A study on scope of foreign banks in india

A STUDY ON SCOPE OF FOREIGN
BANKS IN INDIA

Submitted in partial fulfillment of the requirements of Mumbai
University for the Award of the Degree

MASTER OF MANAGEMENT STUDIES

ACADEMIC YEAR
2011 – 2012

Under the Guidance of
Dr. Aditi Mahajan

ATHARVA INSTITUTE OF MANAGEMENT
STUDIES

INTRODUCTION
A foreign bank is a type of bank that is obligated to follow the regulations of both the home and host
countries. Because the foreign branches of those banks‘ loan limits are based on the parent bank's 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 globalization
hitting 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 in
India. This has made the banking business in the country more smooth and interesting for the
customers. After the set up foreign banks in India the banking sector in India hasalso become
competitive and assertive.

The concept of foreign banks in India has changed the prevailing banking scenario in the country. The
banking industry is now more competitive and customer-friendly than before. The foreign banks have
along 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 entire
banking hierarchy. The scheduled banks under the authority of Reserve Bank of India are further
categorized into two segments - commercial banks and co-operative banks. The commercial banks are
then again subdivided into two classes - private sector banks and public sector banks. In the year
1994, the Government of India allowed the new private banks to operate in the country and this
changed the face of banking in the country.

According to the new rules set by Reserve Bank of India in the new budget, some decisions regarding
foreign banks in India have been taken. The steps taken by the central monetary authority provide
some extent of liberty to the foreign banks and they are hopeful to grow unshackled. The foreign
banks in India are now allowed to set up local subsidiaries in the country. The policy also states that
the 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 as
local banks, except that their focus in terms of product and customers may be different due to their limited
branch network.

They bring in new technology and facilitate in the introduction as well as assimilation of international
products into the domestic markets. They help the local banking industry keep pace with developments in
the financial centers abroad. They also help provide Indian corporations access to foreign capital markets. In
keeping with the general trend towards liberalization, the Government has introduced several measures for
widening the scope for foreign banks to enter and operate in India.

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Scope of Foreign Banks In India

B) DEFINITION OF FOREIGN BANK:
Investopedia Says:
Banks often open a foreign branch in order to provide more services to their multinational corporation
customers. However, operating a foreign branch bank may be considerably complicated because of the dual
banking 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 be
legally 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 the
financial sector. Many banks from both advanced and developing countries, have ventured abroad and
established presence in other countries. As a result, foreign banks have become important in domestic
financial 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 The
General Bank of India (1786) and Bank of Hindustan (1790) both of them are known defunct. Then came
bank of Calcutta (June 1806), which finally became State Bank of India. The Allahabad bank established in
1865 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 was
however 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 prominent
foreign banks which are presently operating in India

Foreign banks too started to arrive, particularly in Calcutta, in the 1860s. The Comptoired‘Escompte de
Paris opened a branch in Calcutta in 1860, and another in Bombay in 1862; branches
in 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 so
became 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 many
international banks to open their branches in India. At present almost all the international banks are
operating in India.

At the end-March 1987, there were 21 foreign banks with 136 branches in India. During 1960-80, the total
assets 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 started
merely to finance India‘s foreign trade. As on June 30th June 2012 there is 34 foreign banks in India with
273 branches.

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INTRODUCTION TO ROYAL BANK OF SCOTLAND
ABN AMRO BANK
The history of ABN Amro Bank dates back to the year 1924, when King Williem – I issued a Royal Decree
declaring 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 the
Dutch East Indies.

On the 3rd of October 1964, NTS merged with the Twentsche Bank, and the new name it was given was
Algemene Bank Nederland (ABN Bank). Further, on the 22nd of September 1991, ABN Bank merged with
the Amro Bank in Amsterdam. Henceforth, the new entity came to be known as ABN AMRO Bank.

Recent Developments

In the month of October 2007, a consortium of RBS, Fortis and Santander acquired ABN AMRO, which is
termed as the biggest banking acquisition ever happened in the financial history of the world. Because of the
worldwide financial crisis of the year 2008, the Dutch state decided to nationalize the Fortis stake in the
ABN AMRO, and according to an announcement made by the state on the 3rd of October 2008, the Dutch
state 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 Dutch
state, BancoSatander and the Royal Band of Scotland Group (RBS). The financial crisis being faced by the
bank led the RBS to announce its plans to fire over 9000 staff members of ABN AMRO. This
announcement was made by the RBS on the 7th of April 2009. The total assets of the bank stood at 912
Billion Euros in June 2008, while it churned a profit of 10 Billion Euros in the year 2007. The working
strength of the ABN AMRO Bank was 102,556 employees at the end of the year 2007.

Presence in India

The ABN AMRO Bank registers a comprehensive presence in India, with its offices located in all the
prominent cities of the country. Its office located at Nariman Point, Mumbai, while the Personal and
Business Banking related its New Delhi office located at Barakhamba Road governs matters manages the
Corporate and Institutional Banking and Private Banking services of the bank. The bank also offers
specialized services to international diamond and jewellery merchants, and its Mumbai office serves as the
regional 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 a
comprehensive transaction execution platform in India. ABN AMRO (India) has branches in many cities of
India, such as Bangalore, Baroda, Chennai, Delhi, Gurgaon, Hyderabad, Kolkata, Lucknow, Mumbai,
Noida, Pune and Surat.

Microfinance Program

The ABN AMRO Bank has also initiated its Microfinance program in India, which is the largest one among
the same being offered by foreign banks in the country. Under the program, the bank deploys intermediary
agencies called microfinance institutions for delivering micro loans less than USD 200 to its target consumer
group of poor women with rural background. Till the month of April 2009, more than 390,000 customers
spanning across 16 states in India were receiving micro financing small loans through its 26 Micro Finance
Institutions.
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The Royal Bank Of Scotland
The Royal Bank of Scotland was founded in 1727 and has a history of over three hundred years. With its
rich history, it has become one of the largest financial service groups in the world. It provides banking
services for individuals, corporate houses and institutions. The headquarters of Royal Bank of Scotland is in
Edinburgh, Scotland. The bank is a part of retail banking subsidiaries of the Royal Bank of Scotland Group
and along with NatWest and Ulster Bank, provides branch-banking facilities in the United Kingdom. The
Royal Bank of Scotland and the Royal Bank of Scotland Group are completely separate from the Bank of
Scotland, 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 of
branches spread in many large towns and cities throughout England and Wales. The Royal Bank of Scotland
Group provides a strong support to large enterprises, including multi-national corporations (MNC) and
financial institutions. It offers integrated consumer and business banking services including transaction
banking, 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 the
Dutch 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 offerings
including personal loans, credit cards, savings accounts, financial planning, investment and insurance
services, which will significantly meet the daily financial needs of over a million personal banking clients in
India. The bank's asset management segment in just two years of its initial operations in the country has
emerged to be amongst the fastest growing asset managers. The bank is looking forward to being a leading
player in the Indian asset management industry. With the help of its comprehensive research and diverse
range of investment products, the bank is offering clients investment options in fixed income, equities,
money markets and structured products.
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NRI Oriented Services:The Royal Bank of Scotland's NRI Services provides premium and exclusive
banking service to its customers in India. It offers a personalized service based on careful understanding of
needs as a Non Resident Indian (NRI), helping you before leaving India, while you are abroad and when you
plan 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. RBS
has a deep-seated commitment to excellence and service, with a strong and sustainable banking
model to meet the evolving market and regulatory backdrop.

Combining Global Banking & Markets (GBM) operations with the international arm of Global
Transaction 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 serve
clients. RBS is committed in supporting its client’s need globally with world-class debt financing, risk
management 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 & strategy

Clients include:
Companies
Financial institutions
Governments
Public sector

M&IB helps clients to:
Raise money
Invest money
Protect themselves against financial risks

RECENT DEVELOPMENTS:

RBS is focusing on trading and investment banking in India after agreeing last July to sell its commercial
and retail banking business in the country to HSBC Holdings Plc. (HSBA)The Edinburgh-based lender was
ranked 12th in stock tradingon India‘s exchanges in the first quarter of 2011, according to data compiled by
Bloomberg. RBS plans to sell its Indian commercial and retail banking unit to HSBC for $95 million more
than tangible net asset value, HSBC said in July.

5


THE INDIAN ECONOMY
OVERVIEW:
India‘s rate of economic growth over past decade has been one of the most significant developments in the
global economy. India is one of the worlds fastest growing significant economies. "Today India is among
the most attractive destinations globally, for investments and business and FDI had increased over the last
few years," according to Mrs.PratibhaPatil, President of India. The Indian economy has continuously
recorded 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 an
office in the next twelve months. "Today, India is amongst the most important G-20 economies and this
underscores Forum's 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 India

The economic scenario in India has been pretty stable over the last 5 years. Despite the economic downturn
three years back the Indian economy has managed to remain stable. The India GDP recorded for the period
December 2010 stood at 7.4 percent. However according to the CMIE (Centre for Monitoring Indian
Economy) India will record a GDP of 7.6% percent in the current fiscal year (2012 – 13). India's GDP
growth 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 a
greater economic activity leading to higher demand for loans, overdraft and credits and vice versa for lower
GDP. This affects the banking industry. Hence if the country will have higher GDP foreign banks would be
attracted towards India.

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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 and
a record low of -11.3 Percent in May of 1976. Inflation rate refers to a general rise in prices measured
against a standard level of purchasing power. The most well known measures of Inflation are the CPI, which
measures consumer prices, and the GDP deflator, which measures inflation in the whole of the domestic
economy.

Chart 2: Chart showing Inflation rate in India

Effects on the Banking Sector:As the inflation in the economy rises the banks change their interest rates
accordingly. As a result of which the treasury income of the banks is impacted. Higher
The 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 to
remain among the top five attractive destinations for international investors during 2010-12, according to
United Nations Conference on Trade and Development (UNCTAD) in a report on world investment
prospects titled, 'World Investment Prospects Survey 2009-2012'.

India attracted FDI equity inflows of US$ 1,274 million in February 2011. The cumulative amount of FDI
equity inflows from April 2000 to February 2011 stood at US$ 128.642 billion, according to the data
released 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 FDI
equity inflow into India, with FDI worth US$ 3,274 million during April-February 2010-11, while
telecommunications including radio paging, cellular mobile and basic telephone services attracted second
largest amount of FDI worth US$ 1,410 million during the same period. Housing and Real Estate industry
was the third highest sector attracting FDI worth US$ 1,109 million followed by power sector which
garnered US$ 1,237 million during April-December 2010-11. The Automobile sector received FDI worth
US$ 1,320 million.

During April-February 2010-11, Mauritius has led investors into India with US$ 6,637 million worth of FDI
comprising 42 per cent of the total FDI equity inflows into the country. The FDI equity inflows from
Mauritius is followed by Singapore at US$ 1,641 million and the US with US$ 1,120 million, according to
data released by DIPP.

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Chart 3: The source of FDI into India between April 2000 and March 2011

Effects on The banking Sector:As more corporates are attracted towards India, and India is ranked among
top five destinations for FDI among the world, foreign banks would have a greater advantage over other
banks in India. Foreign banks have their branches across various countries in the world hence for an MNC
banking with these banks becomes easier and good relations develop between the client and the bank in the
long term which is beneficial for both. If FDI increases the credit demand in the market increases and hence
more 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. The
company would prefer a MNC bank as the bank has greater access to international market.

8


THE BANKING SECTOR:
High growth of Indian Economy: The growth of the banking industry is closely linked with the growth of
the overall economy. India is one of the fastest growing economies in the world and is set to remain on that
path for many years to come. This will be backed by the stellar growth in infrastructure, industry, services
and agriculture. This is expected to boost the corporate credit growth in the economy and provide
opportunities 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 a
conservative outlook towards credit except for housing and other necessities. However, with an increase in
disposable income and increased exposure to a range of products, consumers have shown a higher
willingness to take credit, particularly, young customers. A study of the customer profiles of different types
of banks reveals that foreign and private banks share of younger customers is over 60% whereas public
banks have only 32% customers under the age of 40. Private Banks also have a much higher share of the
more profitable mass affluent segment

New channel – Mobile banking is expected to become the second largest channel for banking after
ATMs: New channels used to offer banking services will drive the growth of banking industry
exponentially 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 the
help of new 3G and smart phone technology (mobile usage has grown tremendously over the years). This
can be looked at as branchless banking and so will also reduce costs, as there is no need for physical
infrastructure and human resources. This will help in acquiring new customers, mainly who live in rural
areas (though this will take time due to technology and infrastructure issues). The IBA-FICCI-BCG report
predicts 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 is
trying 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 of
disadvantaged and low-income groups. The RBI has also taken many initiatives such as Financial Literacy
Program, promoting effective use of development communication and using Information and
Communication 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 social
responsibilities 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 past
couple of years and aggressive lending by banks many loans have turned non-performing. Restructuring of
assets means loans whose duration has been increased or the interest rate has been decreased. This happens
due to inability of the loan taking company/individual to pay off the debt. Both of these have impacted the
profitability of banks, as they are required to have a higher provisioning amount, which directly eats into the
profitability. The key challenge going forward for banks is to increase loans and effectively manage NPAs
while maintaining profitability.

Intensifying competition: Due to homogenous kind of services offered by banks, large number of players
in the banking industry and other players such as NBFCs, competition is already high. Recently, the RBI
released the new Banking License Guidelines for NBFCs. So, the number of players in the Indian banking
industry is going to increase in the coming years. This will intensify the competition in the industry, which
will decrease the market share of existing banks.

9


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 development
initiatives.

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 excellence
in Indian banking’, India‘s gross domestic product (GDP) growth will make the Indian banking industry
the third largest in the world by 2025. According to the report, the domestic banking industry is set for an
exponential growth in coming years with its assets size poised to touch USD 28,500 billion by the turn of
the 2025 from the current asset size of USD 1,350 billion (2010).

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If we look at 5 years historical performance of different types of players in the banking industry, public
sector 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 by
reporting 24.2% growth, followed by public banks (21.4%) and then by foreign banks (14.8%). Though the
growth in the business per employee and profit per employee has been the highest for public sector banks, in
absolute 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 as
compared 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 public
sector bank was also significantly higher than that of private and foreign banks at the end of FY11, which
indicates the asset quality of public banks is comparatively poor. The Capital Adequacy ratio was also very
high for private and foreign bank as compared to public banks.

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In conclusion, we could say that currently, there are many challenges before Indian Banks such as
improving capital adequacy requirement, managing non-performing assets, enhancing branch sales &
services, improving organization design; using innovative technology through new channels and working on
lean operations. Apart from this, frequent changes in policy rates to maintain economic stability, various
regulatory requirements, etc. are additional key concerns.

Despite these concerns, the Indian banking industry will grow through leaps and bounds looking at the huge
growth potential of Indian economy. High population base of India, mobile banking – offering banking
operations through mobile phones, financial inclusion, rising disposable income, etc. will drive the growth
Indian banking industry in the long-term. The Indian economy will require additional banks and expansion
of 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. India's
Internet economy's 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 Group

Nearly 50 per cent of people surveyed in India believe that interacting with the Government is easy, as per
Accenture. 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 than
those from all other countries to use digital services beyond websites and portals.

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ROAD AHED:

India continues to urbanize at a strong pace driven by a combination of up trending consumption, robust jib
creation and growing financial penetration, according to Morgan Stanley‘s proprietary Alpha Wise city
vibrancy index. The report reveals that Bengaluru, Chandigarh, Hyderabad, Pune and Chennai are the top 5
vibrant cities.

The government had liberalized investments made by registered foreign institutional investors (FIIs) under
the portfolio investment scheme (PIS) from April 10, 2012. Earlier these investments required government
approval.

13


FOREIGN BANKS IN INDIA
Foreign Banks in India always brought an explanation about the prompt services to customers. After the set
up 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. In
that, 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 National
Australia Bank Ltd. Given a chance, all banks would like to convert their representative offices into
branches.

Standard Chartered Bank, the oldest foreign bank that came to India 150 years ago, now operates the
maximum 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 to
set 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 the
country viewed as attractive because of gaps in the market and a buoyant economy that has created wealthier
clients.

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.

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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 at
consultancy 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 Depository
Receipts, 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 of
Calcutta 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 banking
operations. Credit Suisse, which already has an Indian investment banking, wealth management and mutual
fund 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, Alex
Thorsby, has said.

The presence of foreign banks has brought changes to the way India banks. They were instrumental in
bringing automated teller machines (ATMs) and credit cards to India.But they have still played a limited
role in India‘s vast lending space, which has traditionally been dominated by state-run banks, mainly due to
restrictions and entry barriers in place until economic liberalization in the early 1990s.

15


Operations still cater to a niche market of wealthy clients in big cities, offering specialized products, forex
and financial transaction facilities, advisory and wealth management services.

Thirty-four foreign banks are currently operating in India with Citibank, Standard Chartered and HSBC
currently 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 of
27%, 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 Reserve
Bank of India says the next phase of expansion will see foreign banks‘ role ―gradually enhanced in a
synchronized manner‖.

A spokeswoman declined to comment on how many overseas banks are looking to set up but said they
would 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 above
its commitment of 12 to the World Trade Organization

One 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 relatively
low 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 and
securities 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 banks
slipped 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 existing
branches of foreign banks into wholly owned subsidiary are given below: -

 GENERAL REQUIREMENT

a) 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
standards

b) The setting up of a wholly owned banking subsidiary in India should have the approval of the home
country regulator.

16


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 directors

c) 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


 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 international
standards. In further enhancing its efficiency and stability to the best global standards a two-track and
gradualist approach will be adopted. One track is consolidation of the domestic banking system in both
public and private sectors. The second track is gradual enhancement of the presence of foreign banks in a
synchronized manner.

The policy decisions announced on March 5, 2004 on FDI, FII and the presence of foreign banks would be
implemented in a phased manner. This will also be synchronized with the two-track approach and will be
consistent with India‘s commitments to the WTO. In this background, the road map for the implementation
of the policy decisions is as follows:

Phase I: (March 2005 to March 2009)

New banks – first time presence

Foreign banks wishing to establish presence in India for the first time could either choose to operate through
branch presence or set up a 100% wholly owned subsidiary (WOS), following the one-mode presence
criterion. (The guidelines are in the Annex).

Existing banks – Branch expansion policy

For new and existing foreign banks, it is proposed to go beyond the existing WTO commitment of 12
branches in a year. The number of branches permitted each year has already been higher than the WTO
commitments. A more liberal policy for underbanked areas will be followed. Branch licensing procedure
will continue to be as per current practice.

Conversion of existing branches to Wholly Owned Subsidiaries

In the first phase, foreign banks already operating in India will be allowed to convert their existing branches
to WOS while following the one-mode presence criterion. (The guidelines on conversion of existing
branches into WOS are in the country's requirements.

18


Acquisition of Shareholding in Select Indian Private Sector Banks

In order to allow Indian Banks sufficient time to prepare themselves for global competition, initially entry of
foreign banks will be permitted only in private sector Policy and Promotion. Banks that are identified by
RBI for restructuring. In such banks, foreign banks would be allowed to acquire a controlling stake in a
phased 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, and
the desired level and nature of presence of the foreign bank in India. RBI may, if it is satisfied that such
investment by the foreign bank concerned will be in the long-term interest of all the stakeholders in the
investee 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 per
cent or more and may also specify the period of time for such acquisition. The overall limit of 74 per cent
will be applicable.

Where such acquisition is by a foreign bank already having presence in India, a time bound plan covering a
period not exceeding six months to conform to the 'one form of presence' concept will have to be submitted
by the foreign bank along with the application for acquisition.

Appropriate amending legislation will be proposed to the Banking Regulation Act, 1949, in order to provide
that the economic ownership of investors is reflected in the voting rights. Simultaneous amendments will be
proposed 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 with
domestic banks to the extent appropriate will be designed and implemented after reviewing the experience
with Phase I and after due consultations with all stakeholders in the banking sector.

Dilution of Stake in Wholly Owned Subsidiaries

In this phase, the WOS of foreign banks on completion of a minimum prescribed period of operation will be
allowed to list and dilute their stake so that at least 26 per cent of the paid up capital of the subsidiary is held
by resident Indians at all times consistent. The dilution may be either by way of Initial Public Offer or as an
offer for Sale.

Mergers and Acquisition of any Private Sector Bank in India

In the second phase, after a review is made with regard to the extent of penetration of foreign investment in
Indian banks and functioning of foreign banks, foreign banks may be permitted, subject to regulatory
approvals and such conditions as may be prescribed, to enter into merger and acquisition transactions with
any private sector bank in India subject to the overall investment limit of 74 percent.

19


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 on
their operations. Banks in India, both Indian and foreign, enjoy full and equal access to the payments and
settlement 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 the
Government or the law of the country in which it is incorporated does not discriminate in any way against
banks from India. Other conditions as enumerated are required to be fulfilled

Unlike the restrictive practices of certain foreign countries, India is liberal in respect of the licensing and
operation 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 branch
presence has been incorporated in the ‗Roadmap for presence of Foreign banks in India‘ indicated in the
Press Release dated February 28, 2005 as well as in the liberalized branch authorization policy issued on
September 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


 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 World
Trade Organization (WTO). In terms of India‘s commitment to WTO, as a part of market access, India is
committed 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 policy
where 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 restrictive
branch 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 foreign
banks 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, it
is proposed that the branch expansion policy as applicable to domestic banks as on January 1, 2010, may be
extended to WOS of foreign banks also. This would mean that the WOS would be enabled to open branches
in Tier 3 to 6 centers except at a few locations considered sensitive on security considerations. Their
application for setting up branches in Tier 1 and Tier 2 centers would also be dealt with in a manner and on
criteria 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 are
present in branch mode would be strictly under the WTO commitments of 12 branches or as may be
modified from time to time. The withdrawal of the current stance of permitting larger number of branches
than the commitment under WTO of 12 branches each year is to incentivize the foreign banks with branch
mode 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-off
and allocate resources across various subsidiaries. The interest of the shareholders of the parent is the
driving force for such decisions. Concerns may arise when the decisions taken for a subsidiary affect
domestic depositors (and domestic shareholders, if the subsidiary is listed). Independent board members
play an important role in protecting the interests of all stakeholders. Banks must include independent
directors on their boards in order to make sure that management acts in the best interest of the local
institution. Independent directors also ensure sufficient separation between the board of a bank and its
owners to ensure that the board does not have unfettered ability to act in the interests of the owners where
those 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


As the international experience shows, some of the important factors to be taken into account before a
foreign bank is allowed to set up a subsidiary is the commitment of its parent to support the subsidiary, the
ability of the subsidiary to operate on a standalone basis even when the parent faces crisis and also that the
subsidiary is managed from the host country with most of the systems and controls residing within its
jurisdiction and not managed remotely from the Head Office.

In order to ensure that the board of directors of the WOS of foreign bank set up in India acts in the best
interest 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 50
percent of the directors should be non-executive directors, (iii) a minimum of one-third of the directors
should be totally independent of the management of the subsidiary in India, its parent or associates and (iv)
the directors shall conform to the ‗Fit and Proper‘ criteria as laid down in our extant guidelines contained in
RBI circular dated June 25, 2004, as amended from time to time. This would be in line with our roadmap
released 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 of
Basel Norm III.

I) More stringent capital requirements to achieve as per Basel III: Recently, the RBI released draft
guidelines for implementing Basel III. As per the proposal, banks will have to augment the minimum core
capital after a stringent deduction. The two new requirements – capital conservative buffer (an extra buffer
of 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 be
dipped 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, shares
buyback, etc. The counter cyclical buffer, achieved through a pro-cyclical build up of the buffer in good
times, is expected to protect the banking industry from system-wide risks arising out of excessive aggregate
credit growth.

The above table reveals that even under current Basel Norm II, Indian banks follow more stringent capital
adequacy requirements than their international counterparts.
22


For Indian Banks, the minimum common equity requirement is 3.6%, minimum tier I capital requirement is
6% and minimum total capital adequacy requirement is 9% as against 2%, 4% and 8% respectively
recommended in the Basel II Norm. Due to this the capital adequacy position of Indian banks is at
comfortable level. So, going ahead, they should not face much problem in meeting the new norms
requirements. But as we saw earlier, private sector banks and foreign banks have considerable high capital
adequacy 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 higher
minimum core Tier I capital requirement of 7-9.5% and overall Tier I capital of 8.5-11%, Banks ROE is
expected to come down.

II) Guidelines for new banking licenses:The Reserve Bank of India placed on its website a discussion
paper on the mode of presence of foreign banks through branch or wholly owned subsidiary (WOS) in
January 2011 soliciting comments from all stakeholders ((RBI, 2011i). As indicated in the RBI discussion
paper, the experience gained, particularly, during the recent global crisis, points towards the subsidiary form
as a preferred mode for the presence of foreign banks. The regulatory comfort that local incorporation of
wholly owned subsidiaries (WOS) provides as compared to the branches of foreign banks would also justify
a preference for WOS. In India, policy on presence of foreign banks would be guided by two cardinal
principles 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 foreign
banks 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 put
up great hopes among foreign banks, which allow them to grow unfettered. As now foreign banks in India
are permitted to set up local subsidiaries. The policy conveys that foreign banks in India may not acquire
Indian ones (except for weak banks identified by the RBI, on its terms) and their Indian subsidiaries will not
be able to open branches freely. In the coming years, the list of foreign banks in India is going to become
more quantitative as numbers of foreign banks are still waiting with baggage to start business in India.

23


MODES TO ENTER IN INDIA FOR A FOREIGN BANK
Entry 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 minimum
start-up capital of $25 million as against the existing requirement of $10 million. It said that foreign banks
could be allowed to set up subsidiaries and joint ventures that should be treated on a par with private banks

Guidelines 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 Reserve
Bank‗s licensing criteria will be allowed to hold 100 per cent paid up capital to enable them to set up a
wholly-owned subsidiary in India.

(c) A foreign bank may operate in India through only one of the three channels viz., (i) branches (ii) a
wholly-owned subsidiary and (iii) a subsidiary with aggregate foreign investment up to a maximum of 74
per cent in a private bank.

(d) A foreign bank will be permitted to establish a wholly-owned subsidiary either through conversion of
existing branches into a subsidiary or through a fresh banking license. A foreign bank will be permitted to
establish a subsidiary through acquisition of shares of an existing private sector bank provided at least the
residents 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 broadly
consistent 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 branches
to subsidiary in India will have to be made to the RBI.

24


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, grant
loans, 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 ports
and 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.: - The
National and Grind lays banks first started merchant banking services in 1967, followed by the first National
City banking1970. The exchange banks have been doing a profitable business in the country. Their financial
ratio.I.e. Profit-to Income ratio is more than double that of the Indian commercial bank. Their high
profitability may be attributed to their non-fund business, such as commission, brokerage, etc. Further they
mostly finance multinational corporations, and their returns are higher. Moreover, they minute their risk in
lending also.

25


ROLE OF A FOREIGN BANK
Foreign Banks in India always brought an explanation about the prompt services to Customers. After the set
up 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 two
reasons. First, the Reserve Bank of India is likely to open up the Indian banking market further. Two, the
global credit crisis has shown how problems in Western banks can reverberate through financial systems in
emerging markets. The advantages of greater foreign bank participation are clear: They tend to increase the
efficiency of the local banking system, bring in more sophisticated financial services and have the ability to
nurse 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 in
the way they allocate capital and manage risks are also prone to make elementary mistakes, partly because
of the imperfect nature of regulations and partly because bankers have perverse incentives to be loose with
other people‘s money.

New rules announced by the Reserve Bank of India for the foreign banks in India in this budget have put up
great hopes among foreign banks, which allow them to grow unfettered. Now foreign banks in India are
permitted to set up local subsidiaries. The policy conveys that foreign banks in India may not acquire Indian
ones (except for weak banks identified by the RBI, on its terms) and their Indian subsidiaries will not be
able to open branches freely the options for foreign banks in India have increased. They have much more
flexibility 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 they
operate in other markets. Some banks are comfortable operating as subsidiaries while some are comfortable
with the merger and acquisition route. Some on the other hand, may prefer to stick to the branch operation
route since this would maintain a status quo and not entail some of the additional burdens like increase
priority sector lending and adhering to the Companies Act. This is the route that is likely to be followed by
the smaller foreign banks that are niche players in the Indian banking sector. It is really difficult to give an
opinion about what to expect from the new rules for setting up subsidiaries by foreign banks. It will be up to
individual banks to take a call on the route that they want to take. Assessment is that some of the bigger
foreign banks in India, especially the ones who have indicated they may want to take up a 49 per cent stake
in a private bank, may go in for a subsidiary. But the smaller foreign banks will not go in for this kind of a
set-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 raise
subordinate debt in the local market. But it would also mean adhering to the provisions of the Companies
Act, changes in the quantum of directed lending and in the remuneration of senior bankers in tune with
guidelines of the Indian law. It will be up to individual banks to use the subsidiary option. However, it may
not 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 the
ability 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 in
India now, have three options before them. The first, of course, is to continue as a branch operation with the
necessary RBI approvals and grow the business organically.

26


This option would have ramifications for tier-1 and tier-2 capital and they will have to either bring in capital
or retain their profit to carry on the same level of business. Some banks may decide that it is better to be a
bank in this category i.e. is a better but different bank and grow its business. The second option is to
continue in India and then take a stake of 49 per cent in a private bank in India. But this option is not an easy
option 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 existing
infrastructure. But the bank will have to take the third option is local incorporation. But a network will still
have to be building since an existing network will not be present. But the bank will have access to capital
with 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 a
branch set up in India, which is what the foreign banks have at the moment. But foreign banks will have to
adhere to the rules and regulations, which the private and state run banks follow. The operational guidelines
have 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. But
permission to such banks to operate in the country is unavoidable on the basis of reciprocity. This is
certainly the view of the Reserve Bank of India, and it is justified by the success of Indian Banks operating
in foreign countries.

Indian Banks have been rapidly expanding their overseas operations. Between 1975 and 1978, the number of
offices 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 growth
of business of Indian Banks has been phenomenal as compared to that of the branches of their foreign
counterparts 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. In
terms 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 funding
joint ventures in Singapore, Indonesia and Malaysia. The Bank has arranged finances to the tune of $ 750
million 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 bank
branches in India. Thus, the question of reciprocity does indeed have relevance, because, if we want to seek
profitable opportunities overseas, we must be prepared to open our own gates also. In short, the operation of
foreign banks in India is fully justified. It is in our own national interest.

27


ADVANTAGES OF A FOREIGN BANK
There is no denying the fact that the foreign banks are playing a pivotal role inIndian economy. They help
the economy by financing the import and export trade of the country. They also receive deposits from the
public as fixed deposits andCurrent account deposits. They also give Loans and advances to the traders and
Businessmen. 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 of
raw materials for transporting goods between manufacturing and trade centers in the country. In this way,
they are offering a stiff competition to the Indian commercial banks. Foreign banks have opened up' several
options for the developi'1g countries to attain economic growth. The achievement of this objective has been
made possiblepartly by foreign exchanges transactions. Like every other facility, the foreignbanks also
create both advantages and disadvantages.

The advantage is that the foreign banks help finance exports and imports under letter of credit, the medium
of D.A. Bills and D.P. Bills, and by promoting internal trade. In this way they help in earning foreign
exchange. As the foreign banks have branches in almost all the other countries of the world, they are able to
maintain business links with all those countries for various purposes.
Thus, through these banks, Indian businessmen are also able to maintain their contacts with. Their
counterparts in other countries. So far as standard of performance is concerned foreign banks are considered
to' be more' efficient and more competent than their Indian counterparts. However, one great disadvantage
of foreign banks is that their attitude towards Indian businessmen is discriminatory.

These banks have more or less monopolized the financing of India's external trade through which they earn
large 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 own
bank branches in India.

The Indian capital invested in these banks is misused in the sense that their capital, instead of being utilized
for the benefit of Indian business, is used for the purchase of shares and bonds from road, thus diminishing
the profit share of India. Foreign banks are required to obtain license from the Reserve Bank of India but the
RBI has failed to exercise an effective control over these banks, with the result that these banks have
acquired large amounts of money in the London money market, thus rendering the Indian money market
ineffective.

It will thus be seen that the foreign banks have played a significant role in the growth of Indian economy
during the post-Independence period. But at the same time, it is also a fact that in conditions of political and
financial instability, especially in developing countries including India, foreign banks, with their vast
resources and political in fluency abroad, can hold the national currencies and economies to. Ransom. The
banking scams of the harshad Mehta fame could not have been made possible 'without the manipulation of
foreign banks operating within the country.

The Indian commercial banks have neither the resources nor the freehand to finance such gigantic and
scandalous transactions and deals. In the East-Asian countries also, when the foreign banks found the
national economies in a state of confusion, they played havoc with the economies of the host countries by
suddenly withdrawing huge amounts of money from the national economies thereby engineering economic
disasters in those countries.

28


Foreign banks are very helpful in the development of India. It is necessary and desirable for us to maintain
and encourage foreign balances in India to promote investments and finance international trade. But we
should utilize their loans properly in the productive way as after economic development we have to repay
their loans in time. It in equally important to exercise strict vigilance and control over their activities lest
they should create another Indonesia or Thailand in India.

29


THE ECONOMIC CRISES IN 2007 – 08
OVERVIEW:

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 by
a 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 an
impact 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 expansion
and institutional bailouts. Although there have been aftershocks, the financial crisis itself ended sometime
between late-2008 and mid-2009. In the U.S., Congress passed the American Recovery and Reinvestment
Act of 2009. In the E.U., the U.K. responded with austerity measures of spending cuts and tax increases
without export growth and it has since slid into a double-dip recession.

IMPACT ON INDIA:

India's economy benefited from recent high economic growth, which declined greatly due to the global
economic crisis. Economic growth in India during FY2008-09 stood at 6.7%. The global crisis had less
impact of India because exports account for only 15% of India's GDP, less than half the levels of major
Asian economic powers such as China and Japan.
However, unlike other major Asian economies, India's government finances were in poor shape and as a
consequence, it was not able to enact large-scale economic stimulus packages. Despite this, from June 2008
to 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 he
expected India's economy to "bounce back" to 9% during FY2009.India's Prime Minister Manmohan Singh
said 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 the
G20 Summit, India called for coordinated global fiscal stimulus to mitigate the severity of the global credit
crunch. India said that it would inject US$4.5 billion into the financial system to help exporters.
Some analysts pointed that India's growing trade with other Asian countries, especially China, will help
reduce the negative impact of the crisis. Analysts also said that India's high domestic demand and large
infrastructure projects would act as a buffer reducing the impact of the global downturn on its economy.
Economists argued that India's financial system is relatively insulated and its banks do not have significant
exposure to subprime mortgage. In an editorial, the New York Times praised the strong regulations placed on
the 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 of
2009 the Indian economy grew by 7.9% and gave indications that the Indian economy would scale a growth
rate of 7% or above in 2009 and 8-9% in 2010. In the 3rd Quarter of 2010, the economy had bounced back
with a growth rate of 8.8%.

30


THE POST CRISES ANALYSIS
Performance of the Indian Banking Sector Post Crisis

Indian banking sector faced the stress because foreign investors pulled out of the economy and created a
liquidity crunch. The tightened global liquidity situation in the period immediately following the failure of
Lehman Brothers in mid-September 2008, coming as it did on top of a turn in the credit cycle, increased the
risk aversion of the financial system and made banks cautious about lending. At the same time, corporates
and retail investors exerted redemption pressures on mutual funds, some of which got transmitted to NBFCs
due to their dependence for funds on mutual funds. Thus, despite not being getting a hit on the balance
sheets, banks and other financial institutions were impacted by the indirect spillovers of the crisis during
2008-09.

The deposit growth of commercial banks decelerated marginally during 2008-09 compared to the previous
year; 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, micro
and small enterprises, microcredit, education and housing. Banks‘ exposures to infrastructure construction
also increased in recent years, fuelled by development needs, while more broad-based economic prosperity
resulted in higher demand for residential and commercial real estate loans.

The sustained efforts of the Government, the Reserve Bank and the banks themselves have resulted
in a competitive, healthy and resilient financial system. The major indicators of the Indian banking
system 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 1.05
per 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-March
2011. Nevertheless, as at end-March 2011, under both Basel I and Basel II, the CRAR at 13.0 per
cent 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-March
2009 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 wide
range of other measures to ensure a robust liquidity backstop. The relatively high levels of SLR set
at 24 per cent of net time and deposit liabilities (NTDL), in addition to CRR set at 6 per cent of
NDTL, have enabled banks to cope well with liquidity pressures during the recent global financial
turmoil.

31


Table 4: Select Banking Indicators@

Indicator 2006- 2010-
2007-08 2008-09 2009-10
07 11

I. 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 6.6

II. Financial Indicators (as percentage of
total 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 2.9

III. Capital to Risk weighted Assets Ratio

Basel I 12.3 13.0 13.2 13.6 13.0

Basel II - - 14.0 14.5 14.2

IV. Gross Non-Performing Assets (As
2.5 2.3 2.3 2.4 2.3
percentage of advances)

@: Relating to Scheduled commercial banks.   Source : Report on Trend and Progress of Banking in
India, sever l values.

As far as the financial sector is concerned, it recovered well from the impact of the crisis and has
maintained its performance at its pre-crisis levels. Since the Indian financial system is bank
dominated, banks‘ ability to withstand stress is critical to overall financial stability. Despite the
fragilities observed in the global macro-financial environment, the performance of Indian banks
remained robust during 2010-11.

A series of stress tests conducted by the Reserve Bank in respect of credit, liquidity and interest rate risks
showed that banks remained reasonably resilient. However, under extreme shocks, some banks could face
moderate liquidity problems and their profitability could be affected (RBI, 2011b)

32


REFORMS AND FUTURE OF INDIAN BANKING SECTOR - POST
CRISES
The Indian financial system has changed considerably over the past fifteen years. Interest rates have been
deregulated and competition and efficiency in the banking business has increased with new entrants being
allowed.
Since 2009, the financial sector reforms in India got a new impetus with India joining hands with the
international community in the post crisis reform of financial regulation, and playing a key role in the
ongoing initiative through international forays like the G20, the IMF and the BIS in designing new
regulatory and supervisory structure.

In view of the high scale of savings within the economy, there is a greater need for further financial-sector
reform such as liberalization of the entry norms, and streamlining the regulatory and legal framework While
such reforms would improve the productivity of the financial sector they would also likely have positive
spillover 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 the
past, but are being guided more by the future needs of the economy. The focus of the second phase of
financial sector reforms starting from the second-half of the 1990s has been on strengthening of the financial
system consistent with the movement towards global integration of financial services as also on structural
reforms largely based on the suggestions made by the various high-level committees and groups so as to
meet 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 in
isolating India from the on slaught of the recent crisis, India is now exploring ways to liberalize these two
areas. India is working on liberalizing the licensing of new banks, presence of foreign banks, and bank
holding company structure for the financial conglomerates - changes that have the potential of changing the
financial landscape.

The progress of the reforms in India in the post crisis period has been remarkable considering a spate of
measures being taken to improve financial soundness of banking sector, which is a sine qua non for the
financial stability in a bank-dominated country. The major indicators of the Indian banking system in the
period following the crisis have not shown any adverse developments and the performance of Indian banks
remained robust during 2010-11.

A series of stress tests conducted by the Reserve Bank in respect of credit, liquidity and interest rate risks
show that banks are reasonably resilient. The single-factor sensitivity calculations suggest that the system
would be able to withstand a range of risk specific and sector specific shocks occurring in isolation, and the
impact of interest rate risk, foreign exchange risk and equity price risk would not be significant. The
liquidity stress test results indicated that the SLR investments enabled the banks to withstand quite severe
deposit runs. The network of the Indian banking and financial system have a tiered structure but limits on
inter bank liabilities mitigate contagion risks (RBI, 2011a).

Going forward, a proper balance between regulation and liberalization of the financial sector would become
important. India is progressing well in adopting new techniques in supervisory assessments such as, network
analysis and stress testing. India has also moved ahead on its agenda to modernize and improve the financial
infrastructure with reforms in the financial markets and the payment and settlement system, which enhance
the efficiency of the financial sector - a crucial input in the real growth of the economy.

33


While mergers and amalgamations and deposit insurance have broadly taken care of the bank failures, the
resolution mechanism is being strengthened based on the evolving international practices. Issues requiring
legislative attention include the orderly resolution of failing banks and financial institutions, domestically as
well as cross-border, home-host regulatory cooperation in information sharing, convergence of Indian
Accounting Standards with IFRS, empowering RBI for consolidated supervision, supervision of financial
conglomerates, 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


A study on scope of foreign banks in india

A study on scope of foreign banks in india

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