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 has also 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.

1

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 18 th 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 Comptoire d’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 30 th June 2012 there is 34 foreign banks in India with 273 branches.

2


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, Banco Satander 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.

3


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.

4


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:

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 trading on 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


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

Foreign exchange (FX) Rates & inflation Structured finance Emerging markets Prime services Debt capital markets (DCM) and credit Investor products and equity derivatives Risk solutions Asset backed securities Counterparty exposure management Fixed income / FX research & strategy

International Banking

Payments and cash management Trade finance Liquidity and deposits Lending Corporate advisory All Markets products

Clients include: Companies Financial institutions Governments Public sector

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

RECENT DEVELOPMENTS:

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. Pratibha Patil, 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. Sushant Palakurthi Rao, Senior Director, WEF.

GROSS DOMESTIC PRODUCT (GDP):

Chart showing the growth in GDP in India: Chart 1

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.

6


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

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. HigherThe inflation lower is the treasury income of the banks.

FDI IN INDIA:

India has been ranked at the second place in global foreign direct investments in 2010 and will continue 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

7


data released by DIPP.

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

9


will decrease the market share of existing banks.

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).

10


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.

11


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.

12


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 Vizcaya Argentaria, Spain’s second largest bank; Italy’s Banca di Roma; the Dublinbased Depfa 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 forces at almost every parts of the country.

3) Increasing improvement of Infrastructure: - A lot of research study in India finds out that historically the country fails to attract a significant amount of FDI mainly because of problems in infrastructure. But the scenario is changing. The Indian government has taken huge projects in transportation and energy sectors to improve the case.

14


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 Abizer Diwanji, 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 Aditi Thapliyal.

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 under banked 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 in Indian 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 and Current 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 possible partly by foreign exchanges transactions. Like every other facility, the foreign banks 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 harsh ad 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


32


33


Table 4: Select Banking Indicators@

Indicator 2006-07

2007-08 2008-09 2009-102010-

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 percentage of advances)

2.5 2.3 2.3 2.4 2.3

@: Relating toScheduled commercial banks. Source: Report on Trend and Progress of Banking in India, severl 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)

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.

34


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:

35


BRANCH SUBSIDARYGreater operational flexibility Clear delineation between assets and

liabilities of the Indian outfit and those of its parents

Increased lending capacity (Loan Size limits are based on the parent banks capital)

Ring fences capital within the host country

Reduced corporate governance requirements

Has its own board of Directors

Branches are generally not allowed to take retail deposits and do not have a deposit insurance

Local incorporation provides effective control in a crises and enables the host country to act independently

PERFORMANCE ANALYSIS OF FOREIGN INVESTMENT BANKS IN INDIA

An investment bank or an investment banking firm is a kind of a financial institution, which assists governments, corporations and even individuals in raising assets by underwriting or acting as an agent of client for issuing securities. Such an organization even assists companies indulged in M and A (Mergers and Acquisitions) and offer ancillary services like market making, foreign exchange, trading of derivatives, commodities, equity securities and instruments of fixed income.

To analyze the performance of foreign banks in India we will consider few foreign banks and analyze their individual performance in past five years:

1) HSBC Bank (Hong Kong and Shanghai Banking Corporation) Securities and Capital Markets (India) Private Limited:

HSBC Bank is a subsidiary of HSBC Holdings plc. A London based banking giant who, according to the Forbes magazine, is the largest banking group in the world, and the 6th largest company in the world as of April 2009. HSBC Holdings had been established in Hong Kong in the year 1990 as the parent company to the Hong Kong and Shanghai Banking Corporation (HSBC). Further, the bank moved its headquarters from Hong Kong to London. HSBC is one of the top 10 investment banks in India. With their operation in two business lines, they deal with the country's securities for national as well as international institutions

Key Attributes

With a loan-deposit ratio of 90%, HSBC Bank is said to be one of the five British banks that claim to have more deposits than loans. Such a high loan-deposit ratio of the bank has been able to retain the trust of its investors and customers, keeping them assured of its financial strengths. The sound financial position of the bank can also be attributed to the fact that its stocks maintained relatively high price even during the credit crunch phase, something not commonly seen to have happened to other banks.

Presence In India

In India, the introduction of HSBC Bank can be dated as early as the year 1853, with the establishment of the Mercantile Bank of India in Mumbai. Currently, HSBC Group operates through a number of its subsidiaries in India, viz. The Hong Kong and Shanghai Banking Corporation Limited (HSBC), HSBC Asset Management (India) Private Limited, HSBC Global Resourcing / HSBC Electronic Data Processing (India) Private Limited, HSBC Insurance Brokers (India) Private Limited, HSBC Operations and Processing Enterprise (India) Private Limited, HSBC Private Equity Management (Mauritius) Limited, HSBC Professional Services (India) Private Limited, HSBC Securities and Capital Markets (India) Private Limited and HSBC Software Development (India) Private Limited. The group carries out its Commercial Banking, Banking Technology, Asset Management, Global Resourcing, Insurance and Data Processing operations in the country through its subsidiaries.

Commendable Achievements

HSBC Bank is well known for having established the first ATM (Automatic Teller Machine) in India in the year 1987. As of April 2009, the bank is present in many prominent cities of the country including Mumbai, New Delhi, Bangalore, Hyderabad, Jaipur, and Chandigarh etc.

36


Financial Results:

The growth in profitability in the region reflected strong lending and deposit growth during 2010 and 2011, mainly in Singapore and Mainland China, coupled with widening deposit spreads due to higher interest rates in certain countries, notably India and Mainland China.

In India and South Korea, domestic demand also slowed markedly in the second half of 2011 after rising inflationary pressures prompted central banks to tighten monetary policy.

2009 2010 2011

594762 827

HSBC Profit before tax $bn

2010 20119000

11000

13000

12,143

10,227

Customer A/c's in India (Gross Deposits)

2010 2011

4,583

3,914

Gross Loans & Advances $bn (Commercial , International Trade & Others)

37


Impaired loans in the region decreased by 16% from the end of 2010 to US$1.1bn at the end of 2011, mainly in India due to the repayment or write-off of previously impaired loans. Interest income from short-term funds and loans and advances to banks, as well as financial investments, also benefited from higher yields as interest rates rose, particularly in Mainland China, India and Brazil.

Hence, we can see that though the profits show an upward trend in HSBC, though the deposits have decreased by $1916 billion and as a result of which the advances has also dropped by $669 billion. In India, HSBC was ranked the number one foreign bank by Bloomberg for domestic bonds in 2011 and issued the first and only offshore ‘renminbi’ bond in the country.

1 Working funds to be reckoned as average of total assets (excluding accumulated losses, if any) under Section 27 of the Banking Regulation Act, 1949, during the 12 months of the financial year.

The NPA ratio to net advances is very high in the year 2010, which indicates that the bank has made most of its investment in unsecured assets and shifted its focus only on secured assets later on, Overall NPA ratio of the bank in last five years has been maintained below 1.5% which shows the efficiency of the bank in recovering its advances and strong legal measures taken by the bank.

Capital adequacy ratio indicates the stability and efficiency of the bank; ideally it should be greater than 10%, HSBC bank has maintained its CAR on an average 15% and hence we can say that it is a stable bank and has sufficient capital to absorb a reasonable amount of losses.

Ideal ROA of banks is less than 5%; ROA figure gives investors an idea of how effectively the company is converting the money it has to invest into net income. The higher the ROA the better is the company. In case of HSBC bank the ROA on an average has been maintained at 1.3% in past five years, which indicates that the bank is not able to convert its assets into investments with good returns. Maximum ROA was achieved

38


PARTICULARS 2011 2010 2009 2008 2007

Interest Income as a percentage of working funds

5.46% 5.61% 6.66% 7.18% 7.57%

Non-Interest Income as a percentage of working funds

1.88% 2.32% 2.84% 3.05% 2.62%

Operating profit as a percentage of working funds

3.08% 3.73% 4.39% 4.23% 4.09%

Return on Assets 1.68% 0.88% 1.51% 1.82% 1.82%

Capital adequacy ratio 18.03% 18.03% 15.31% 11.46% 11.06%

Business (Deposits plus Advances) per employee (Rs’000)

122,170 113,552

96,181 101,234

97,968

Net Profit Per employee (‘000) 2,320 1,173 1,606 1,669 1,432

Net NPA [Non – Performing Advances] (‘000)

2,487 5,431 3,911 1,748 985

NPA ratio to net Advances 0.91% 2.31% 1.42% 0.58% 0.43%

in the year 2007 & 2008.

Operating Profit is the profit earned from the normal core operations of the bank and excludes the investments made by the bank. The bank has attributed the decline in income to "rising interest rates and increased levels of competition compressing lending margins. Hence we can see that the operating profit as a percentage of working funds has a downward trend in the past 2 years.

Non- Interest income comprises of the fees that bank take e.g. annual fees, Deposit and transaction fees, monthly account service charges, inactive fees etc. Net Interest Income is: NII = (interest payments on assets) − (interest payments on liabilities), We can see that the net interest income of the bank was highest before the economic crises but has gradually started declining, because of the high volatility in the interest rates and the inflation factor in the country in that period, overall in the past five years the bank has earned an average of 6.49%.

As the business per employee has shown an overall growth of 24.65% over a period of five years, as a result the profit of the bank has also increased. The advances and deposits ratio of the bank has shown a decline post economic crises i.e. after 2008, the advances to deposits have grown by 21.4% in the year 2011 (last year it was -23.63%), The bank was majorly affected because of the economic crises and hence the advances to deposits declined during the same year. The bank however showed a recovery in the year 2011.

Interest RatePeriod Of deposit Interest Rate (2011)15 to 29 Days 4.7530 to 59 Days 4.7560 to 89 Days 5.0090 to 179 Days 7.00180 to 269 Days 8.00270 to 364 Days 8.50365 Days 9.00366 to 399 Days 8.10400 Days 8.00401 Days to less than 18 months 8.0018 months to 730 days 7.50731 Days 8.00732 Days to less than 36 months 7.5036 months to less than 37 months 7.7537 months to less than 48 months 8.50

39


Year Advances Deposits

2011 274,006,211 541,067,115

2010 234,747,670 557,478,247

2009 275,886,858 499,702,753

2008 299,444,017 426,202,881

2007 231,416,786 348,246,476

48 months to 60 months 8.00

Overall HSBC continued to position the business for growth, increasing revenues in each of the world’s faster-growing regions, particularly in Mainland China, India, Malaysia, Brazil and Argentina. The Advances to Deposits ratio of the bank is 50.6 % in the year 2011 (42.1% in the year 2010). Commercial Banking achieved record revenue and profits, helped by loan growth as well as growth in cross - selling from Global Banking and Markets, in India.

2) Citi Banks:

With their commitment for more than 106 years to India, this is a part of the well-known Citi Group and is one of the premier financial institutions in the country that has got an invested capital of around US $ 3.1 billion across the globe. Apart from the different investment banking services, this global investment banking firm provide different other banking services. Citibank had been founded in the year 1812. Initially its name was City Bank of New York, which was later changed to First National City Bank of New York.

In over 100 countries worldwide, Citibank has been carrying out its operations, which comprise of regular banking services along with credit card, insurance and investment services. The bank claims to have a customer base of 15 million users catered by its online services division alone.

As Citibank was badly affected by the financial crisis of 2008, the U.S. government provided the bank with an aid of US$ 50 billion in two installments of US$ 25 billion each. In India, Citibank is present at 30 locations as of 31st March 2012

Presence in India

Citi began operations in India over a century ago in 1902 in Kolkata Citi is the largest foreign direct investor in financial services in India with a total capital commitment

of approximately US$4 billion in its onshore banking and financial services business and its principal and alternate investment programs

As promoter-shareholder, Citi has played a leading role in establishing important market intermediaries such as depositories, credit bureau, clearing and payment institutions

Citi operates 42 full-service Citibank branches in 30 cities and over 700 ATMs across the country Citi is an employer of choice to about 7000 people Citi is the preferred banker to more than 40,000 small and mid-sized companies across India

Commendable achievements

Global Finance Best Internet Bank Awards 2012, Euro money Awards for Excellence 2012, Finance Asia Country Awards 2012 (For 6th consecutive year), Indo-American Corporate Excellence Award 2012 (Best US co. operating in India), IAMAI India Digital Awards 2011, Asia money Fixed Income Poll 2011 (For best Credit and interest rates), Brand Equity Most Trusted Brands Survey 2011.

40


Financial Results

The bank had maximum NPA during the economic crises i.e. 2.63% in the year 2009 and the least in the year 2007, the bank is working towards decreasing its NPA ratio as it is slightly towards higher side. Where as, the Capital adequacy ratio showed a downward trend till 2010, but now it has recovered up to some extent. The operating profit shows an upward trend till 2009, after 2009 it shows a decreasing trend.

Hence, we can say that the economic crises has had an impact on the financials of the company, as the company shows a decline after 2009 i.e. after economic crises had occurred and mainly because of the high inflation rate and instability in the country.

The Net profit also declined sharply from 21,730,785 million in the year 2009 to 8,603,865 in the year 2010, but has increased to 14,246,369 in the year 2011.

41


Particulars 2011 2010 2009 2008 2007


6.05% 6.75% 6.67% 7.40% 8.00%


1.85% 1.77% 3.49% 3.04% 2.45%


3.16% 3.66% 3.72% 4.04% 3.98%

Return on Assets 1.37% 0.96% 2.12% 2.24% 2.79%



174,594 197,989 188,010 176,378 136,048


49,280 78,446 10,507 4,718 3,361


Year Net Profit (Million)

2011 14,246,369

2010 8,603,865

2009 21,730,785

2008 18,042,600

2007 9,000,010

The Net Advances and deposits has noticed a upward trend in spite of the economic crises and the instability in the nation, though the inflation rates were high the interest rates provided by the bank was the major source of attraction for corporates.

Period Of deposit Interest (September 19 th 20110 7-14 Days 3.50%15-25 Days 3.75%26-35 Days 4.00%36-45 Days 4.50%46-60 Days 6.25%61-90 Days 7.25%91-120 Days 7.25%121-150 Days 7.75%151-180 Days 7.75%181-270 Days 8.25%365-400 Days 9.00%541-731 Days 8.75%>=1096 Days 8.75%

Overall, CITIBANK has maintained its position in the Indian market by overcoming various hurdles; the bank looks forward to become a leading bank in the industry and increase its revenues. The advances to deposit ratio of the bank is 71% approx. in the year 2011 (67.3% in the year 2010). The interest rates offered by the bank are the best in the Industry; in spite of high inflation rates the bank maintained its interest rates. The bank is now planning to target rural areas in the country to increase its revenue in the near future.

Interest Rate

42



2011 405,970,099 566,680,633

2010 366,550,720 544,521,336

2009 399,199,368 516,774,572

2008 383,765,173 461,250,200

2007 328,611,067 378,750,031

3) Standard Chartered Bank

Standard Chartered Bank is a London based bank, currently operational within over 70 nations with more than 1,700 branches and 73,000 strong workforces as of April 2009. Although the bank is located in Britain, still a huge chunk of its revenues originate from the continents of Asia, Africa and Middle East.

Standard Chartered Bank was formed as the merger of two banks viz. The Chartered Bank of India, Australia & China and The Standard Bank of British South Africa. The merger took place in the year 1969.

Recent Developments

Standard Chartered Bank has been actively engaged in acquisitions and expansion, and acquired Grindlays Bank from ANZ Bank in the year 2000, which considerably increased its banking operations in the nations of India and Pakistan. The bank defeated HSBC Bank in a bid to acquire Korea First Bank in the year 2005, which was renamed as SC First Bank after the acquisition.

In the year 2006 the bank announced to have acquired an 80% stake in the Union Bank of Pakistan for a sum of US$ 511 Million, making the Standard Chartered Bank (Pakistan) the 6th largest bank in the nation of Pakistan.

Presence in India

In India, the Standard Chartered Bank introduced its first branch in Kolkata on 12th of April 1858. Later on, when Mumbai took over Kolkata as the financial capital of India, the bank administration was shifted to Mumbai from Kolkata.

Currently, the bank offers a wide variety of banking services and products to the Indian customers under Personal Banking, Private Banking, SME Banking and Wholesale Banking categories.

The services being offered include Regular Banking Services, Credit Cards, Debit & Prepaid cards, and Loans & Mortgages, NRI Banking Services, Executive Banking and Insurance & Investment products.

As of April 20012, Standard Chartered bank is located in all the prominent cities of India, including New Delhi, Mumbai, Kolkata, Bangalore, Hyderabad, and Ahmedabad etc.

43


Financial Results

The NPA ratio to net advances is very low in the year 2011, which indicates that the bank has reduced its investment in unsecured assets and now is focusing only on secured assets, Overall NPA ratio of the bank in last five years has been maintained below 1.5% which shows the efficiency of the bank in recovering its advances and strong legal measures taken by the bank.

Capital adequacy ratio indicates the stability and efficiency of the bank; ideally it should be greater than 10%, Standard Chartered bank has maintained its CAR on an average more than 10% and hence we can say that it is a stable bank and has sufficient capital to absorb a reasonable amount of losses.

Usually ROA of banks is less than 5%; ROA figure gives investors an idea of how effectively the company is converting the money it has to invest into net income. The higher the ROA the better is the company. In case of Standard Chartered bank the ROA on an average has been maintained at 2.9% in past five years, Maximum ROA was achieved in the year 2008.

Operating Profit is the profit earned from the normal core operations of the bank and excludes the investments made by the bank. The bank has attributed the decline in income to "rising interest rates and increased levels of competition compressing lending margins,

Non- Interest income comprises of the fees that bank take e.g. annual fees, Deposit and transaction fees, monthly account service charges, inactive fees etc. Net Interest Income is: NII = (interest payments on assets) − (interest payments on liabilities), We can see that the net interest income of the bank has decreased in the year 2011 because of the high volatility in the interest rates and the inflation factor in the country in that period, overall in the past five years the bank has earned an average of 8.43%.

44


Particulars 2011 2010 2009 2008 2007


7.54% 8.08% 8.50% 8.95% 9.07%


2.93% 4.04% 4.66% 4.13% 3.02%


4.60% 6.14% 5.66% 5.41% 5.25%

Return on Assets 2.44% 3.03% 2.87% 3.13% 3.06%



134,562 108,345

97,143 82,666 92,420


1,318 5,805 5,141 3,454 4,319


Loan impairment was however significantly lower by 43 per cent at $32 million as a result of the focus on secured lending and improved portfolio quality. The advances to deposits have grown by 2.38% in the year 2011 (last year it was -3.3%); as the sectors performance had decelerated because of the economic crises in the year 2008, which has had an impact on the performance of the bank. But, as the sector recovered up to a great extent and started performing at the pre-crises level the bank also witnessed growth.

Highest growth in net profit was recorded in the year 2008 i.e. 25.6%, in the later years the growth in net profit was approx. 11%. A sudden decline was witnessed in the net profit in the year 2011 of 3.18%. This indicates that the bank had incurred lot of expenses during this year. Expenses could be to reduce the NPA and build a strong portfolio.

Overall, The bank has maintained its stability during the crises and as well as after the crises, the bank has tried to maintain a secured portfolio for loans, so as to reduce NPA’s and has incurred expenses for the same

45



2011 492,007,928 584,191,102

2010 415,521,514 481,923,855

2009 374,891,281 418,017,661

2008 333,515,256 369,565,223

2007 301,037,976 341,746,660

Year Net Profit

2011 20,592,869

2010 21,270,385

2009 19,067,715

2008 17,062,349

2007 13,643,122

as a result of which the net profits have declined marginally in the year 2011. The Bank has maintained its performance in accordance with the performance of the sector. Though the liquidity concerns remains today as well for the bank

COMPARATIVE ANALYSIS OF THE BANKS

Maximum amount of loan was disbursed by Standard Chartered bank in the year 2011.The bank has

also shown a constant growth in the volume of advances in past five years. Where as, HSBC and Citibank has moreover remained at the same level in past five years.

Citibank has recorded highest number of deposits every year over a period of past five years, and has also shown a constant growth. This is mainly because of its attractive interest rates. Though in the

2011 2010 2009 2008 20070

100000000

200000000

300000000

400000000

500000000

600000000

Advances

HSBCCitiStandard Chartered

2011 2010 2009 2008 20070

100,000,000

200,000,000

300,000,000

400,000,000

500,000,000

600,000,000

700,000,000

Deposits

HSBC

Citibank

Standard Chartered

46


year 2011 Standard Chartered has recorded higher deposits than Citibank. However HSBC has shown growth every year but still it is not as high as Citibank and Standard Chartered Bank.

This ratio indicates that the percentage of advances given by the bank in respect to the deposits collected by the bank. The Advances to Deposits ratio of Standard Chartered bank has remained the highest in past five years. HSBC has shown a decline after 2008 and then recovered back in the year 2011. The decline in the performance of the banks in the year 2010 and 2011 is majorly because of the economic crises that had taken place in the US and the banking sector in India was also affected to a great extent because of the crises. Though the sector has recovered to the pre – Crises level in the year 2011. The highly volatile interest rates and rising inflation was another factor for the decrease in the ratio.

2011 2010 2009 2008 20070

10

20

30

40

50

60

70

80

90

100

Advances to Deposits Ratio

HSBC

Citibank

Standard Chartered

2011

2010

2009

2008

2007

0 1 2 3 4 5 6 7 8 9 10


Standard CharteredCitibankHSBC

47


Standard Chartered has reported the highest Net Interest income, followed by Citibank and then HSBC bank. Net Interest Income = (Net Interest payment on assets – Net Interest payment on liabilities), Hence we can say that Standard Chartered disburses loans on high interest rate and the interest rate on deposits is not so attractive. Where as Citibank has attractive interest rates for loans as well as deposits and hence attracts more customers. HSBC has more or less more or less remained at the same level in past five years.

Standard chartered bank has reported highest non – interest income in past five years, i.e. the fees charged by Standard Chartered bank is higher compared to the other banks, or the customer base of the bank is wide enough for it to generate such high income. HSBC and Citibank have more or less remained at the same level.

As we can see that the performance of all the banks declined in the year 2011 as a result of high volatility in the interest rates and high inflation in the country. Standard Chartered still managed to maintain its position at the top and performed better than rest of the banks.

2011 2010 2009 2008 20070

0.5

1

1.5

2

2.5

3

3.5

4

4.5

5

Non - Interest Income as a percentage of working funds

HSBCCitibankStandard Chartered

2011 2010 2009 2008 20070

1

2

3

4

5

6

7

Operating Profit as a percentage of working funds


48


Standard Chartered bank has reported highest ROA, and has maintained its position at the same level in past five years, Citibank and HSBC showed a tremendous fall in the year 2010 as a result of high inflation rate and interest rate fluctuation Citibank declined by approx. 54% where as HSBC declined by approx. 41%, but recovered in the next year.

The CAR of all the banks has almost remained at the same level in past five years. It indicates that the bank has sufficient funds to meet its requirements in case of crises. There was a liquidity crunch in the year 2008 because of the economic crises; the banks have managed to survive during that period as well because they had sufficient capital to manage its operations. Standard Chartered bank has

2011 2010 2009 2008 20070

0.5

1

1.5

2

2.5

3

3.5

Return on Assets


2011 2010 2009 2008 20070

5

10

15

20

25

Capital Adeqaucy Ratio


49


maintained its CAR at the ideal level i.e. 10%; where as other banks have maintained it above minimum requirement level.

The NPA ratio of Standard Chartered bank has reduced drastically as it has shifted its focus on secured advances. Citibank reported highest NPA in the year 2009 i.e. post economic crises. HSBC reported highest NPA in the year 2010. Both the banks HSBC and Citibank have controlled its NPA in the year 2011 and reduced it by 43% (Citibank) and 60% (HSBC). HSBC and Citibank should focus on secured lending so as to create a stable portfolio of the bank.

CONCLUSION:

Overall we can conclude that Standard Chartered has come out as a best Investment bank in the year 2011. Citibank has attractive interest rates but the NPA ratio and ROA of Citibank is lower than Standard Chartered bank. HSBC’s performance has been affected by the economic crises in the year 2008, and the volatility in the interest rate and high inflation rate in India in past two years. However HSBC has still shown growth and stability in past five year’s.

The performance of foreign banks in India was robust during the period 2011 – 12. Banks did face problems because of the economic crises but now have recovered to the pre – crises level. There are huge opportunities for banks in the coming year as the government of India is taking measures to improve the financial soundness of the banking sector and to bring new technology in India for the smooth functioning of the banks in India. RBI recently announced that they would now use other measures to control inflation and not bring too much volatility in the interest rates.

SUGGESTIONS:

Citibank and HSBC should focus on secured lending’s to improve their portfolio and maintain stability in the bank. The bank should also increase its consumer base so as to earn high interest income.

2011 2010 2009 2008 20070

0.5

1

1.5

2

2.5

3

NPA ratio

HSBCCitibankStandard Charterd

50


Standard Chartered should improve its capital adequacy ratio, as it just meets the minimum requirements as per the standard set by RBI. Standard chartered should try and improve, as in case of liquidity crunch the bank should be able to meet its requirements.

FUTURE OF FOREIGN BANKS IN INDIA

51


More Foreign Banks Rush to India, a large number of foreign banks are now keen on opening shop in India to gain a critical mass by April 2009, when private banking space is expected ' to open up for foreign players.

The list of foreign players in India includes banks like Citibank, Bank of America, and Bank of Nova Scotia, ABN-AMRO Bank/ RBS, Deutsche Bank and JPMorgan Chase Bank, which figure in the top 25 global banks ranked by The Banker magazine. The other top banks like Credit Suisse Group, Industrial and CommercialBank of China, are still to start banking business in India.

India is expected to find a place in the strategy of these banks given the c8-untry's growth prospects. India's GDP is seen growing at a robust pace of around 8-9 per cent over the next few years, throwing up opportunities for the banking sector to profit from.

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.

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 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.

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 that bank as a weak bank. The Indian subsidiaries of the foreign banks are not allowed to open branches freely in the country.

CONCLUSION

52


As far as the economic scenario is concerned India is surely on a roll. The last twenty years have really proved extremely beneficial for India. The country now stands only after Brazil as far as GDP ranking is concerned. India has replaced Russia and grabbed the second position in the global forefront mostly due to the strategic planning and huge amount of expenditures on education in India. India GDP 2011 is expected to cross the 8 percent mark and move to 9 percent GDP growth rate.

India is the second largest populated country in the world sheltering over one billion people. Although India has not had a striking 10 percent year over year economic growth as its neighbor China it has still managed to grow at a nominal rate. India's GDP growth has been slow but careful.

According to trade pundits India will take the third position as Far as GDP growth in concerned by 2020 replacing Germany, the UK, and Japan. Only United States and China will be ahead of it.

The growth in the Indian Banking Industry has been more qualitative than quantitative and it is expected to remain the same in the coming years. The Indian economy is expected to grow between 8-9% this year hence we can expect more of foreign banks to enter in India as higher the growth rate the greater is the economic activity.

The November 2010 G20 meeting, an agreement was reached wherein India will be one of the 10 largest members in IMF. UN estimates India would contribute a quarter of addition to world’s workforce over next 10 years. India has emerged as a top five destinations for FDI, after China

RBI has recently given licenses to few banks. Rabbo Bank has received banking license in April 2011, Industrial and Commercial Bank of China (ICBC) was recently granted a business license for branch in India in May 2011.

Major MNC banks and Indian players are also considering full-fledged banking operations in India. According to Price Waterhouse Coopers (PWC), a research agency the banking assets of emerging nations are likely to overtake that of G7 economies by the year 2050, with India likely to emerge as the third largest domestic banking market in the world in the next three decades.

India is a huge and growing economy, hence it gives ample scope for foreign banks across various segments. Industrial growth is expected to expand in the coming years. Indian trade with other foreign countries shows an upward trend.

BIBLIOGRAPHY

53


Reports

1) Annual Reports of foreign banks2) RBI – Bulletin published by RBI

Journals

1) International Journal of Global Business, 5 (1), 1-16, June 2012 2) ICFAI journal – published by ICFAI university – Hyderabad3) Journal of Asian research Consortium, Volume 2- Issue 2 (Feb -2012)

Website

1) http://www.rbi.org.in/Scripts/bs_viewcontent.aspx?Id=2313

2) http://en.wikipedia.org/wiki/Late-2000s_recession_in_Asia#India

3) http://corporatelawsforindia.blogspot.in/2012/04/fdi-in-banking-sector-of-india-under.html

4) http://en.wikipedia.org/wiki/Narasimham_Committee_on_Banking_Sector_Reforms_(1998)

5) http://www.aijsh.org

6) http://www.imf.org/external/pubs/ft/wp/2012/wp1210.pdf

7) www.google.com

54


Date post:	29-Jan-2015
Category:	Documents
Upload:	anchal-mathur
View:	149 times
Download:	1 times

A study on scope of foreign banks in india

Documents