposable income and increased exposure to a range of products, consumers have shown a higherwillingness to take credit, particularly, young customers. A study of the customer profiles of different typesof banks reveals that foreign and private banks share of younger customers is over 60% whereas publicbanks have only 32% customers under the age of 40. Private Banks also have a much higher share of themore profitable mass affluent segmentNew channel – Mobile banking is expected to become the second largest channel for banking afterATMs: New channels used to offer banking services will drive the growth of banking industryexponentially in the future by increasing productivity and acquiring new customers. During the last decade,banking through ATMs and Internet has shown a tremendous growth, which is still in the growth phase.After ATMs, mobile banking is expected to give another push to this industry growth in a big way, with thehelp of new 3G and smart phone technology (mobile usage has grown tremendously over the years). Thiscan be looked at as branchless banking and so will also reduce costs, as there is no need for physicalinfrastructure and human resources. This will help in acquiring new customers, mainly who live in ruralareas (though this will take time due to technology and infrastructure issues). The IBA-FICCI-BCG reportpredicts that mobile banking would become the second largest channel of banking after ATMs.Financial Inclusion Program: Currently, in India, 41% of the adult population doesn‘t have bank accounts,which indicates a large untapped market for banking players. Under the Financial Inclusion Program, RBI istrying to tap this untapped market and the growth potential in rural markets by volume growth for banks.Financial inclusion is the delivery of banking services at an affordable cost to the vast sections ofdisadvantaged and low-income groups. The RBI has also taken many initiatives such as Financial LiteracyProgram, promoting effective use of development communication and using Information andCommunication Technology (ICT) to spread general banking concepts to people in the under-banked areas.All these initiatives of promoting rural banking are taken with the help of mobile banking; self help groups,microfinance institutions, etc. Financial Inclusion, on the one side, helps corporate in fulfilling their socialresponsibilities and on the other side it is fueling growth in other industries and so as a whole economy.Increasing non-performing and restructured assets: Due to a slowdown in economic activity in pastcouple of years and aggressive lending by banks many loans have turned non-performing. Restructuring ofassets means loans whose duration has been increased or the interest rate has been decreased. This happensdue to inability of the loan taking company/individual to pay off the debt. Both of these have impacted theprofitability of banks, as they are required to have a higher provisioning amount, which directly eats into theprofitability. The key challenge going forward for banks is to increase loans and effectively manage NPAswhile maintaining profitability.Intensifying competition: Due to homogenous kind of services offered by banks, large number of playersin the banking industry and other players such as NBFCs, competition is already high. Recently, the RBIreleased the new Banking License Guidelines for NBFCs. So, the number of players in the Indian bankingindustry is going to increase in the coming years. This will intensify the competition in the industry, whichwill decrease the market share of existing banks. 9 Scope of Foreign Banks In India
  11. 11. Managing Human Resources and Development: Banks have to incur a substantial employee training cost,as the attrition rate is very high. Hence, banks find it difficult manage the human resources and developmentinitiatives. Since March 2002, Bankex (Index tracking the performance of leading banking sector stocks) has grown at a compounded annual rate of about 31%. After a very successful decade, a new era seems to have started for the Indian Banking Industry. According to a Mckinsey report, the Indian banking sector is heading towards being a high- performing sector.According to an IBA-FICCI-BCG report titled ‘Being five star in productivity – road map for excellencein Indian banking’, India‘s gross domestic product (GDP) growth will make the Indian banking industrythe third largest in the world by 2025. According to the report, the domestic banking industry is set for anexponential growth in coming years with its assets size poised to touch USD 28,500 billion by the turn ofthe 2025 from the current asset size of USD 1,350 billion (2010). 10 Scope of Foreign Banks In India
  12. 12. If we look at 5 years historical performance of different types of players in the banking industry, publicsector bank has grown its deposits, advances and business per employee by the highest rate – 21.7%, 23%and 21.1% respectively. As far as net interest income is concerned, private banks are ahead in the race byreporting 24.2% growth, followed by public banks (21.4%) and then by foreign banks (14.8%). Though thegrowth in the business per employee and profit per employee has been the highest for public sector banks, inabsolute terms, foreign banks have the highest business per employee as well as profit per employee.In the last 5 years, foreign and private sector banks have earned significantly higher return on total assets ascompared to their pubic peers. If we look at its trend, foreign banks show an overall decreasing trend,private banks an increasing trend and Public banks have been more or less stagnant. The net NPA of publicsector bank was also significantly higher than that of private and foreign banks at the end of FY11, whichindicates the asset quality of public banks is comparatively poor. The Capital Adequacy ratio was also veryhigh for private and foreign bank as compared to public banks. 11 Scope of Foreign Banks In India
  13. 13. In conclusion, we could say that currently, there are many challenges before Indian Banks such asimproving capital adequacy requirement, managing non-performing assets, enhancing branch sales &services, improving organization design; using innovative technology through new channels and working onlean operations. Apart from this, frequent changes in policy rates to maintain economic stability, variousregulatory requirements, etc. are additional key concerns.Despite these concerns, the Indian banking industry will grow through leaps and bounds looking at the hugegrowth potential of Indian economy. High population base of India, mobile banking – offering bankingoperations through mobile phones, financial inclusion, rising disposable income, etc. will drive the growthIndian banking industry in the long-term. The Indian economy will require additional banks and expansionof existing banks to meet its credit needs.GROWTH POTENTIAL: Consumer spending in India is likely to grow nearly four times to touch US$ 3.6 trillion by 2020, driven by rising incomes and aspirations, widespread media proliferation and better physical reach across the country, according to a joint report titled, The Tiger Roars - How a billion plus people consume and shop, by Boston Consulting Group (BCG) and the Confederation of Indian Industry (CII). Indian Space Research Organization (ISRO) plans to launch its biggest ever spacecraft, the 5,000 kg GSAT-11, by 2014. The advanced communication satellite, GSAT-11, will be double the capacity and size of the present buses, and will be built over the next two years The Indian IT infrastructure market will reach US$ 2.05 billion in 2012, showing a growth of 10.3 per cent over the previous year. According to technology research firm, Gartner. The Indian Internet economy is expected to touch Rs. 10.8 trillion (US$ 203.77 billion) by 2016, according to a report titled Connected World Series study by the Boston Consulting Group. Indias Internet economys growth rate of 23 per cent makes it the second fastest across the G-20 countries and ahead of many other developing nations. The report the $4.2 trillion Opportunity: The Internet Economy in G-20, further notes that if the Internet were a sector, it would be the eighth largest in India. The Indian outbound meetings, incentives, conventions and exhibitions (MICE) market is estimated to be around US$ 550 million-US$ 600 million and expected to increase by 10-15 per cent in 2012. Spending by Indian Inc. on corporate travel is helping in the growth of the market. The wealth of high net worth individuals (HNIs) in India, is set to grow by a compounded annual growth rate (CAGR) of 23 per cent over the next four years and will touch a staggering Rs. 249 trillion (US$ 4.69 trillion), highlighted a report by Karvy Private Wealth, the wealth management arm of the financial services firm Karvy GroupNearly 50 per cent of people surveyed in India believe that interacting with the Government is easy, as perAccenture. The response is higher than the results from six other countries-Australia, France, Germany,Singapore, the US and the UK-participating in the global pulse survey. Users in India are more likely thanthose from all other countries to use digital services beyond websites and portals. 12 Scope of Foreign Banks In India
  14. 14. ROAD AHED:India continues to urbanize at a strong pace driven by a combination of up trending consumption, robust jibcreation and growing financial penetration, according to Morgan Stanley‘s proprietary Alpha Wise cityvibrancy index. The report reveals that Bengaluru, Chandigarh, Hyderabad, Pune and Chennai are the top 5vibrant cities.The government had liberalized investments made by registered foreign institutional investors (FIIs) underthe portfolio investment scheme (PIS) from April 10, 2012. Earlier these investments required governmentapproval. 13 Scope of Foreign Banks In India
  15. 15. FOREIGN BANKS IN INDIAForeign Banks in India always brought an explanation about the prompt services to customers. After the setup foreign banks in India, the banking sector in India also become competitive and customer friendly.There are thirty - four foreign banks are present in India through 273 branches and 871Offsite ATMs. Inthat, four foreign banks have set up shop in the past one-year. They are Banco Bilbao VizcayaArgentaria,Spain‘s second largest bank; Italy‘s Banca di Roma; the DublinbasedDepfa Bank Plc.; and NationalAustralia Bank Ltd. Given a chance, all banks would like to convert their representative offices intobranches.Standard Chartered Bank, the oldest foreign bank that came to India 150 years ago, now operates themaximum number of 83 branches. It is followed by HSBC, which entered India in 1867, with 47 branches.Citibank has 39 branches and ABN Amro, which has now been taken over by Royal Bank of Scotland N.V,has 30 branches. The only other bank that has a double-digit branch presence is Deutsche Bank. A) WHY ARE FOREIGN BANKS ENTERING INDIA:Foreign banks have been in India for more than 150 years but more overseas lenders are now queuing up toset up operations, amid signs that tough restrictions on entry may be eased.Five to eight foreign banks are seeking to come to India, a source familiar with the industry said, with thecountry viewed as attractive because of gaps in the market and a buoyant economy that has created wealthierclients.Advantages of Investment in India: 1) Huge market size and Fast developing Economy: - India is the second largest country in the world just behind China in terms of population. Currently the total population is about 1.2 billion. This huge population base automatically makes a huge market for the business operators to capture and also a major part of it is still can be considered as un-served or not yet been penetrated. He economy of India is also moving at faster pace than most of the economy of the world and inhabitants of the country also obtaining purchasing power at the same rate. 2) Availability of diversified resources and cheap labor force: - The huge advantage every company gets by investing in India is the availability of diversified resources. It is a country where different kinds of materials and technological resources are available. India is a huge country and has forest as well as mining and oil reserve as well. These are also coupled with availability of very cheap labor forcesat almost every parts of the country. 3) Increasing improvement of Infrastructure: - A lot of research study in India finds out that historically the country fails to attract a significant amount of FDI mainly because of problems in infrastructure. But the scenario is changing. The Indian government has taken huge projects in transportation and energy sectors to improve the case. 14 Scope of Foreign Banks In India
  16. 16. 4) Public Private Partnership: - Investors experience Public private Partnership in different important sectors like energy, transportation, mining, oil industry etc. It is advantageous in several ways as it has eliminated the traditional tirade barriers and also joint venture with government is risk free up to the great extent. 5) IT Revolution and English literacy: - Today the modern India considered being one of the global leaders in IT. India has developed its IT sectors immensely in last few years and as of today many leading firms outsource their IT tasks in India. Because of IT advancement the firm that will invest in India will get cheap information access and IT capabilities, as Indian firms are global leader. 6) Openness towards FDI: - Recently the Government of India has liberalized their policies in certain sectors, like Increase in the FDI limits in different sectors and also made the approval system far easier and accessible. Unlike the historical tradition, today for investing in India government approval do not require in the special cases of investing in various important sectors like energy, transportation, telecommunications etc. 7) Regulatory framework and Investment Protection: - In the process of accelerating FDI in the country the government of India has make the regulatory framework lot more flexible. Now a day‘s foreign investors get different advantages of tax holiday, tax exemptions, exemption of service and central taxes. The government also opened few special economic zones and investors of those zones also get a lot of befits by investing money. Apart from that there are number of laws has been passed and executed for making the investments safe and secure for the foreign investors―India is in focus. It is a high-growth market,‖ added AbizerDiwanji, head of financial services atconsultancy KPMG India. ―Foreign banks are building their base here, focusing on high-net-worth clients‖.Britain‘s Standard Chartered Bank raised $530 million in a novel share sale through Indian DepositoryReceipts, which gives Indians an opportunity to get a global exposure to banking.The London-based lender, which as The Chartered Bank opened its first overseas bank in the eastern city ofCalcutta in 1858, called the fund-raising issue — which was oversubscribed by more than double — a―homecoming.‖Australia‘s third-largest bank, ANZ, has been given the go-ahead for retail and wholesale bankingoperations. Credit Suisse, which already has an Indian investment banking, wealth management and mutualfund arm, is following suit. Embattled bank Goldman Sachs is also keen to enter India.―India is a real market of substance,‖ ANZ‘s chief executive for Asia Pacific, Europe and America, AlexThorsby, has said.The presence of foreign banks has brought changes to the way India banks. They were instrumental inbringing automated teller machines (ATMs) and credit cards to India.But they have still played a limitedrole in India‘s vast lending space, which has traditionally been dominated by state-run banks, mainly due torestrictions and entry barriers in place until economic liberalization in the early 1990s. 15 Scope of Foreign Banks In India
  17. 17. Operations still cater to a niche market of wealthy clients in big cities, offering specialized products, forexand financial transaction facilities, advisory and wealth management services.Thirty-four foreign banks are currently operating in India with Citibank, Standard Chartered and HSBCcurrently accounting for 70% of their total business.In the last five years to March 2009, foreign banks have seen a net profit compounded annual growth of27%, led by interest and fee-based income, a report from Mumbai-based HDFC Securities shows.India has concentrated on consolidating its domestic banking system over the last five years but the ReserveBank of India says the next phase of expansion will see foreign banks‘ role ―gradually enhanced in asynchronized manner‖.A spokeswoman declined to comment on how many overseas banks are looking to set up but said theywould clear applications as they come in.The RBI has approved an average 15 bank-branch licenses every year for the past few years, which is aboveits commitment of 12 to the World Trade OrganizationOne issue that could delay entry is the current trouble in the euro zone, which could affect strategic decision-making.―Typically, foreign banks are dependent on the fortunes of their head office,‖ said one banking analyst.Foreign banks could also face stiff competition from Indian lenders, despite the country having a relativelylow penetration of financial services, as more private banks have come into the sector in the last decade.Interest margins for banks have been falling since 2000, according to a report by investment bankers andsecurities firm Execution Noble, as banks fight for market share across the board.In the decade to September 2009, private banks doubled their market share to 20%, while foreign banksslipped from 8% to 6%, said Execution Noble‘s AditiThapliyal. B) GUIDELINES FOR PRESENCE OF FOREIGN BANKS IN INDIA:The guidelines for setting up of wholly owned subsidiary by foreign banks and conversion of existingbranches of foreign banks into wholly owned subsidiary are given below: -  GENERAL REQUIREMENTa) Foreign banks applying to the RBI for setting up a WOS in India must satisfy RBI that they are subject to adequate prudential supervision in their home country regulator; the RBI will have regard to the Basel standardsb) The setting up of a wholly owned banking subsidiary in India should have the approval of the home country regulator. 16 Scope of Foreign Banks In India
  18. 18. c) Other factors (but not limited to) that will be taken into account while considering the application are given below: Economic and political relations between India and the country incorporation of the foreign bank Financial soundness of the foreign bank Ownership pattern of the foreign bank International and home currency ranking of the foreign bank Rating of the foreign bank by international rating agencies International presence of the foreign bank.  CAPITAL:-a) The minimum start-up capital requirement for a WOS would be Rs. 3 billion and the WOS shall be required to maintain a capital adequacy ratio of 10 percent or as may be prescribed from time to time on a continuous basis, from the commencement of its operations.b) The parent foreign bank will continue to hold 100 percent equity in the Indian subsidiary for a minimum prescribed period of operation.  CORPORATE GOVERNANCE:-a) Not less than 50 percent of the directors should be Indian nationals resident in India.b) Not less than 50 percent of the directors should be non-executive directorsc) A minimum of one-third of the directors should be totally independent of the management of the subsidiary in India, its parent or associates.d) The directors shall conform to the ‗Fit and Proper‘ criteria as laid down in RBI‘s extant guidelines dated June 25, 2004.e) RBI‘s approval for the directors may be obtained as per the procedure adopted in the case of the erstwhile Local Advisory Boards of foreign bank branches.  ACCOUNTING, PRUDENTIAL NORMS AND OTHER REQUIREMENTS:-a) The WOS will be subject to the licensing requirements and condition, broadly consistent with those for new private banks.b) The WOS will be treated on par with the existing branches of foreign banks for branch expansion. The Reserve Bank may also prescribe market access and national treatment limitation consistent with international practices and the country‘s requirements.c) The banking subsidiary will be governed by the provisions of the Companies Act, 1956, Banking Regulation Act, 1949, Reserve Bank Of India Act, 1934, other relevant status and the directives, prudential regulations and other guidelines/instructions issued by RBI and other regulators from time to time. 17 Scope of Foreign Banks In India
  19. 19.  CAPITAL REQUIREMENTS:-a) The minimum net worth of the WOS on conversion would not be less than Rs. 3 billion and the WOS will be required to maintain a minimum capital adequacy ratio of 10 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 available capital including remittable surplus retained in India, as assessed by the RBI will qualify.b) Reserve Bank will cause an inspection/audit to assess the financial position of the financial position of the branches operating in India and arrive at the aggregate net worth of the branches. RBI‘s assessment of the net worth will be final. C) ROADMAP FOR PRESENCE OF FOREIGN BANKS IN INDIA:The banking sector in India is robust and its standards are broadly in conformity with internationalstandards. In further enhancing its efficiency and stability to the best global standards a two-track andgradualist approach will be adopted. One track is consolidation of the domestic banking system in bothpublic and private sectors. The second track is gradual enhancement of the presence of foreign banks in asynchronized manner.The policy decisions announced on March 5, 2004 on FDI, FII and the presence of foreign banks would beimplemented in a phased manner. This will also be synchronized with the two-track approach and will beconsistent with India‘s commitments to the WTO. In this background, the road map for the implementationof the policy decisions is as follows:Phase I: (March 2005 to March 2009) New banks – first time presenceForeign banks wishing to establish presence in India for the first time could either choose to operate throughbranch presence or set up a 100% wholly owned subsidiary (WOS), following the one-mode presencecriterion. (The guidelines are in the Annex). Existing banks – Branch expansion policyFor new and existing foreign banks, it is proposed to go beyond the existing WTO commitment of 12branches in a year. The number of branches permitted each year has already been higher than the WTOcommitments. A more liberal policy for underbanked areas will be followed. Branch licensing procedurewill continue to be as per current practice. Conversion of existing branches to Wholly Owned SubsidiariesIn the first phase, foreign banks already operating in India will be allowed to convert their existing branchesto WOS while following the one-mode presence criterion. (The guidelines on conversion of existingbranches into WOS are in the countrys requirements. 18 Scope of Foreign Banks In India
  20. 20. Acquisition of Shareholding in Select Indian Private Sector BanksIn order to allow Indian Banks sufficient time to prepare themselves for global competition, initially entry offoreign banks will be permitted only in private sector Policy and Promotion. Banks that are identified byRBI for restructuring. In such banks, foreign banks would be allowed to acquire a controlling stake in aphased manner.In considering an application made by a foreign bank, for acquisition of 5 % or more in the private bank,RBI will take into account the standing and reputation of the foreign bank, globally as well as in India, andthe desired level and nature of presence of the foreign bank in India. RBI may, if it is satisfied that suchinvestment by the foreign bank concerned will be in the long-term interest of all the stakeholders in theinvestee bank, permit acquisition of such percentage as it may deem fit.The RBI may also specify, if necessary that the investor bank shall make a minimum acquisition of 15 percent or more and may also specify the period of time for such acquisition. The overall limit of 74 per centwill be applicable.Where such acquisition is by a foreign bank already having presence in India, a time bound plan covering aperiod not exceeding six months to conform to the one form of presence concept will have to be submittedby the foreign bank along with the application for acquisition.Appropriate amending legislation will be proposed to the Banking Regulation Act, 1949, in order to providethat the economic ownership of investors is reflected in the voting rights. Simultaneous amendments will beproposed to provide for regulatory approvals from the RBI.Phase II: April 2009 According Full National Treatment to Wholly Owned Subsidiaries of Foreign Banks In the second phase, the removal of limitations on the operations of the WOS and treating them on par withdomestic banks to the extent appropriate will be designed and implemented after reviewing the experiencewith Phase I and after due consultations with all stakeholders in the banking sector. Dilution of Stake in Wholly Owned SubsidiariesIn this phase, the WOS of foreign banks on completion of a minimum prescribed period of operation will beallowed to list and dilute their stake so that at least 26 per cent of the paid up capital of the subsidiary is heldby resident Indians at all times consistent. The dilution may be either by way of Initial Public Offer or as anoffer for Sale. Mergers and Acquisition of any Private Sector Bank in IndiaIn the second phase, after a review is made with regard to the extent of penetration of foreign investment inIndian banks and functioning of foreign banks, foreign banks may be permitted, subject to regulatoryapprovals and such conditions as may be prescribed, to enter into merger and acquisition transactions withany private sector bank in India subject to the overall investment limit of 74 percent. 19 Scope of Foreign Banks In India
  21. 21. D) LICENSING OF FOREIGN BANKS IN INDIA:India issues a single class of banking license to banks and hence does not place any undue restrictions ontheir operations. Banks in India, both Indian and foreign, enjoy full and equal access to the payments andsettlement systems and are full members of the clearinghouses and payments system.Procedurally, foreign banks are required to apply to RBI for opening their branches in India. Foreign banks‘application for opening their maiden branch is considered under the provisions of Sec 22 of the BR Act,1949. Before granting any license under this section, RBI may be required to be satisfied that theGovernment or the law of the country in which it is incorporated does not discriminate in any way againstbanks from India. Other conditions as enumerated are required to be fulfilledUnlike the restrictive practices of certain foreign countries, India is liberal in respect of the licensing andoperation of the foreign bank branches as illustrated by the following: 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. Deposit insurance cover is uniformly available to all foreign banks at a non-discriminatory rate of premium. The norms for capital adequacy, income recognition and asset classification are by and large the same. Other prudential norms such as exposure limits are the same as those applicable to Indian banks. E) OPENING AND EXPANSION OF BRANCHES BY FOREIGN BANKS IN INDIA:The policy for approving foreign banks applications to open maiden branch and further expand their branchpresence has been incorporated in the ‗Roadmap for presence of Foreign banks in India‘ indicated in thePress Release dated February 28, 2005 as well as in the liberalized branch authorization policy issued onSeptember 8, 2005. The branch authorization policy for Indian banks has been made applicable to foreign banks subject to the following: Foreign banks are required to bring an assigned capital of US $25 million up front at the time of opening the first branch in India. Existing foreign banks having only one branch would have to comply with the above requirement before their request for opening of second branch is considered. Foreign banks may submit their branch expansion plan on an annual basis. In addition to the parameters laid down for Indian banks, the following parameters would also be considered for foreign banks: -  Foreign banks and its group‘s track record of compliance and functioning in the global markets would be considered. Reports from home country supervisors will be sought, wherever necessary.  The treatment extended to Indian banks in the home country of the applicant foreign bank would be considered. 20 Scope of Foreign Banks In India
  22. 22.  Due consideration would be given to the bilateral and diplomatic relations between India and the home country.The branch expansion of foreign banks would be considered keeping in view India‘s commitments at WorldTrade Organization (WTO). In terms of India‘s commitment to WTO, as a part of market access, India iscommitted to permit opening of 12 branches of foreign banks every year. As against these commitments,Reserve Bank of India has permitted up to 17- 18 branches in the past. The Bank follows a liberal policywhere the branches are sought to be opened in unbanked/under-banked areas.With a view to creating an environment for encouraging foreign banks to set up WOS, a less restrictivebranch expansion policy, though not at par with domestic banks may be envisaged. Accordingly,differentially favorable treatment to WOS of foreign banks as compared to the branches of other foreignbanks may be put in place on the grounds of regulatory comfort that subsidiaries would provide.Therefore, with a view to incentivize setting up of WOS/conversion of foreign bank branches into WOS, itis proposed that the branch expansion policy as applicable to domestic banks as on January 1, 2010, may beextended to WOS of foreign banks also. This would mean that the WOS would be enabled to open branchesin Tier 3 to 6 centers except at a few locations considered sensitive on security considerations. Theirapplication for setting up branches in Tier 1 and Tier 2 centers would also be dealt with in a manner and oncriteria similar to those applied to domestic banks.The expansion of the branch net work of foreign banks in India – both existing and new entrants that arepresent in branch mode would be strictly under the WTO commitments of 12 branches or as may bemodified from time to time. The withdrawal of the current stance of permitting larger number of branchesthan the commitment under WTO of 12 branches each year is to incentivize the foreign banks with branchmode of presence to move to WOS structure. F) CORPORATE GOVERNANCE:Any global entity would manage its investments on the basis of their assessment of the risk / return trade-offand allocate resources across various subsidiaries. The interest of the shareholders of the parent is thedriving force for such decisions. Concerns may arise when the decisions taken for a subsidiary affectdomestic depositors (and domestic shareholders, if the subsidiary is listed). Independent board membersplay an important role in protecting the interests of all stakeholders. Banks must include independentdirectors on their boards in order to make sure that management acts in the best interest of the localinstitution. Independent directors also ensure sufficient separation between the board of a bank and itsowners to ensure that the board does not have unfettered ability to act in the interests of the owners wherethose interests diverge from those of the bank. In some countries foreign bank subsidiaries operate like branches focusing above all on sales, with decision making powers being locally limited and risk – management being located abroad. To address these tendencies Reserve Bank of New Zealand requires locally incorporated large entities conduct substantial portion of their business in and from New Zealand. 21 Scope of Foreign Banks In India
  23. 23. As the international experience shows, some of the important factors to be taken into account before aforeign bank is allowed to set up a subsidiary is the commitment of its parent to support the subsidiary, theability of the subsidiary to operate on a standalone basis even when the parent faces crisis and also that thesubsidiary is managed from the host country with most of the systems and controls residing within itsjurisdiction and not managed remotely from the Head Office.In order to ensure that the board of directors of the WOS of foreign bank set up in India acts in the bestinterest of the local institution, RBI may, in line with the best practices in other countries, mandate that (i)not less than 50 percent of the directors should be Indian nationals resident in India, (ii) not less than 50percent of the directors should be non-executive directors, (iii) a minimum of one-third of the directorsshould be totally independent of the management of the subsidiary in India, its parent or associates and (iv)the directors shall conform to the ‗Fit and Proper‘ criteria as laid down in our extant guidelines contained inRBI circular dated June 25, 2004, as amended from time to time. This would be in line with our roadmapreleased in February 2005. G) RECENT DEVELOPMENTS RELATED TO FOREIGN BANKS IN INDIA:Recently, the RBI took a few important steps to make the Indian Banking industry more robust and healthy.This includes de-regulation of savings rate, guidelines for new banking licenses and implementation ofBasel Norm III.I) More stringent capital requirements to achieve as per Basel III: Recently, the RBI released draftguidelines for implementing Basel III. As per the proposal, banks will have to augment the minimum corecapital after a stringent deduction. The two new requirements – capital conservative buffer (an extra bufferof 2.5% to reduce risk) and a counter cyclical buffer (an extra capital buffer if possible during good times) –have also been introduced for banks. As the name indicates that the capital conservative buffer can bedipped during stressed period to meet the minimum regulatory requirement on core capital. In this scenario,the bank would not be supposed to use its earnings to make discretionary payouts such as dividends, sharesbuyback, etc. The counter cyclical buffer, achieved through a pro-cyclical build up of the buffer in goodtimes, is expected to protect the banking industry from system-wide risks arising out of excessive aggregatecredit growth.The above table reveals that even under current Basel Norm II, Indian banks follow more stringent capitaladequacy requirements than their international counterparts. 22 Scope of Foreign Banks In India
  24. 24. For Indian Banks, the minimum common equity requirement is 3.6%, minimum tier I capital requirement is6% and minimum total capital adequacy requirement is 9% as against 2%, 4% and 8% respectivelyrecommended in the Basel II Norm. Due to this the capital adequacy position of Indian banks is atcomfortable level. So, going ahead, they should not face much problem in meeting the new normsrequirements. But as we saw earlier, private sector banks and foreign banks have considerable high capitaladequacy ratio, hence are not expected to face any problem. But, public sector banks are lagging behind. So,the Government will have to infuse capital in public banks to meet Basel III requirements. With the higherminimum core Tier I capital requirement of 7-9.5% and overall Tier I capital of 8.5-11%, Banks ROE isexpected to come down.II) Guidelines for new banking licenses:The Reserve Bank of India placed on its website a discussionpaper on the mode of presence of foreign banks through branch or wholly owned subsidiary (WOS) inJanuary 2011 soliciting comments from all stakeholders ((RBI, 2011i). As indicated in the RBI discussionpaper, the experience gained, particularly, during the recent global crisis, points towards the subsidiary formas a preferred mode for the presence of foreign banks. The regulatory comfort that local incorporation ofwholly owned subsidiaries (WOS) provides as compared to the branches of foreign banks would also justifya preference for WOS. In India, policy on presence of foreign banks would be guided by two cardinalprinciples of reciprocity (mutual benefit) and single mode of presence.To contain dominance of foreign banks, it is proposed that when the capital and reserves of the foreignbanks in India including WOS and branches exceed 25 per cent of the capital of the banking system,restrictions would be placed on entry, branch expansion and capital infusion.This new rule announced by the Reserve Bank of India for the foreign banks in India in this budget has putup great hopes among foreign banks, which allow them to grow unfettered. As now foreign banks in Indiaare permitted to set up local subsidiaries. The policy conveys that foreign banks in India may not acquireIndian ones (except for weak banks identified by the RBI, on its terms) and their Indian subsidiaries will notbe able to open branches freely. In the coming years, the list of foreign banks in India is going to becomemore quantitative as numbers of foreign banks are still waiting with baggage to start business in India. 23 Scope of Foreign Banks In India
  25. 25. MODES TO ENTER IN INDIA FOR A FOREIGN BANKEntry of Foreign Banks: Narasimham Committee on Banking Sector Reforms (1998):The committee suggested that the foreign banks seeking to set up business in India should have a minimumstart-up capital of $25 million as against the existing requirement of $10 million. It said that foreign bankscould be allowed to set up subsidiaries and joint ventures that should be treated on a par with private banksGuidelines for Setting up of a subsidiary by foreign banks:(a) Foreign banks will be permitted to either have branches or subsidiaries but not both.(b) Foreign banks regulated by banking supervisory authority in the home country and meeting ReserveBank‗s licensing criteria will be allowed to hold 100 per cent paid up capital to enable them to set up awholly-owned subsidiary in India.(c) A foreign bank may operate in India through only one of the three channels viz., (i) branches (ii) awholly-owned subsidiary and (iii) a subsidiary with aggregate foreign investment up to a maximum of 74per cent in a private bank.(d) A foreign bank will be permitted to establish a wholly-owned subsidiary either through conversion ofexisting branches into a subsidiary or through a fresh banking license. A foreign bank will be permitted toestablish a subsidiary through acquisition of shares of an existing private sector bank provided at least theresidents of the host country hold 26 per cent of the paid capital of the private sector bank.(e) A subsidiary of a foreign bank will be subject to the licensing requirements and conditions broadlyconsistent with those for new private sector banks.(f) Guidelines for setting up a wholly-owned subsidiary of a foreign bank will be issued separately by RBI.(g) All applications by a foreign bank for setting up a subsidiary or for conversion of their existing branchesto subsidiary in India will have to be made to the RBI. 24 Scope of Foreign Banks In India
  26. 26. FUNCTION OF A FOREIGN BANK FINANCING FOREIGN TRADE: -They primarily finance India‘s foreign trade. They under take two-way operations: - Financing of exports and imports of India; and Financing of movement of goods from and to Indian ports/to or from the distributing or collecting centers in the interiors parts of the country. In this context, they discount or purchase foreign bills BANKING BUSINESS: -The exchange bank conducts all types of banking business. They accept Deposit from the public, grantloans, discount trade bills and provide remittance facilities. And thus compete with Indian banks. FINANCING INLAND TRADE: -They also finance trade in many up country centers, as they opened a number of branches in the main portsand trading centers of the country. AGENCIES SERVICES:Like other commercial banks, foreign exchange bank render several agencies services to their customers. MERCHANT BANKING: -Some exchange bank has opened merchant banking division to provide banking services. For e.g.: - TheNational and Grind lays banks first started merchant banking services in 1967, followed by the first NationalCity banking1970. The exchange banks have been doing a profitable business in the country. Their financialratio.I.e. Profit-to Income ratio is more than double that of the Indian commercial bank. Their highprofitability may be attributed to their non-fund business, such as commission, brokerage, etc. Further theymostly finance multinational corporations, and their returns are higher. Moreover, they minute their risk inlending also. 25 Scope of Foreign Banks In India
  27. 27. ROLE OF A FOREIGN BANKForeign Banks in India always brought an explanation about the prompt services to Customers. After the setup foreign banks in India, the banking sector in India also become competitive and accurtive.Foreign banks play a relatively minor role in the Indian economy; this fact is relevant right now for tworeasons. First, the Reserve Bank of India is likely to open up the Indian banking market further. Two, theglobal credit crisis has shown how problems in Western banks can reverberate through financial systems inemerging markets. The advantages of greater foreign bank participation are clear: They tend to increase theefficiency of the local banking system, bring in more sophisticated financial services and have the ability tonurse weak banks back to health. That underlies the case for greater freedom for foreign banks.The credit crisis has brought the dark underside into focus. Global banks that boast of the best practices inthe way they allocate capital and manage risks are also prone to make elementary mistakes, partly becauseof the imperfect nature of regulations and partly because bankers have perverse incentives to be loose withother people‘s money.New rules announced by the Reserve Bank of India for the foreign banks in India in this budget have put upgreat hopes among foreign banks, which allow them to grow unfettered. Now foreign banks in India arepermitted to set up local subsidiaries. The policy conveys that foreign banks in India may not acquire Indianones (except for weak banks identified by the RBI, on its terms) and their Indian subsidiaries will not beable to open branches freely the options for foreign banks in India have increased. They have much moreflexibility vies-a-vies the nature of their operations in India.Banks will take a choice on what option they would follow depending on their strategies and the way theyoperate in other markets. Some banks are comfortable operating as subsidiaries while some are comfortablewith the merger and acquisition route. Some on the other hand, may prefer to stick to the branch operationroute since this would maintain a status quo and not entail some of the additional burdens like increasepriority sector lending and adhering to the Companies Act. This is the route that is likely to be followed bythe smaller foreign banks that are niche players in the Indian banking sector. It is really difficult to give anopinion about what to expect from the new rules for setting up subsidiaries by foreign banks. It will be up toindividual banks to take a call on the route that they want to take. Assessment is that some of the biggerforeign banks in India, especially the ones who have indicated they may want to take up a 49 per cent stakein a private bank, may go in for a subsidiary. But the smaller foreign banks will not go in for this kind of aset-up and will prefer to continue operating the way they have been.The option of setting up a subsidiary will have its own pros and cons. It will allow foreign banks to raisesubordinate debt in the local market. But it would also mean adhering to the provisions of the CompaniesAct, changes in the quantum of directed lending and in the remuneration of senior bankers in tune withguidelines of the Indian law. It will be up to individual banks to use the subsidiary option. However, it maynot affect the taking over of 49 per cent in an Indian private sector bank.Foreign bankers are of the view that one of the major draws for setting up a subsidiary would have been theability to set up branches without requiring a Reserve Bank of India (RBI) license (like other Indian banks),but now getting a license for a branch from the central bank has also become much easier. Foreign banks inIndia now, have three options before them. The first, of course, is to continue as a branch operation with thenecessary RBI approvals and grow the business organically. 26 Scope of Foreign Banks In India
  28. 28. This option would have ramifications for tier-1 and tier-2 capital and they will have to either bring in capitalor retain their profit to carry on the same level of business. Some banks may decide that it is better to be abank in this category i.e. is a better but different bank and grow its business. The second option is tocontinue in India and then take a stake of 49 per cent in a private bank in India. But this option is not an easyoption since it would entail two brands in the same country and dilute the brand equity.It may be a good option for a bank from outside, since it can take control of a local bank with an existinginfrastructure. But the bank will have to take the third option is local incorporation. But a network will stillhave to be building since an existing network will not be present. But the bank will have access to capitalwith the choice of raising tier-2 capital in the local market like the Indian banks.Finance minister in the Budget had allowed foreign banks the option to function as a subsidiary as against abranch set up in India, which is what the foreign banks have at the moment. But foreign banks will have toadhere to the rules and regulations, which the private and state run banks follow. The operational guidelineshave not yet come out and the RBI is said to be in the process of formulating the same.Some economists are of the view that Foreign Banks should, not be allowed to operate in the country. Butpermission to such banks to operate in the country is unavoidable on the basis of reciprocity. This iscertainly the view of the Reserve Bank of India, and it is justified by the success of Indian Banks operatingin foreign countries.Indian Banks have been rapidly expanding their overseas operations. Between 1975 and 1978, the number ofoffices of Indian Banks in foreign countries had increased by 48, from 77 to 125.This is in contrast with the stagnant number of Foreign Bank Offices in India. As a consequence, the growthof business of Indian Banks has been phenomenal as compared to that of the branches of their foreigncounterparts in India. Deposits and advances of Indian Banks abroad have increased by 14% and 18%respectively, whereas the corresponding figures of Foreign Banks in India are 28% and 30% respectively. Interms of remittances of the present banks also, Indian banks are ahead.In 1976, they remitted Rs. 90 millions to India, where their counterparts remitted Rs. 70 millions only.Indian Banks abroad are involved in many new banking activities. State Bank of India and Bank of Baroda,the two leaders in the sphere, are raising foreign currency funds, for both private and public sector concerns.In addition, these banks are funding many joint ventures in South East Asia. For instance, SBI is fundingjoint ventures in Singapore, Indonesia and Malaysia. The Bank has arranged finances to the tune of $ 750million dollars we can see clearly that Indian Banks are indeed generating a lot of business overseas.At present they are operating in as many as 26 countries of which only eight countries have their own bankbranches in India. Thus, the question of reciprocity does indeed have relevance, because, if we want to seekprofitable opportunities overseas, we must be prepared to open our own gates also. In short, the operation offoreign banks in India is fully justified. It is in our own national interest. 27 Scope of Foreign Banks In India
  29. 29. ADVANTAGES OF A FOREIGN BANKThere is no denying the fact that the foreign banks are playing a pivotal role inIndian economy. They helpthe economy by financing the import and export trade of the country. They also receive deposits from thepublic as fixed deposits andCurrent account deposits. They also give Loans and advances to the traders andBusinessmen. They also issue bank drafts, cheques and Mail Transfers to the Customers.Further, they also help in internal trade, by giving credit facilities· to their customers for the procurement ofraw 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 have opened up severaloptions for the developi1g countries to attain economic growth. The achievement of this objective has beenmade possiblepartly by foreign exchanges transactions. Like every other facility, the foreignbanks alsocreate both advantages and disadvantages.The advantage is that the foreign banks help finance exports and imports under letter of credit, the mediumof D.A. Bills and D.P. Bills, and by promoting internal trade. In this way they help in earning foreignexchange. As the foreign banks have branches in almost all the other countries of the world, they are able tomaintain business links with all those countries for various purposes.Thus, through these banks, Indian businessmen are also able to maintain their contacts with. Theircounterparts in other countries. So far as standard of performance is concerned foreign banks are consideredto be more efficient and more competent than their Indian counterparts. However, one great disadvantageof foreign banks is that their attitude towards Indian businessmen is discriminatory.These banks have more or less monopolized the financing of Indias external trade through which they earnlarge sums of money as commission or brokerage, etc.They also extend preferential treatment to foreign institutions in the matter of grant of loans and advances.They also charge excessive commission for the currencies of those countries, which do not have their ownbank branches in India.The Indian capital invested in these banks is misused in the sense that their capital, instead of being utilizedfor the benefit of Indian business, is used for the purchase of shares and bonds from road, thus diminishingthe profit share of India. Foreign banks are required to obtain license from the Reserve Bank of India but theRBI has failed to exercise an effective control over these banks, with the result that these banks haveacquired large amounts of money in the London money market, thus rendering the Indian money marketineffective.It will thus be seen that the foreign banks have played a significant role in the growth of Indian economyduring the post-Independence period. But at the same time, it is also a fact that in conditions of political andfinancial instability, especially in developing countries including India, foreign banks, with their vastresources and political in fluency abroad, can hold the national currencies and economies to. Ransom. Thebanking scams of the harshad Mehta fame could not have been made possible without the manipulation offoreign banks operating within the country.The Indian commercial banks have neither the resources nor the freehand to finance such gigantic andscandalous transactions and deals. In the East-Asian countries also, when the foreign banks found thenational economies in a state of confusion, they played havoc with the economies of the host countries bysuddenly withdrawing huge amounts of money from the national economies thereby engineering economicdisasters in those countries. 28 Scope of Foreign Banks In India
  30. 30. Foreign banks are very helpful in the development of India. It is necessary and desirable for us to maintainand encourage foreign balances in India to promote investments and finance international trade. But weshould utilize their loans properly in the productive way as after economic development we have to repaytheir loans in time. It in equally important to exercise strict vigilance and control over their activities lestthey should create another Indonesia or Thailand in India. 29 Scope of Foreign Banks In India
  31. 31. THE ECONOMIC CRISES IN 2007 – 08OVERVIEW:The bursting of the U.S. housing bubble, which peaked in 2006, caused the values of securities tied to U.S.real estate pricing to plummet, damaging financial institutions globally. The financial crisis was triggered bya complex interplay of valuation and liquidity problems in the United States banking system in 2008.Questions regarding bank solvency, declines in credit availability and damaged investor confidence had animpact on global stock markets, where securities suffered large losses during 2008 and early 2009.Economies worldwide slowed during this period, as credit tightened and international trade declined.Governments and central banks responded with unprecedented fiscal stimulus, monetary policy expansionand institutional bailouts. Although there have been aftershocks, the financial crisis itself ended sometimebetween late-2008 and mid-2009. In the U.S., Congress passed the American Recovery and ReinvestmentAct of 2009. In the E.U., the U.K. responded with austerity measures of spending cuts and tax increaseswithout export growth and it has since slid into a double-dip recession.IMPACT ON INDIA:Indias economy benefited from recent high economic growth, which declined greatly due to the globaleconomic crisis. Economic growth in India during FY2008-09 stood at 6.7%. The global crisis had lessimpact of India because exports account for only 15% of Indias GDP, less than half the levels of majorAsian economic powers such as China and Japan.However, unlike other major Asian economies, Indias government finances were in poor shape and as aconsequence, it was not able to enact large-scale economic stimulus packages. Despite this, from June 2008to June 2009, industrial production in India grew by 7.1%.Though he ended up being wrong, the former Indian Finance Minister P. Chidambaram once boasted that heexpected Indias economy to "bounce back" to 9% during FY2009.Indias Prime Minister Manmohan Singhsaid that the government would take measures to ensure that the economic growth bounces back to 9%.The Asian Development Bank predicted India to recover from weakening momentum in 4-6 quarters. At theG20 Summit, India called for coordinated global fiscal stimulus to mitigate the severity of the global creditcrunch. India said that it would inject US$4.5 billion into the financial system to help exporters.Some analysts pointed that Indias growing trade with other Asian countries, especially China, will helpreduce the negative impact of the crisis. Analysts also said that Indias high domestic demand and largeinfrastructure projects would act as a buffer reducing the impact of the global downturn on its economy.Economists argued that Indias financial system is relatively insulated and its banks do not have significantexposure to subprime mortgage. In an editorial, the New York Times praised the strong regulations placed onthe Indian banking system by the Reserve Bank of India.In May 2009, India reported an economic growth rate of 5.8%, beating most forecasts. In second quarter of2009 the Indian economy grew by 7.9% and gave indications that the Indian economy would scale a growthrate of 7% or above in 2009 and 8-9% in 2010. In the 3rd Quarter of 2010, the economy had bounced backwith a growth rate of 8.8%. 30 Scope of Foreign Banks In India
  32. 32. THE POST CRISES ANALYSISPerformance of the Indian Banking Sector Post CrisisIndian banking sector faced the stress because foreign investors pulled out of the economy and created aliquidity crunch. The tightened global liquidity situation in the period immediately following the failure ofLehman Brothers in mid-September 2008, coming as it did on top of a turn in the credit cycle, increased therisk aversion of the financial system and made banks cautious about lending. At the same time, corporatesand retail investors exerted redemption pressures on mutual funds, some of which got transmitted to NBFCsdue to their dependence for funds on mutual funds. Thus, despite not being getting a hit on the balancesheets, banks and other financial institutions were impacted by the indirect spillovers of the crisis during2008-09.The deposit growth of commercial banks decelerated marginally during 2008-09 compared to the previousyear; on the other hand, growth in bank credit decelerated at a faster rate than deposits during 2008-09.Loans and advances of commercial banks have been growing at a compounded annual growth rate (CAGR)of above 20 per cent, driven largely by targeted lending to priority sector which includes agriculture, microand small enterprises, microcredit, education and housing. Banks‘ exposures to infrastructure constructionalso increased in recent years, fuelled by development needs, while more broad-based economic prosperityresulted in higher demand for residential and commercial real estate loans.The sustained efforts of the Government, the Reserve Bank and the banks themselves have resultedin a competitive, healthy and resilient financial system. The major indicators of the Indian bankingsystem in the period following the crisis also did not show any adverse movement.The profitability of Indian banks was maintained during the year of the crisis. The Return on Assets(RoA) during 2008-09 remained at last year‘s level of about 1.13 per cent. It fell moderately to 1.05per cent in 2009-10.The CRAR of scheduled commercial banks (SCBs) after improving from 13.0 per cent as at end-March 2008 to 13.6 percent as at end-March 2010, slipped back to 13.0 per cent at end-March2011. Nevertheless, as at end-March 2011, under both Basel I and Basel II, the CRAR at 13.0 percent and 14.2 per cent, respectively, was far above the BCBS norm of 8 per cent.The gross NPA ratio of SCBs remained intact during the crisis year at 2.3 per cent. As at end-March2009 and end-March 2008, it increased moderately to 2.39 per cent (Table 4).The RBI uses cash reserve ratio (CRR) and statutory liquidity ratio (SLR) together with a widerange of other measures to ensure a robust liquidity backstop. The relatively high levels of SLR setat 24 per cent of net time and deposit liabilities (NTDL), in addition to CRR set at 6 per cent ofNDTL, have enabled banks to cope well with liquidity pressures during the recent global financialturmoil. 31 Scope of Foreign Banks In India
  33. 33. Table 4: Select Banking Indicators@ Indicator 2006- 2010- 2007-08 2008-09 2009-10 07 11I. Growth in Major Aggregates (per cent) Aggregate Deposits 24.6 23.1 22.4 16.8 18.3 Loans and Advances 30.6 25.0 21.1 16.6 22.9 Investment in Government Securities 9.3 22.7 25.9 17.3 6.6II. Financial Indicators (as percentage oftotal assets) Return on Assets 0.9 1.0 1.1 1.1 1.1 Net Interest Margin 2.6 2.3 2.4 2.2 2.9III. Capital to Risk weighted Assets RatioBasel I 12.3 13.0 13.2 13.6 13.0Basel II - - 14.0 14.5 14.2IV. Gross Non-Performing Assets (As 2.5 2.3 2.3 2.4 2.3percentage of advances)@: Relating to Scheduled commercial banks. 
 Source : Report on Trend and Progress of Banking inIndia, sever l values.As far as the financial sector is concerned, it recovered well from the impact of the crisis and hasmaintained its performance at its pre-crisis levels. Since the Indian financial system is bankdominated, banks‘ ability to withstand stress is critical to overall financial stability. Despite thefragilities observed in the global macro-financial environment, the performance of Indian banksremained robust during 2010-11.A series of stress tests conducted by the Reserve Bank in respect of credit, liquidity and interest rate risksshowed that banks remained reasonably resilient. However, under extreme shocks, some banks could facemoderate liquidity problems and their profitability could be affected (RBI, 2011b) 32 Scope of Foreign Banks In India
  34. 34. REFORMS AND FUTURE OF INDIAN BANKING SECTOR - POST CRISESThe Indian financial system has changed considerably over the past fifteen years. Interest rates have beenderegulated and competition and efficiency in the banking business has increased with new entrants beingallowed.Since 2009, the financial sector reforms in India got a new impetus with India joining hands with theinternational community in the post crisis reform of financial regulation, and playing a key role in theongoing initiative through international forays like the G20, the IMF and the BIS in designing newregulatory and supervisory structure.In view of the high scale of savings within the economy, there is a greater need for further financial-sectorreform such as liberalization of the entry norms, and streamlining the regulatory and legal framework Whilesuch reforms would improve the productivity of the financial sector they would also likely have positivespillover effects on the rest of the economy and help sustain rapid growth (OECD, 2011).Also, the post crisis regulatory and supervisory developments in India are based not on the lessons from thepast, but are being guided more by the future needs of the economy. The focus of the second phase offinancial sector reforms starting from the second-half of the 1990s has been on strengthening of the financialsystem consistent with the movement towards global integration of financial services as also on structuralreforms largely based on the suggestions made by the various high-level committees and groups so as tomeet the requirements of a fast growing modern-market economy.Even though a large public sector in banking and limited openness to foreign banks proved helpful inisolating India from the on slaught of the recent crisis, India is now exploring ways to liberalize these twoareas. India is working on liberalizing the licensing of new banks, presence of foreign banks, and bankholding company structure for the financial conglomerates - changes that have the potential of changing thefinancial landscape.The progress of the reforms in India in the post crisis period has been remarkable considering a spate ofmeasures being taken to improve financial soundness of banking sector, which is a sine qua non for thefinancial stability in a bank-dominated country. The major indicators of the Indian banking system in theperiod following the crisis have not shown any adverse developments and the performance of Indian banksremained robust during 2010-11.A series of stress tests conducted by the Reserve Bank in respect of credit, liquidity and interest rate risksshow that banks are reasonably resilient. The single-factor sensitivity calculations suggest that the systemwould be able to withstand a range of risk specific and sector specific shocks occurring in isolation, and theimpact of interest rate risk, foreign exchange risk and equity price risk would not be significant. Theliquidity stress test results indicated that the SLR investments enabled the banks to withstand quite severedeposit runs. The network of the Indian banking and financial system have a tiered structure but limits oninter bank liabilities mitigate contagion risks (RBI, 2011a).Going forward, a proper balance between regulation and liberalization of the financial sector would becomeimportant. India is progressing well in adopting new techniques in supervisory assessments such as, networkanalysis and stress testing. India has also moved ahead on its agenda to modernize and improve the financialinfrastructure with reforms in the financial markets and the payment and settlement system, which enhancethe efficiency of the financial sector - a crucial input in the real growth of the economy. 33 Scope of Foreign Banks In India
  35. 35. While mergers and amalgamations and deposit insurance have broadly taken care of the bank failures, theresolution mechanism is being strengthened based on the evolving international practices. Issues requiringlegislative attention include the orderly resolution of failing banks and financial institutions, domestically aswell as cross-border, home-host regulatory cooperation in information sharing, convergence of IndianAccounting Standards with IFRS, empowering RBI for consolidated supervision, supervision of financialconglomerates, etc.BENEFITS OF OPERATION AS A: BRANCH SUBSIDARY Greater operational flexibility Clear delineation between assets and liabilities of the Indian outfit and those of its parents Increased lending capacity (Loan Size Ring fences capital within the host limits are based on the parent banks country capital) Reduced corporate governance Has its own board of Directors requirements Branches are generally not allowed to Local incorporation provides effective take retail deposits and do not have a control in a crises and enables the host deposit insurance country to act independently 34 Scope of Foreign Banks In India