This document provides an overview of private banks and multinational banks in India. It discusses the need for privatization of banks in India in the 1980s due to issues with public sector banks. It then outlines the guidelines for establishing and operating private sector banks in India, including capital requirements, priority sector lending obligations, and regulatory frameworks. The document also discusses multinational banks, including Indian banks with international branches and foreign banks operating in India. It covers some of the problems faced by overseas branches of Indian banks, such as lack of capital and viability issues, and strategies for overcoming these problems, including closing non-viable branches and establishing branches in key trade markets.

1. INTRODUCTION TO PRIVATE
BANKS &
MULTINATIONAL BANKS
SDJ International college
ASST. PROF. Vaghela Nayan

2. NEED FOR PRIVATIZATION
 In early 80s, the Banking Sector in India was dominated by the public
sector banks which were characterized by
 High Intermediation Costs
 Over-staffing and Over-branching
 Huge portfolio of Non performing Loans
 Poor Customer Services
 Undercapitalized
 Poorly Managed / Narrow Product Range
 Undue Interference in Lending, Loan Recovery& Personnel

3. IN INDIA, EXISTENCE OF PRIVATE BANKS IS
JUSTIFIED ON THE GROUND THAT
 Private sector is free form bureaucratic elements which adds rigidity in
decision-making.
 They can more efficiently compete with money lenders in rural areas,
small private banks can provide better services at local level and to
small groups of ordinary citizens.
 They can help in reducing concentration of economic and political
powers.

4. BENEFITS OF PRIVATIZATION
 There was a great increase in the no. of bank branches after
privatization.
 Branches in rural/semi-urban sectors increased after privatization.
 Credit to agriculture increases.
 More job opportunities raise after privatization.
 Private sector banks provide many additional services to its
customers.

5. GUIDELINES FOR PRIVATE SECTOR
BANKS:
1. Establishment of Private Banks:
 Banks should be registered as public limited company under
The Companies Act,1956.
 The banks will be governed under Reserve Bank of India Act,
1934 and Banking Regulation Act, 1949.
 The decision of RBI with regards to licensing and inclusion in
second schedule shall be final.
 Any individual can be a director of two private banks at same
time.
 All the guidelines of Reserve bank, RBI Act and BR Act must be
followed by private banks.

6. 2. Capital of Private Banks:
 Initial minimum paid up capital for a new bank shall be Rs. 100 crore.
 The contribution of promoters shall be 25% or 20% in case of paid up
capital more than 100 crore.
 NRI participation in primary equity could be to the extent of 40%.
 In case of foreign banking company or financial institution, as a
technical collaborator or a co-promoter, equity participation shall be
restricted to 20%.
 The shares of the banks must be listed in the stock exchange.
 The prudential norms for accounting system, Standards of income,
classification of assets and properties and standards of loans and
advances should be framed in advance.

7. 3. Working of Private Banks:
 Private sector banks shall have to observe priority sector lending
applicable to other domestic banks.
 Some relaxation in the composition of the priority sector lending may
be considered for an initial period of 3 years.
 The banks will have to comply with the Reserve bank instructions in
respect of export credit and can get authorized dealer license when
applied for.
 The banks can not set up subsidiaries or mutual fund for three years
from the date of commencement.
 New banks have to lay down all the prudential norms related to party
transactions with in the guidelines of reserve bank.
 These banks shall be subject to the directives, instructions,
guidelines and advices given by the RBI from time to time.

8. GUIDELINES FOR THE ENTRY OF NEW BANKS (2001)
1. According to the revised guidelines for Private sector banks in January
2001, the minimum paid up capital is 200 crs. Instead of 100 crs. In
subsequent 3 years it was further increased to 300 crs.
2. A non-banking financial institution can be converted into commercial
banks if it fulfills;
I. Minimum net worth of 200 crs.
II. Credit rating of not less than AAA in previous year.
III. Capital adequacy of not less than 12%. And
IV. Net NPA not more than 5%.
3. the large industrial houses are not permitted to promote any new bank.
4. Individual companies can participate in the equity of anew private
sector bank up to a maximum of 10% but can not have controlling
interest in the bank.

9. 5. Preferences will be given to the promoters with expertise of financing
priority area and in setting up banks specializing in the financing of rural
and agro-based industries.
6. In case of issue of shares and bonds, bank will have to adhere to SEBI’s
guidelines. The banks are free to price their issue once their shares are
listed on the stock exchange.
7. Foreign investment in private sector banks is possible up to a
composition ceiling of 74% of the paid up capital. Of course the full
investment limit cannot exceed 49% and at all time at least 26% of paid
up capital would have to be held by the residents.
 Note: AAA is the highest possible rating assigned to an issuer's bonds by
credit rating agencies. An AAA-rated bond has an exceptional degree of
creditworthiness, because the issue can easily meet its financial
commitments. The ratings agencies Standard & Poor's (S&P) and Fitch
ratings use the AAA to identify bonds with the highest Credit quality, while
Moody's uses AAA is the top credit rating.

10. BANKING LICENSE GUIDELINES (2013)
1. Eligible Promoters: Entities / groups in the private sector, entities in public sector
and Non-Banking Financial Companies (NBFCs) shall be eligible to set up a bank
through a wholly-owned Non-Operative Financial Holding Company (NOFHC).
2. ‘Fit and Proper’ criteria: Entities / groups should have a past record of sound
credentials and integrity, be financially sound with a successful track record of
10 years. For this purpose, RBI may seek feedback from other regulators and
enforcement and investigative agencies.
3. Corporate structure of the NOFHC: The NOFHC shall be wholly owned by the
Promoter / Promoter Group. The NOFHC shall hold the bank as well as all the
other financial services entities of the group.
4. Minimum voting equity capital requirements for banks and shareholding by
NOFHC: The initial minimum paid-up voting equity capital for a bank shall be `5
billion. The NOFHC shall initially hold a minimum of 40 per cent of the paid-up
voting equity capital of the bank which shall be locked in for a period of five
years and which shall be brought down to 15 per cent within 12 years. The bank
shall get its shares listed on the stock exchanges within three years of the
commencement of business by the bank.

11. 5. Regulatory framework: The bank will be governed by the provisions of
the relevant Acts, relevant Statutes and the Directives, Prudential
regulations and other Guidelines/Instructions issued by RBI and other
regulators. The NOFHC shall be registered as a non-banking finance
company (NBFC) with the RBI and will be governed by a separate set of
directions issued by RBI.
6. Foreign shareholding in the bank: The aggregate non-resident
shareholding in the new bank shall not exceed 49% for the first 5 years
after which it will be as per the extant policy.
7. Corporate governance of NOFHC: At least 50% of the Directors of the
NOFHC should be independent directors. The corporate structure should
not impede effective supervision of the bank and the NOFHC on a
consolidated basis by RBI.
8. Prudential norms for the NOFHC: The prudential norms will be applied to
NOFHC both on stand-alone as well as on a consolidated basis and the
norms would be on similar lines as that of the bank.

12. 9. Exposure norms: The NOFHC and the bank shall not have any exposure to the Promoter
Group. The bank shall not invest in the equity / debt capital instruments of any financial
entities held by the NOFHC.
10. Business Plan for the bank: The business plan should be realistic and viable and should
address how the bank proposes to achieve financial inclusion.
11. Other conditions for the bank :
 The Board of the bank should have a majority of independent Directors.
 The bank shall open at least 25 per cent of its branches in unbanked rural
centers (population up to 9,999 as per the latest census)
 The bank shall comply with the priority sector lending targets and sub-targets as
applicable to the existing domestic banks.
 Banks promoted by groups having 40 per cent or more assets/income from non-
financial business will require RBI’s prior approval for raising paid-up voting
equity capital beyond `10 billion for every block of `5 billion.
 Any non-compliance of terms and conditions will attract penal measures
including cancellation of license of the bank.
12. Additional conditions for NBFCs promoting / converting into a bank : Existing NBFCs, if
considered eligible, may be permitted to promote a new bank or convert themselves into
banks.

13. MULTINATIONAL BANKS:
 Indian banks, having their branches spread over the foreign countries are
said to be multinational banks in India. In general term we can say that a
multinational bank is a bank having its branches in foreign countries. It
includes;
I. Indian banks having their branches abroad
II. Foreign banks having their branches in India
III. Overseas banks.
 Foreign branches of Indian Banks:
 The branch expansion programme also affected the number of foreign
branches of Indian banks but still Indian banks are having very few
branches abroad. The objectives to establish foreign branches are:
1. To earn foreign exchange.
2. To enhance India’s trade with other countries.
3. To assist Indian entrepreneurs in setting up of joint venture abroad.

14.  To develop Indian trade with foreign countries, there has to be more focus
on establishing more foreign branches of Indian banks.
 Through good contact with people, commercial banks can act as
supplementary agencies in disseminating information to commercial
representatives.
 They can also give valuable information as to credit standing and
reliability of foreign importers.
 There are hindrances against the expansion of foreign banking companies
in some of the countries:
1. The Nationalization of commercial banking in Burma and Aden.
2. The conversion of Indian banks operating in Uganda and Nigeria into
subsidiary companies.
3. The imposition of severe restrictions on foreign banks operating in
Pakistan.
4. Apart of the above problems, India has no surplus capital to export and
thus, foreign branches may have to suffer from lack of resources.

15. PROBLEMS AND PROSPECTS OF OVERSEAS BRANCHES:
 The overseas banks of India are generally facing operational issues and
basic issues.
 Operational issues are those which arises in the course of their
operations with customer in different situations.
 Basic problems include problems of capital adequacy and inability of
innovations, involving both products and processes in the banking
system.
 In operational issues, the erosion of established customer base is a major
one. The customers are attracted by the electronic equipment and
mechanization in the banking process brought by the large multinational
banks. In order to meet these challenges it is imperative on the part of
Indian banks to mechanize their overseas branches for better efficiency
and reduction in cost.
 Increased no. of branches of Indian banks also increased the level of
competition among themselves in attracting more customers.

16.  Some of our foreign branches have been found non-viable, Indian banks
branches abroad have also begun to adopt selective and cautious
approach in matters of loan disbursements. Consequently, prudential
ceilings for borrowers are also fixed.
 Another serious problem that the Indian Banks abroad encountering is
inadequacy of capital. Owing to small reserves and equity, ability of
foreign branches to attract primary deposits is adversely affected.
Besides, some of the important countries which offer profitable business
potential, also stipulate heavy capital requirements which preclude entry
of Indian banks in those countries.

17.  Strategies to Overcome the problems of Overseas branches:
1. Closing down the non-viable branches from the countries giving non-
profitable business.
2. Establishing the branches in countries with more scope of deposits and
expansion of credits.
3. Establishing the branches in the countries with which India is engaged in
Import and/or Export business.
4. Identifying the prudent and concrete plans for kind and range of services
that the banks will be providing at the foreign branches.
5. Developing the expertise and management capabilities to enable Indian
banks to conduct business in a competitive manner.
6. The working of banks’ staff in an international environment should be
alive to situations of country currency and even individual risks.

18.  The performance of overseas branches:
1. Satisfactory network expansion in the areas where there are more Indian
population is residing.
2. Majority of branches are working well in retail business and have secured
market.
3. The computerization of banks has helped the overseas branches in making a
good impact in international financial off shore banking centers.
 Precautions required to be taken by Overseas Branches:
1. There is a growing trend of interest earnings, a large degree of
diversification into non-fund based business have to be adopted.
2. Steps should be taken to minimize the risk in foreign branches by introducing
a proper loan and investment portfolio management and central information
system.
3. Controlling through head offices, internal audit and inspection can also
improve the functioning of overseas branches.
4. The favourable judicious changes and effective use of tele communication
system is expected to tone up the efficiency of overseas branches.

19. THANK YOU