FDI in Banking

8/18/2019 FDI in Banking

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ST. ANDREW’S COLLEGE

OF ARTS, SCIENCE AND COMMERCE

BANDRA (W), MUMBAI – 400050.

A STUDY ON FDI IN BANKING SECTOR

Sub!""#$ %&' "# C&u'#

ECONOMICS OF GLOBAL TRADE AND FINANCE

IN

MASTER OF COMMERCE *ROGRAMME –*ART I

SEMESTER I

OF T+E

UNIERSITY OF MUMBAI

BY

RA-I DOS+I

ROLL NO /00

UNDER T+E GUIDANCE OF D'. K1!'1 M&$2

305 – 30

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DECLARATION

I hereby declare that this project report entitled 6A STUDY ON FDI INBANKING SECTOR7 which is being submitted in partial fulfillment of therequirement of the course on Economics of Global Trade and Finance leading tothe award of the “Master of ommerce !egree" by the #ni$ersity of Mumbai isthe result of the research carried out by me under the guidance and super$isionof !r% &ashmira Mody%

I further declared that I ha$e not pre$iously submitted this project report to any

other institution'uni$ersity for any other degree' diploma or for any other

person%

D1"#

*819#( Mumbai S!:;1"u'# &% S"u$#;"

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CERTIFICATE

It is certified that this project “A STUDY ON FDI IN BANKING SECTOR7 has

been prepared and submitted by )aj$i !oshi *)oll +umber , -./.0 under myguidance during the academic year 1.2341.2/%

D1"# S!:;1"u'#

(D'. K1!'1 M&$2)

(A&9!1"# *'&%#&')

*819# Mumbai

S!:;1"u'# &% "# S!:;1"u'# &% "# S!:;1"u'# &% "#

I;"#';18 E


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ACKNOWLEDGEMENT

I would li5e to e6press my sincere gratitude towards my teacher and guide !r% &ashmira

Mody% I would also li5e to than5 our Principal !r% Marie Fernandes for pro$iding us with the

moti$ation and facilities to help me in completing this project% I would also li5e to than5 mu

family and peers for their 5ind co4operation and encouragement which help me in completion

of this project% I would li5e to e6press my special gratitude and than5s towards these people%

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E?ECUTIE SUMMARY

Foreign direct in$estment *F!I0 has played an important role in the process of

globalisation during the past two decades% The rapid e6pansion in F!I bymultinational enterprises since the mid4eighties may be attributed to significant

changes in technologies7 greater liberalisation of trade and in$estment regimes7

and deregulation and pri$atisation of mar5ets in de$eloping countries li5e India%

The present study aims at pro$iding detailed information about F!I inflows in

India during the subsequent years% The analysis is fully based on secondary data

collected through different website and journals%

The project aims at pro$iding information of present F!I policy7 year wise F!I

inflows7 ad$antages and disad$antages of F!I7 )8I policy7 foreign portfolio

in$estment7 impact and importance of F!I in ban5ing sector7 etc%

9nd thus different suggestion and recommendation are gi$en to impro$e the

present condition of F!I in India%

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SR.

NO.

TO*ICS *AGE

NO.

C+A*TER @ INTRODUCTION

2%2 I+T):!#TI:+ ;

2%1 !EFI+ITI:+ <C+A*TER 3

1%2 =T9TEME+T :F P):8>EM -

1%1 :8?ETI@E= 2.

1%A )E=E9)B METB:>:GC 22

1%D >ITE)9T#)E )E@IE 21

C+A*TER > – FDI IN BANKING

A%2 TCPE= :F F!I= 2D

A%1 IMP:)T9+E 9+! 89))IE)=

T: F!I

2/

A%A I+!I9+ F!I =E+9)I: 2;

A%D G:@E)+ME+T 9PP):@9>=

F:) F:)EIG+ :MP9+IE=

!:I+G 8#=I+E== I+ I+!I9

2-

A%3 IMP9T :F F!I :+ I+!I9+

89+&I+G =ET:)

2-

A%/ :)>! 89+&I+G =ET:) 1.

A%; TBE P)E=E+T 89+&I+G=E+9)I: I+ I+!I9

13

A%< F!I I+ I+!I9+ 89+&I+G 1/

A%- TBE IMF =T#!C )EP:)T 1<

A%2. F!I I+ I+!I9 9 8::+ :) 9

89I+

A.

A%22 8E+EFIT= :F F!I A2

A%21 >IMIT9TI:+ :F F!I AA

A%2A F#T#)E =:PE A3

C+A*TER 4

D%2 FI+!I+G= 9+! =#GGE=TI:+= A<

D%1 :+>#=I:+ D2

D%A )EFE)E+E= D1

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C+A*TER

INTRODUCTION

9 foreign direct in$estment *F!I0 is a controlling ownership in a business

enterprise in one country by an entity based in another country%

Foreign direct in$estment is distinguished from portfolio foreign in$estment7 a

passi$e in$estment in the securities of another country such as public stoc5s and

bonds7 by the element of control%" 9ccording to the Financial Times7 =tandard

definitions of control use the internationally agreed 2. percent threshold of

$oting shares7 but this is a grey area as often a smaller bloc5 of shares will gi$e

control in widely held companies% Moreo$er7 control of technology7

management7 e$en crucial inputs can confer de facto control%

The origin of the in$estment does not impact the definition as an F!I( the

in$estment may be made either inorganically by buying a company in the

target country or organically by e6panding operations of an e6isting business

in that country%

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https://en.wikipedia.org/wiki/Portfolio_investmenthttps://en.wikipedia.org/wiki/Stockhttps://en.wikipedia.org/wiki/Bond_(finance)https://en.wikipedia.org/wiki/Portfolio_investmenthttps://en.wikipedia.org/wiki/Stockhttps://en.wikipedia.org/wiki/Bond_(finance)


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DEFINITION

8roadly7 foreign direct in$estment includes mergers and acquisitions7 building

new facilities7 rein$esting profits earned from o$erseas operations and intra

company loans% In a narrow sense7 foreign direct in$estment refers just to

building new facilities% The numerical F!I figures based on $aried definitions

are not easily comparable% 9s a part of the national accounts of a country7 and in

regard to the G!P equation CHIHGH*4M0Jonsumption H gross In$estment

H Go$ernment spending H*e6ports 4 imports0K7 where I is domestic in$estment

plus foreign in$estment7 F!I is defined as the net inflows of in$estment *inflow

minus outflow0 to acquire a lasting management interest *2. percent or more of

$oting stoc50 in an enterprise operating in an economy other than that of the

in$estor% F!I is the sum of equity capital7 other long4term capital7 and short4term capital as shown the balance of payments% F!I usually in$ol$es

participation in management7 joint4$enture7 transfer of technology and e6pertise%

=toc5 of F!I is the net *i%e%7 inward F!I minus outward F!I0 cumulati$e F!I

for any gi$en period% !irect in$estment e6cludes in$estment through purchase

of shares% F!I is one e6ample of international factor mo$ements 9 foreign

direct in$estment *F!I0 is a controlling ownership in a 8#=I+E== enterprise in

one country by an entity based in another country% Foreign direct in$estment is

distinguished from portfolio foreign in$estment7 a passi$e in$estment in the

securities of another country such as public stoc5s and bonds7 by the element of

control% 9ccording to the Financial Times7 =tandard definitions of control use

the internationally agreed 2. percent threshold of $oting shares7 but this is a

grey area as often a smaller bloc5 of shares will gi$e control in widely held

companies% Moreo$er7 control of technology7 management7 e$en crucial inputs

can confer de facto control%"

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https://en.wikipedia.org/wiki/Equity_capitalhttps://en.wikipedia.org/wiki/Balance_of_paymentshttps://en.wikipedia.org/wiki/Joint-venturehttps://en.wikipedia.org/wiki/Transfer_of_technologyhttps://en.wikipedia.org/wiki/Foreign_portfolio_investmenthttps://en.wikipedia.org/wiki/Foreign_portfolio_investmenthttps://en.wikipedia.org/wiki/International_factor_movementshttps://en.wikipedia.org/wiki/Equity_capitalhttps://en.wikipedia.org/wiki/Balance_of_paymentshttps://en.wikipedia.org/wiki/Joint-venturehttps://en.wikipedia.org/wiki/Transfer_of_technologyhttps://en.wikipedia.org/wiki/Foreign_portfolio_investmenthttps://en.wikipedia.org/wiki/Foreign_portfolio_investmenthttps://en.wikipedia.org/wiki/International_factor_movements


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C+A*TER 3

STATEMENT OF T+E *ROBLEM

In todayLs economy F!I plays an important role in each sector% 8eing a

de$eloping country7 F!I is a topic of great discussion in India7 considering that

foreign income has the will to change the face of the Indian economy% 9s easy

as it may sound to a layman that incoming cash flow is good for the economy7

F!I comes with a lot of complications% hile there are few who support F!I7

there are also many who oppose the idea% The ban5ing industry is a bac5bone on

which any country can grow% It is through which the entire economy and the

cash flow of the country runs% Therefore it is necessary to understand the change

in the industry which is going to be brought about by the increase in F!I in the

particular industry% The study will also illustrate how F!I changes an industryand highlights the benefits which will be recei$ed by the people%

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OB-ECTIE OF T+E STUDY

To find out the Impact of F!I on Indian ban5ing ser$ices%

To analyNe the Impact of F!I on Indian ban5ing Technology

To understand the Impact of F!I on Indian ban5ing Infrastructure%

To chec5 out customer satisfaction towards F!I

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RESEARC+ MET+OLOGY

=econdary data has been done by using tools such as internet7 research papers

and news articles%

AREA OF RESEARC+

Indian ban5ing sector has been considered while researching%

LIMITATIONS OF RESEARC+

!ue to certain time and resource barriers7 a part of study is focused on

secondary research%

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C+A*TER >

TY*ES OF FDI

BY DIRECTION

:utward F!I 4 9n outward4bound F!I is bac5ed by the go$ernment against all

types of associated ris5s% This form of F!I is subject to ta6 incenti$es as well as

disincenti$es of $arious forms% )is5 co$erage pro$ided to the domestic

industries and subsidies granted to the local firms stand in the way of outward

F!Is7 which are also 5nown as Odirect in$estments abroad%O

Inward F!Is 4 !ifferent economic factors encourage inward F!Is% These

include interest loans7 ta6 brea5s7 subsidies7 and the remo$al of restrictions and

limitations% Factors detrimental to the growth of F!Is include necessities of

differential performance and limitations related with ownership patterns%

BoriNontal F!Is 4 In$estment in the same industry abroad as a firm operates in

at home%

@ertical F!Is

• 8ac5ward @ertical F!I( here an industry abroad pro$ides inputs for a firmOs

domestic production process%

• Forward @ertical F!I( here an industry abroad sells the outputs of a firmOs

domestic production%

BY TARGET

Greenfield In$estment( 4 !irect in$estment in new facilities or the e6pansion of

e6isting facilities% Greenfield in$estments are the primary target of a host

nationLs promotional efforts because they create new production capacity and

jobs7 transfer technology and 5now4how7 and can lead to lin5ages to the global

mar5etplace% The :rganiNation for International In$estment cites the benefits of

Greenfield in$estment *or in sourcing0 for regional and national economies to

include increased employment *often at higher wages than domestic firms0

in$estments in research and de$elopment and additional capital in$estments%

!isad$antage of Greenfield in$estments include the loss of mar5et share for

competing domestic firms%

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Mergers 9nd 9cquisitions(4 Transfers of e6isting assets from local firms to

foreign firm ta5es place the primary type of F!I% ross4border mergers occur

when the assets and operation of firms from different countries are combined to

establish a new legal entity% ross4border acquisitions occur when the control of

assets and operations is transferred from a local to a foreign company7 with thelocal company becoming an affiliate of the foreign company%

BY MOTIE

F!I can also be categoriNed based on the moti$e behind the in$estment from the

perspecti$e of the in$esting firm(

)esource4=ee5ingIn$estments which see5 to acquire factors of production those are more efficient

than those obtainable in the home economy of the firm% In some cases7 these

resources may not be a$ailable in the home economy at all% For e6ample see5ing

natural resources in the Middle East and 9frica7 or cheap labour in =outheast

9sia and Eastern Europe%

Mar5et4=ee5ing

In$estments which aim at either penetrating new mar5ets or maintaininge6isting ones% F!I of this 5ind may also be employed as defensi$e strategy it is

argued that businesses are more li5ely to be pushed towards this type of

in$estment out of fear of losing a mar5et rather than disco$ering a new one%

Efficiency4=ee5ing

In$estments which firms hope will increase their efficiency by e6ploiting the

benefits of economies of scale and scope7 and also those of common ownership%

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IM*ORTANCE AND BARRIERS TO FDI

The rapid growth of world population since 2-3. has occurred mostly in

de$eloping countries% This growth has been matched by more rapid increases in

gross domestic product7 and thus income per capita has increased in most

countries around the world since 2-3.%

9n increase in F!I may be associated with impro$ed economic growth due to

the influ6 of capital and increased ta6 re$enues for the host country% Bost

countries often try to channel F!I in$estment into new infrastructure and other

projects to boost de$elopment% Greater competition from new companies can

lead to producti$ity gains and greater efficiency in the host country and it has

been suggested that the application of a foreign entityLs policies to a domestic

subsidiary may impro$e corporate go$ernance standards% Furthermore7 foreignin$estment can result in the transfer of soft s5ills through training and job

creation7 the a$ailability of more ad$anced technology for the domestic mar5et

and access to research and de$elopment resources% The local population may

benefit from the employment opportunities created by new businesses%In many

instances7 the in$esting company is simply transferring its older production

capacity and machines7 which might still be appealing to the host country

because of technological lags or under4de$elopment7 in order to a$oid

competition against its own products by the host country'company%

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INDIAN FDI SCENARIO

To facilitate ease of doing business for foreign in$estors and their domestic

recipients7 the #nion 8udget 1.2/42; has proposed liberaliNation of foreign

direct in$estment *F!I0 norms in a host of sectors%

These include insurance7 pension7 9sset )econstruction ompanies *9)07

stoc5 e6changes7 mar5eting of food products7 listed entral Public =ector

Enterprises *P=E0 e6cept ban5s and areas go$erned by financial sector

regulators7 falling beyond the 2< specified +8F acti$ities%

This the second time such Q big bangL F!I reforms are being announced by the

go$ernment under Prime Minister +arendra Modi% In +o$ember last year7 just

after the 8?P4led +ational !emocratic 9lliance *+!90 suffered a huge defeat inthe 8ihar 9ssembly Elections7 the entre had similarly eased norms across 23

sectors7 including defence7 pri$ate sector ban5ing7 construction7 single brand

retail7 broadcasting and ci$il a$iation to boost in$estment sentiment and attract

more foreign capital into the country% Following these reforms and the Ma5e in

India initiati$e7 F!I during 9pril4!ecember 1.23 in FCL2/ was up D. per cent

year4on4year to R1-%3 billion%

=ignificantly7 in a mo$e that is in line with the union go$ernmentLs policy of

Qcooperati$e and competiti$e federalismL as well as to ensure effecti$e

implementation of 8ilateral In$estment Treaties *8IT0 signed by India with

other countries7 the go$ernment proposed in the FCL2; 8udget to introduce a

entre4=tate In$estment 9greement%

=tates opting to in5 these pacts with the entre will be seen as more attracti$e

destinations by foreign in$estors7 according to the anne6ure to the finance

ministerLs 8udget speech%

The finance ministry had in !ecember last year brought out IndiaLs Model 8IT

Te6t that will be used as a basic template during treaty negotiations with other

countries% ith se$eral instances of in$estors suing go$ernments under different

8ITs and claiming huge compensation for their Qlosses7L these initiati$es are

aimed at protecting the go$ernmentLs interests and securing their policy space%

India has 8ITs with


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e6tant guidelines on Indian management and control to be $erified by the

sectoral regulators%

In the FCL23 8udget7 the go$ernment had increased the composite cap

*including F!I and foreign institutional in$estment0 in the insurance sector *and

automatically in the pension sector as well0 to D- per cent from the 1/ per cent

but with full Indian management and control and through the go$ernment

appro$al *through Foreign In$estment Promotion 8oard or FIP80 route%

In$estors had delayed new in$estments in the sectors citing ambiguity regarding

the rider specifying that management and control should be in Indian hands%

To help ban5s and financial institutions *FI0 address the problem of huge bad

loans7 the FCL2; 8udget has proposed 2.. per cent F!I in 9)s through

automatic route% 9)s play a crucial role in resolution of non4performing assets by acquiring them from ban5s and FIs% The FCL2; 8udget also proposed that

foreign portfolio in$estors will be allowed up to 2.. per cent of each tranche in

securities receipts issued by 9)s subject to sectoral caps%

The go$ernment has also proposed to allow 2.. per cent F!I through FIP8

route in mar5eting of food products produced and manufactured in India%

hile trade bodies including onfederation of 9ll India Traders ha$e opposed

the mo$e saying it amounts to partially opening up foreign in$estment in multi4

brand retail trade and allowing multi4nationals in the sector through the

bac5door7 Finance Minister 9run ?aitley justified the decision saying( “9 lot of

fruits and $egetables grown by our farmers either do not fetch the right prices or

fail to reach the mar5ets% Food processing industry and trade should be more

efficient% This mo$e will benefit farmers7 gi$e impetus to food processing

industry and create $ast employment opportunities%"

The FCL2; 8udget has also proposed to hi5e the in$estment limit for foreign

entities in Indian stoc5 e6changes from fi$e per cent to 23 per cent on par withdomestic institutions% This mo$e is aimed at enhancing global competiti$eness

of Indian stoc5 e6changes and accelerating adoption of best4in4class technology

and global mar5et practices7 the go$ernment said%

9lso7 the e6isting 1D per cent limit for in$estment by foreign portfolio in$estors

*FPI0 in P=Es other than ban5s7 listed in stoc5 e6changes7 will be increased to

D- per cent% The mo$e is to ob$iate the need for prior appro$al of go$ernment

for increasing the FPI in$estment7 the go$ernment said%

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http://www.thehindu.com/business/budget/the-impact-of-the-budget-across-sectors/article8295738.ecehttp://www.thehindu.com/business/budget/the-impact-of-the-budget-across-sectors/article8295738.ecehttp://www.thehindu.com/business/budget/the-impact-of-the-budget-across-sectors/article8295738.ecehttp://www.thehindu.com/business/budget/the-impact-of-the-budget-across-sectors/article8295738.ecehttp://www.thehindu.com/business/budget/the-impact-of-the-budget-across-sectors/article8295738.ece


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GOERNMENT A**ROALS FOR FOREIGN COM*ANIES

DOING BUSINESS IN INDIA

Go$ernment 9ppro$als for Foreign ompanies !oing 8usiness in India or

In$estment )outes for In$esting in India7 Entry =trategies for Foreign In$estors

IndiaOs foreign trade policy has been formulated with a $iew to in$ite and

encourage F!I in India% The )eser$e 8an5 of India has prescribed the

administrati$e and compliance aspects of F!I% 9 foreign company planning to

set up business operations in India has the following options(

Au"&1"!9 1=='&18 b2 RBI

The )eser$e 8an5 of India accords automatic appro$al within a period of two

wee5s *subject to compliance of norms0 to all proposals and permits foreign

equity up to 1DS 3.S 32S ;DS and 2..S is allowed depending on the

category of industries and the sectoral caps applicable% The lists are

comprehensi$e and co$er most industries of interest to foreign companies%

In$estments in high4priority industries or for trading companies primarily

engaged in e6porting are gi$en almost automatic appro$al by the )8I%

T# FI*B R&u"# – *'&9#!;: &% ;&;@1u"&1"!9 1=='&18 91#

FIP8 stands for Foreign In$estment Promotion 8oard which appro$es all other cases where the parameters of automatic appro$al are not met% +ormal

processing time is D to / wee5s% Its approach is liberal for all sectors and all

types of proposals7 and rejections are few% It is not necessary for foreign

in$estors to ha$e a local partner7 e$en when the foreign in$estor wishes to hold

less than the entire equity of the company% The portion of the equity not

proposed to be held by the foreign in$estor can be offered to the public%

IM*ACT OF FDI ON INDIAN BANKING SECTOR

Today Indian 8an5s are as technology sa$$y as their counter parts in de$eloped

countries%

The competiti$e and reform force ha$e led to the emergence of internet7 e4

ban5ing7 9TM7 credit card and mobile ban5ing too7 to let ban5s attract and retain

customers%

In recent times economy is been pushing to increase the role of multi4national

ban5s in the ban5ing sector%

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WORLD BANKING SECTOR

9 1.2. meta4analysis of the effects of foreign direct in$estment on local firms

in de$eloping and transition countries suggests that foreign in$estment robustly

increases local producti$ity growth% The ommitment to !e$elopment Inde6

ran5s the de$elopment4friendliness of rich country in$estment policies%

C+INA

F!I in hina7 also 5nown as )F!I *renminbi foreign direct in$estment07 has

increased considerably in the last decade7 reaching R2-%2 billion in the first si6

months of 1.217 ma5ing hina the largest recipient of foreign direct in$estment

and topping the #nited =tates which had R2;%D billion of F!I%In 1.2A the F!I

flow into hina was R1D%2 billion7 resulting in a AD%;S mar5et share of F!I intothe 9sia4Pacific region% 8y contrast7 F!I out of hina in 1.2A was Rist of the ten largest foreign companies

in$esting in India *from 9pril 1...4 ?anuary 1.220 are as follows 44

2 TMI Mauritius >td% 4)s ;1-D crore'R2/.. million

30 P a g e

https://en.wikipedia.org/wiki/Meta-analysishttps://en.wikipedia.org/wiki/Meta-analysishttps://en.wikipedia.org/wiki/Commitment_to_Development_Indexhttps://en.wikipedia.org/wiki/Financial_crisis_of_2007%E2%80%932008https://en.wikipedia.org/wiki/Foreign_Exchange_Management_Acthttps://en.wikipedia.org/wiki/Foreign_Exchange_Management_Acthttps://en.wikipedia.org/wiki/Manmohan_Singhhttps://en.wikipedia.org/wiki/Aviationhttps://en.wikipedia.org/wiki/Insurancehttps://en.wikipedia.org/wiki/UNCTADhttps://en.wikipedia.org/wiki/Meta-analysishttps://en.wikipedia.org/wiki/Commitment_to_Development_Indexhttps://en.wikipedia.org/wiki/Financial_crisis_of_2007%E2%80%932008https://en.wikipedia.org/wiki/Foreign_Exchange_Management_Acthttps://en.wikipedia.org/wiki/Foreign_Exchange_Management_Acthttps://en.wikipedia.org/wiki/Manmohan_Singhhttps://en.wikipedia.org/wiki/Aviationhttps://en.wikipedia.org/wiki/Insurancehttps://en.wikipedia.org/wiki/UNCTAD


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1 airn #& Bolding 4 )s///A crores'R2D-1 million

A :racle Global *Mauritius0 >td% 4 )s Dtd% , )s A1/< crore'Rtd% , )s A11< crore

; MP 9sia >td% , )s 1/Aynch*Mauritius0 >td% , )s 11A.%.1 crore ' RDtd%0

In 1.23 India emerged as top F!I destination surpassing hina and the #=% In

first half of the 1.23 India attracted F!I of RA2 billion compared to R1< billion

and R1; billion of hina and the #= respecti$ely%

UNITED STATES

8roadly spea5ing7 the #nited =tates has a fundamentally open economy and

low barriers to F!I%

#%=% F!I totalled R2-D 8illion in 1.2.% u6embourg7 the +etherlands7 and anada%J9 major source of

in$estment is the real estate7 the foreign in$estment in this area totalled R-1%1

billion in 1.2A7 under $arious forms of purchase structures *considering the #%=%

ta6ation and residency laws0%

9 1..< study by the Federal )eser$e 8an5 of =an Francisco indicated that

foreigners hold greater shares of their in$estment portfolios in the #nited =tates

if their own countries ha$e less de$eloped financial mar5ets7 an effect whose

magnitude decreases with income per capita% ountries with fewer capital

3 P a g e

https://en.wikipedia.org/wiki/Open_economyhttps://en.wikipedia.org/wiki/Foreign_investment_in_the_United_States_real_estatehttps://en.wikipedia.org/wiki/Foreign_investment_in_the_United_States_real_estatehttps://en.wikipedia.org/wiki/Federal_Reserve_Bank_of_San_Franciscohttps://en.wikipedia.org/wiki/Open_economyhttps://en.wikipedia.org/wiki/Foreign_investment_in_the_United_States_real_estatehttps://en.wikipedia.org/wiki/Federal_Reserve_Bank_of_San_Francisco


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controls and greater trade with the #nited =tates also in$est more in #%=% equity

and bond mar5ets%

hite Bouse data reported in 1.22 found that a total of 3%; million wor5ers

were employed at facilities highly dependent on foreign direct in$estors% Thus7

about 2AS of the 9merican manufacturing wor5force depended on suchin$estments% The a$erage pay of said jobs was found as around R;.7... per

wor5er7 o$er A.S higher than the a$erage pay across the entire #%=% wor5force%

President 8arac5 :bama said in 1.217 In a global economy7 the #nited =tates

faces increasing competition for the jobs and industries of the future% Ta5ing

steps to ensure that we remain the destination of choice for in$estors around the

world will help us win that competition and bring prosperity to our people%

In =eptember 1.2A7 the #nited =tates Bouse of )epresentati$es $oted to pass

the Global In$estment in 9merican ?obs 9ct of 1.2A *B%)% 1.31 22Athongress07 a bill which would direct the #nited =tates !epartment of

ommerce to conduct a re$iew of the global competiti$eness of the #nited

=tates in attracting foreign direct in$estment%=upporters of the bill argued that

increased foreign direct in$estment would help job creation in the #nited =tates%

CANADA

Foreign direct in$estment by country and by industry are trac5ed by =tatistics

anada% Foreign direct in$estment accounted for 9!R/AD billion in 1.217

eclipsing the #nited =tates in this economic measure% Global F!I inflows and

outflows are tabulated by =tatistics anada%

UNITED KINGDOM

The #& has a $ery free mar5et economy and is open to foreign in$estment%

Prime Minister !a$id ameron has sought in$estment from emerging mar5ets

and from the Far East in particular and some of 8ritainOs largest infrastructure

including energy and s5yscrapers such as The =hard ha$e been built with

foreign in$estment%

RUSSIAN FEDERATION

• History of Foreign Investment Law

In 2--27 for the first time7 )ussia regulated the form7 range and fa$orable policy

of F!I in )ussia%

In 2--D7 a consulting council of F!I was an established in )ussia7 which was

responsible for setting ta6 rate and policies for e6change rate7 impro$ing

in$estment en$ironment7 mediating relationship between central and localgo$ernment7 researching and impro$ing images of F!I wor57 and increasing the

33 P a g e

https://en.wikipedia.org/wiki/White_Househttps://en.wikipedia.org/wiki/White_Househttps://en.wikipedia.org/wiki/Barack_Obamahttps://en.wikipedia.org/wiki/United_States_House_of_Representativeshttps://en.wikipedia.org/wiki/Global_Investment_in_American_Jobs_Act_of_2013_(H.R._2052;_113th_Congress)https://en.wikipedia.org/wiki/Global_Investment_in_American_Jobs_Act_of_2013_(H.R._2052;_113th_Congress)https://en.wikipedia.org/wiki/United_States_Department_of_Commercehttps://en.wikipedia.org/wiki/United_States_Department_of_Commercehttps://en.wikipedia.org/wiki/Statistics_Canadahttps://en.wikipedia.org/wiki/Statistics_Canadahttps://en.wikipedia.org/wiki/David_Cameronhttps://en.wikipedia.org/wiki/The_Shardhttps://en.wikipedia.org/wiki/White_Househttps://en.wikipedia.org/wiki/Barack_Obamahttps://en.wikipedia.org/wiki/United_States_House_of_Representativeshttps://en.wikipedia.org/wiki/Global_Investment_in_American_Jobs_Act_of_2013_(H.R._2052;_113th_Congress)https://en.wikipedia.org/wiki/Global_Investment_in_American_Jobs_Act_of_2013_(H.R._2052;_113th_Congress)https://en.wikipedia.org/wiki/United_States_Department_of_Commercehttps://en.wikipedia.org/wiki/United_States_Department_of_Commercehttps://en.wikipedia.org/wiki/Statistics_Canadahttps://en.wikipedia.org/wiki/Statistics_Canadahttps://en.wikipedia.org/wiki/David_Cameronhttps://en.wikipedia.org/wiki/The_Shard


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right and responsibility of Ministry of Economic in appealing F!I and enforcing

all 5inds of policies%

In 2--;7 )ussia starts to enact policies for appealing F!I on particular

industries7 for e6ample7 fossil fuel7 gas7 woods7 transportation7 food

reprocessing7 etc%

In 2---7 )ussia announced a law named F!I of )ussian Federation7 which

aimed at pro$iding a basic guarantee for foreign in$estors on in$esting7 running

business7 earnings%

In 1..


24/42

M1!; !"# &% !;%8& !;#"#;" !; Ru!1; F#$#'1"!&;

34 P a g e


25/42

T+E *RESENT BANKING SCENARIO IN INDIA

In recent times economy is been pushing to increase the role of multi4national

ban5s in the ban5ing and insurance sector7 despite7 the concern e6pressed by the

left communist parties are opposing the finance minister mo$e to raise o$erseas

in$estment limits in the insurance business% The go$ernment wants to fulfil a

pledge to allow companies li5e +ew Cor5 >ife Insurance7 Met >ife Insurance to

raise in$estment in local companies to D- per cent from 1/ per cent%

8ut it is opposed on the front that it will lead to state run insurers losing

business and wor5ers their job% >eft do not want foreign in$estors to ha$e

greater $oting rights in pri$ate ban5s and oppose the pri$atiNation of state run

pension fund%

There are se$eral reasons why such mo$e is fraught with dangers% hen

domestic or foreign in$estors acquire a large shareholding in any ban5 and

e6ercise proportionate $oting rights7 it creates potential problems not only of

e6cursi$e concentration in the ban5ing sector but also can e6pose the economy

to more intensi$e financial crises at the slightest hint of panic%

:pposition is not considering the need of present situation% F!I in ban5ing

sector can sol$e $arious problems of the o$erall ban5ing sector% =uch as ,

i0 Inno$ati$e Financial Products

ii0 Technical !e$elopments in the Foreign Mar5ets

iii0 Problem of Inefficient Management

i$0 +on4performing 9ssets

$0 Financial Instability

$i0 Poor apitaliNation

$ii0 hanging Financial Mar5et onditions

If we consider the root cause of these problems7 the reason is low4capital base

and all the problems is the outcome of the transactions carried o$er in a ban5

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26/42

without a substantial capital base% In a nutshell7 we can say that7 as the F!I is a

non4debt inflow7 which will directly sol$e the problem of capital base%

FDI IN INDIAN BANKING

In the pri$ate ban5ing sector of India7 F!I is allowed up to a ma6imum limit of

;D S of the paid4up capital of the ban5% :n the other hand7 Foreign !irect

In$estment and Portfolio In$estment in the public or nationaliNed ban5s in India

are subjected to a limit of 1. S in totality% This ceiling is also applicable to the

in$estments in the =tate 8an5 of India and its associate ban5s% F!I limits in the

ban5ing sector of India were increased with the aim to bring in more F!I

inflows in the country along with the incorporation of ad$anced Technology and

Management practices% The objecti$e was to ma5e the Indian ban5ing sector more competiti$e% The )eser$e 8an5 of India go$erns the in$estment matters in

the ban5ing sector%

The global ban5ing industry weathered turbulent times in 1..; and 1..


27/42

The new F!I norms will not apply to P=# ban5s7 where the F!I ceiling is still

capped at 1.S% Foreign in$estment in pri$ate ban5s with a joint $enture or

subsidiary in the insurance sector will be monitored by )8I and the I)!9 to

ensure that the 1/ per cent equity cap applicable for the insurance sector is not

breached%

9ll entities ma5ing F!I in pri$ate sector ban5s will be mandatorily required to

ha$e credit rating% The increase in foreign in$estment limit in the ban5ing sector

to ;DS includes portfolio in$estment Jie7 foreign institutional in$estors *FIIs0

and non4resident Indians *+)Is0K7 IP:s7 pri$ate placement7 9!)s or G!)s and

acquisition of shares from the e6isting shareholders% This will be the cap for any

increase through an in$estment subsidiary route as in the case of B=84#TI

deal%

In real terms7 the sectorial cap has come down from -


28/42

T+E IMF STUDY RE*ORT

The IMFOs study is in supporti$e to the abo$e4discussed features of F!I% This

study tal5s about the optimism o$er India emanates from a contribution of

following factors%

U India contributed nearly one fifth of 9sian domestic demand growth o$er

1...4.3% >oo5ing forward7 India slated to be the second largest demand dri$er

in the region7 after hina%

U India accounts for almost one quarter of the global portfolio flows to

emerging mar5et economies7 nearly R 21 bn in 1..3%

U India is the worldOs leading recipient of remittances7 accounting for about 1.S

of the global flows%

E$en though abo$e discussed factors are fair enough for the de$elopment of economy% 8ut it is a noted fact that7 economy dri$ers are reluctant towards more

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liberaliNation for F!I in the ban5ing sector% 9s the ceiling rates are not

increased7 F!I in Financial =ector is not getting a wholesome en$ironment% 8ut

the foreign in$estment is finding its own way to come in the economy% May be

the way of FII% It is e$ident from the diagram%

+ow a days7 foreign commercial and in$estment ban5s ha$e quietly begun

pic5ing up public sector ban5Os bond issues% 8an5ers said that the funds were

coming into these bonds some of the foreign ban5s were also using the ban5sO

bonds as an arbitrage opportunity in $iew of the increasing liquidity%

=o7 therefore from last 1 years FIIs ha$e e6ceeded the F!I and in portfolio

in$estment into India since 1..A4.D reflects both domestic and global factors%

ompared with FII always F!I has a greater and long4term effect on the Indianmar5et due to the whimsical nature of FII% *9s it is considered as hot money0

The present scenario loo5s more closely at the paradigm of e6ponential growth

and laments that IndiaOs role as an engine for global growth has been limited by

the still relati$ely closed nature of its economy%

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30/42

FDI IN INDIA A BOON OR A BAIN

Foreign !irect In$estment as seen as an important source of non4debt inflows7

and is increasing being sought as a $ehicle for technology flows and as a means

of attaining competiti$e efficiency by creating a meaningful networ5 of global

interconnections%

F!I plays a $ital role in the economy because it does not only pro$ide

opportunities to host countries to enhance their economic de$elopment but also

opens new $istas to home countries to optimiNe their earnings by employing

their ideal resources%

India has sought to increase inflows of F!I with a much liberal policy since2--2 after decadeOs cautious attitude% The 2--.Os ha$e witnessed a sustained rise

in annual inflows to India% 8asically7 opening of the economy after 2--2 does

not li$e much choice but to attract the foreign in$estment7 as an engine of

dynamic growth especially in $iew of fast paced mo$ement of the world

forward >iberalisation7 Pri$atisation and Globalisation%

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BENEFITS OF FDI

. E9&;&!9 D##8&=#;" S"!u81"!&;.

Foreign direct in$estment can stimulate the target countryLs economic

de$elopment7 creating a more conduci$e en$ironment for you as the in$estor

and benefits for the local industry%

3. E12 I;"#';1"!&;18 T'1$#.

ommonly7 a country has its own import tariff7 and this is one of the reasons

why trading with it is quite difficult% 9lso7 there are industries that usually

require their presence in the international mar5ets to ensure their sales and goals

will be completely met% ith F!I7 all these will be made easier%

>. E=8&2#;" 1;$ E9&;&!9 B&&".

Foreign direct in$estment creates new jobs7 as in$estors build new companies in

the target country7 create new opportunities% This leads to an increase in income

and more buying power to the people7 which in turn leads to an economic boost%

4. D##8&=#;" &% +u1; C1=!"18 R#&u'9#.

:ne big ad$antage brought about by F!I is the de$elopment of human capital

resources7 which is also often understated as it is not immediately apparent%Buman capital is the competence and 5nowledge of those able to perform labor7

more 5nown to us as the wor5force% The attributes gained by training and

sharing e6perience would increase the education and o$erall human capital of a

country% Its resource is not a tangible asset that is owned by companies7 but

instead something that is on loan% ith this in mind7 a country with F!I can

benefit greatly by de$eloping its human resources while maintaining ownership%

5. T1< I;9#;"!#.

Parent enterprises would also pro$ide foreign direct in$estment to get additional

e6pertise7 technology and products% 9s the foreign in$estor7 you can recei$e ta6

incenti$es that will be highly useful in your selected field of business%

. R#&u'9# T'1;%#'.

Foreign direct in$estment will allow resource transfer and other e6changes of

5nowledge7 where $arious countries are gi$en access to new technologies and

s5ills%

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. R#$u9#$ D!=1'!"2 B#"##; R##;u# 1;$ C&".

Foreign direct in$estment can reduce the disparity between re$enues and costs%

ith such7 countries will be able to ma5e sure that production costs will be the

same and can be sold easily%

. I;9'#1#$ *'&$u9"!!"2.

The facilities and equipment pro$ided by foreign in$estors can increase a

wor5forceLs producti$ity in the target country%

/. I;9'##;" !; I;9&#.

9nother big ad$antage of foreign direct in$estment is the increase of the target

countryLs income% ith more jobs and higher wages7 the national income

normally increases% 9s a result7 economic growth is spurred% Ta5e note thatlarger corporations would usually offer higher salary le$els than what you

would normally find in the target country7 which can lead to increment in

income%

0. T#9;&8&:2 T'1;%#'

9s due to the globaliNation local ban5s are competing in the global mar5et7

where inno$ati$e financial products of multinational ban5s is the 5ey limiting

factor in the de$elopment of local ban5% They are trying to 5eep pace with thetechnological de$elopment in the ban5s% +owadays ban5s ha$e been prominent

and prudent in the rapid e6pansion of consumer lending in domestic as well as

in foreign mar5ets% It needs appropriate tools to assess *how such credit is

managed0 credit management of the ban5s and authorities in charge of financial

stability%

. B#""#' R! M1;1:##;"

9s the ban5s are e6panding their area of operation7 there is a need to change

their strategies e6ert competiti$e pressures and demonstration effect on local

institutions7 often including them to reassess business practices7 including local

lending practices as the whole ban5ing sector is crying for a strategic policy for

ris5 management% Through F!I7 the host countries will 5now efficient

management technique% The best e6ample is 8asel II% Most of the ban5s are

opting 8asel II for ma5ing their financial system safer%

3. F!;1;9!18 S"1b!8!"2 1;$ B#""#' C1=!"18!1"!&;

Bost countries may benefit immediately% From foreign entry7 if the foreign ban5 re4capitaliNe a struggling local institution% In the process also pro$ides needed

>3 P a g e


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balance of payment finance% In general more efficient allocation of credit in the

financial sector7 better capitaliNation and wider di$ersification of foreign ban5s

along with the access of local operations to parent funding7 may reduce the

sensiti$ity of the host country ban5ing system and lead towards financial

stability%

LIMITATION OF FDI

. +!;$'1;9# "& D&#"!9 I;#"#;".

9s it focuses its resources elsewhere other than the in$estorLs home country7

foreign direct in$estment can sometimes hinder domestic in$estment%

3. R! %'& *&8!"!918 C1;:#.8ecause political issues in other countries can instantly change7 foreign direct

in$estment is $ery ris5y% Plus7 most of the ris5 factors that you are going to

e6perience are e6tremely high%

>. N#:1"!# I;%8u#;9# &; E


34/42

in some foreign mar5ets7 which means that it is impossible to pursue an in$iting

opportunity%

. M&$#';@D12 E9&;&!9 C&8&;!18!.

Many third4world countries7 or at least those with history of colonialism7 worry

that foreign direct in$estment would result in some 5ind of modern day

economic colonialism7 which e6poses host countries and lea$e them $ulnerable

to foreign companiesL e6ploitations%

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FUTURE SCO*E

T#9;&8&:2 T'1;%#'

9s due to the globaliNation local ban5s are competing in the global mar5et7

where inno$ati$e financial products of multinational ban5s is the 5ey limiting

factor in the de$elopment of local ban5% They are trying to 5eep pace with the

technological de$elopment in the ban5s% +ow a days ban5s ha$e been

prominent and prudent in the rapid e6pansion of consumer lending in domestic

as well as in foreign mar5ets% It needs appropriate tools to assess *how such

credit is managed0 credit management of the ban5s and authorities in charge of

financial stability% It may need additional information and techniques to monitor

for financial $ulnerabilities% F!IOs tech transfers7 information sharing7 training programs and other forms of technical assistance may help meet this need%

B#""#' R! M1;1:##;"

9s the ban5s are e6panding their area of operation7 there is a need to change

their strategies e6ert competiti$e pressures and demonstration effect on local

institutions7 often including them to reassess business practices7 including local

lending practices as the whole ban5ing sector is crying for a strategic policy for

ris5 management%

Through F!I7 the host countries will 5now efficient management technique% The

best e6ample is 8asel II% Most of the ban5s are opting 8asel II for ma5ing their

financial system more safer%

F!;1;9!18 S"1b!8!"2 1;$ B#""#' C1=!"18!1"!&;

Bost countries may benefit immediately% From foreign entry7 if the foreign ban5 re4capitaliNe a struggling local institution% In the process also pro$ides needed

balance of payment finance% In general more efficient allocation of credit in the

financial sector7 better capitaliNation and wider di$ersification of foreign ban5s

along with the access of local operations to parent funding7 may reduce the

sensiti$ity of the host country ban5ing system and lead towards financial

stability%

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=ource ( Economic )e$iew7 )8I 9nnual )eport 1..34./%

=o due to the aforesaid benefits economy has consistent flow of F!I o$er the

past few years% In addition to that7 the go$t% has also ta5en step to enhance the

F!I *eg% Telecom7 ci$il a$iation0 F!I up to 2..S through the )eser$e 8an5Os

automatic route was permitted for a no% of new sectors in 1..34./ such as

Greenfield airport projects7 e6port trading% 9ll these measures ha$e been

contributing towards increasing direct in$estment%

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=ource ( Economic )e$iew7 )8I 9nnual )eport 1..34./%

This o$erall F!I is e$ident from the abo$e graph%

F!I V FII ha$e risen sharply during the 2--.s reflecting the policies to attract

non4debt creating flows%

umulati$e foreign in$estment flows ha$e amounted to #= V 2./ billion since

2--.4-2 and almost e$enly balanced between direct in$est flows *#= V D- bn0

and portfolio flows *#= V 3; bn0% =ince 2--A4-D7 F!I flows ha$e e6ceeded

portfolio flows in the 3 years while portfolio flows ha$e e6ceeded F!I in the

remaining < years% 9s a proportion to F!I flows to emerging mar5et and

de$eloping countries7 F!I flows to India ha$e shown a consistent rise from

2%/S in 2--< to A%;S in 1..3O2%

IndiaOs F!I growth of abo$e A.S during past 1 years is encouraging% 9lthough

the F!I inflows into India are small as compared to other emerging mar5ets7

their siNe is growing on the bac5 of growing interest by many of the worldOs

leading multinationals% India has impro$ed its ran5 from fifteenth *in 1..10 to

become the second most li5ely F!I destination after hina in 1..3%

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C+A*TER 4

FINDINGS AND SUGGESTIONS

hen the Modi go$ernment came into power in May 1.2D7 it found itself

inheriting a host of legacy issues resulting from the after4effects of global

recession and #P9 IILs financial misad$entures% There was a deep

macroeconomic instability brought about by the high fiscal and current account

deficits7 raging inflation7 tapering of G!P growth rates and the unra$elling of

the infrastructure sector% The state electricity discoms were in financial turmoil%

The ban5ing sector was also battling a systemic problem of highly stressed

assets%

+ow7 as 1.2/ begins7 the macroeconomic indicators ha$e seen a turn for the

better% Inflation7 the current account deficit and fiscal deficit ha$e been brought

under control% The fiscal deficit which stood at 3%


39/42

rein$igorating the economy% This allocation has to be frontloaded as soon as

possible to a$oid further festering of the +P9 crisis% For instance7 an e6tra )s%

D.7... crore o$er and abo$e the Indradhanush allocation can be pro$ided in the

upcoming budget for FC 2; itself% In this case7 outside in$estors will be more

than happy to pitch in with the rest of amount as this mo$e would significantlyimpro$e the $iability of P=8s% 9s long as the ban5s are in distress7 it would be

difficult for in$estors to lend support to ban5s other than marquee ones li5e

=tate 8an5 of India and 8an5 of 8aroda%

It can be argued that increasing allocation towards recapitalisation will create

further pressure on fiscal deficit targets% 8ut unless the ban5ing sector is

unshac5led from the burden of its bad loans7 it will not be able to contribute as

much to growth in G!P% The mid4year economic re$iew states that pri$ate

in$estments and e6ports are lagging behind in dri$ing the economic growth

engine% +ot much can be done about e6ports as it is a function of global demand

but pri$ate in$estments can be 5ic5started if ban5s ha$e an increased capacity to

lend to the corporate sector% 9n increase in pri$ate in$estments will be able to

more than offset the pressures created on the fiscal side as it will pro$ide a boost

to G!P growth%

*!#9##18 1=='&19 &;’" #8=

9 slow and steady approach towards cleaning up the ban5ing mess will pro$e to

be counter4producti$e in the long run e$en on the fiscal front% If pri$ate

in$estments are stalled7 the lionLs share of the responsibility of infrastructure

building will fall on the shoulders of the go$ernment% This will entail further

borrowing7 which will not help the cause of fiscal consolidation% :n the other

hand7 if growth in credit off4ta5e restarts7 then pri$ate in$estments will share the

burden of in$esting in infrastructure sectors li5e power7 roads7 ports and non4

renewable energy sources% )ight now7 since the hands of the domestic corporate

sector are tied7 the go$ernment is relying hea$ily on F!I to fill the gaps in

infrastructure funding% 8ut a more holistic and sustainable approach would be to

in$ol$e pri$ate in$estments to also contribute towards financially $iable

infrastructure projects%

The funding tap for these projects has been left dry for too long% Bence it

becomes all the more essential for ban5s to start with a clean slate% 8ailouts are

>/ P a g e


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ne$er a pleasant outcome% 8ut once it becomes necessary7 it needs to be

underta5en quic5ly and unflinchingly% If the problem is left untreated for too

long it spreads rapidly across the system7 li5e an untreated cancer%

The high +P9s are a gra$e cause for concern and there is good reason to belie$ethat e$en the current le$el of high +P9s may be understated% The 5itchen sin5

cleaning efforts by 8an5 of 8aroda in the pre$ious quarter is a case in point% In

such a scenario7 ban5s will be in no mood to lend e6tensi$ely due to the scarcity

of capital% :nly a comprehensi$e bailout pac5age will enable the ban5s to

re5indle the lending spirit%

>imited access to capital will definitely stifle these initiati$es% Therefore it is

necessary for foreign in$estment to fill the gaps and there needs to be structural

reforms set in place to ensure no more bailout is necessary for the Indian ban5s%

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CONCLUSION

The )8IOs decision to allow foreign direct in$estment in Indian ban5s7 the lifting

of sectorial caps on foreign institutional in$estors and a series of other policy

measures could ultimately lead to the pri$atisation of public sector ban5s% The

series of policy announcements in recent wee5s promises to unleash a sha5eout

in the Indian ban5ing industry% 9 major policy change7 effected through an

innocuous clarification issued by the )eser$e 8an5 of India *)8I0 a few

wee5s ago7 set the stage for the increased presence of foreign entities in the

industry% The )8IOs mo$e to allow foreign direct in$estment *F!I0 in Indian

ban5s has been followed by the announcement in the #nion 8udget lifting

sectorial caps on foreign institutional in$estors *FII0%

There are also reports that the )8IOs forthcoming credit policy may feature more

sops for pri$ate and foreign ban5s% These changes are li5ely to hasten the

process of consolidation of the ban5ing industry% 9lthough there is some doubt

o$er whether the mo$es will ha$e any immediate impact7 there is consensus that

the changes are merely a prelude to the wholesale pri$atisation of the public

sector ban5s *P=8s0% I!8I7 the promoter of I!8I 8an57 has already announced

its intention to relinquish control of the ban5% Foreign ban5s ha$e also mounted

pressure on the Finance Ministry7 see5ing the remo$al of legislati$e hurdles that

set limits to pri$ate and foreign holdings in P=8s% In the short term7 the action is

li5ely to be focused on the Indian pri$ate ban5s% :f the 2.. ban5s in India7 1;

are P=8s *including eight in the =tate 8an5 of India group0% There are A2 pri$ate

sector ban5s7 of which eight are of recent $intage *for e6ample7 III 8an5 and

B!F 8an50 and there are D1 foreign ban5s with branches in India% The )8IOs

decision is seen as enabling foreign ban5s to e6tend their operations7 primarily

by acquiring other ban5s%

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REFERENCES

• http(''shodhganga%inflibnet%ac%in'handle'2./.A'13.-3

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FDI in Banking

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