PRESENTATIONON

FDI IN INDIAN BANKING SECTOR

Meaning of FDI 1. FDI stands for Foreign Direct Investment, a

component of a country's national financial accounts.

2. Foreign direct investment is investment of foreign assets into domestic structures, equipment, and organizations.

3. It does not include foreign investment into the stock markets.

4. FDI‘ Means Investment By Non-resident Entity/Person Resident Outside India In The Capital Of An Indian Company Under Schedule 1 Of Foreign Exchange Management (Transfer Or Issue Of Security By A Person Resident Outside India)

History of FDI In India

1997 2006 2008 2011

FDI Up To 100% Allowed Under The Automatic

Route In Cash & Carry

(Wholesale)

Government Allowed 51% FDI In Multi Brand Retail And

100% FDI In Single Brand Retail

FDI Up To 51% Allowed With Prior

Government Approval In

‘Single Brand Retail’

Government Mulled Over The Idea Of Allowing 100% FDI In Single-brand Retail And 50% In Multi Brand

Retail

Significance Of FDI Financial Transfer In

Foreign Exchange Production Technology Management Skills Physical Resources

Like Machinery Tools Equipment Etc.

Institutional System

Information & Database

Worldwide Contacts Research &

Development Training Resources Trade Channels

FDI IN BANKING SECTOR

FDI is permitted through 4 distinct Channels in the

Banking Sector‐

In Public Sector Banks : FDI is permitted with a

cap of 20% of equity.

In Private Sector Banks : FDI is permitted with a

cap of 74% of equity.

Branches of Foreign Banks

Wholly Owned Subsidiaries of Foreign Banks

Recent Rbi guidelines regarding fdi in banking sector

Foreign Direct Investment (FDI) of up to 49% from different sources will be allowed in private sectors banks of India on the automatic route.

Fresh shares issue under automatic route will not be available to foreign investors who have technical or financial collaboration in the allied or similar field. Such category of foreign investors will have to take approval from Foreign Investment Promotion Board (FIPB).

According to the Insurance Act, maximum foreign investment in any insurance company has a limitation of 26%.Application for doing foreign investment in Indian bank which has joint venture with insurance sector must be made to RBI. All these applications will be observed by the RBI in collaboration with the Insurance Regulatory and Development Authority (IRDA).

Foreign bank which has branch in India is eligible for FDI in private sector banks, after taking approval from the RBI, subject to the limit of 49% mentioned above.

The RBI has allowed foreign investors to set up new branches in rural India and weak banks with an investment of upto 74 percent.

 Foreign Direct Investment in Indian banking sectors is permitted up to 74 percent where 49 percent is allowed via automotive route, while FDI beyond 49 percent up to 74 percent is permitted through government approval route.

Following important conditions must be satisfied with regards to investment from foreign investors (NRIs/PIOs/OCBs) in banking sector of India :

The 74 percent limit will include all the investment done under Portfolio Investment Scheme (PIS) by NRIs and FIIs along with the all the shares acquired by OCBs. It also includes Private placements, IPOs and GDR/ADRs along with acquisition of shares from current shareholders.

The aggregate foreign holding in private bank from different sources will be permitted up to 74% of entire paid up capital of the private bank. Apart from this, at least 26% of the entire paid up capital should be held by residents.

For NRIs and FIIs, the limits under Portfolio Investment Schemes (PIS) through stock exchanges are:

Individual FII holding is limited to 10% of the overall paid-up capital and an aggregate limit for all FIIs can’t exceed 24% of entire paid-up capital. However, the limit can be increased to 49% of entire paid-up capital by taking resolution of bank’s Board of Directors.

Transfer of Shares under Foreign Direct investment from residents to non-residents will require necessary approval from Indian Government and Reserve Bank of India.

The procedures and policies prescribed by RBI, SEBI, IRDA and Department of Company Affairs will be applicable for NRIs and FIIs from time to time.

Foreign bank setting up a subsidiary in India:

Foreign banks are allowed to set up either subsidiary or branch but not both.

All the guidelines for establishing a wholly owned subsidiary of foreign bank will be issued by RBI.

Foreign bank subsidiary will be subject to all the licensing requirements which are broadly consistent with those of private sector banks.

All the applications for conversion of existing branch into subsidiary or setting up a new subsidiary by foreign bank will have to be forwarded to the RBI.

Limit for Foreign Direct Investment (FDI) in public sector banks

Foreign Direct Investment (FDI) in public sector banks of India is permitted up to 20% (Portfolio investment and FDI) via government approval subject to Banking Companies Act.

The investment cap of 20% is also applicable to nationalized banks such as State Bank of India (SBI) and its other associated banks.

Regulatory Control Perspective The post‐crisis lessons support domestic incorporation of

foreign banks i.e. subsidiarization. Following are the main advantages of local

incorporation:(i) it ensures that there is a clear delineation between the

assets and liabilities of the domestic bank and those of its foreign parent.

(ii) it is easier to define laws of which jurisdiction applies(iii) local incorporation provides more effective control in a

banking crisis

Proposed Framework for Presence of

Foreign Banks in India

Eligibility of the Parent Bank

Foreign Banks must satisfy RBI that they are subject to adequate prudential supervision in their home country.

The setting up of WOS/branches in India should have the approval of the home country regulator.

Other factors that will be taken into account while considering the application ,are;

I. Economic and political relations between India and the

country of incorporation of the foreign bank

II. Financial soundness of the foreign bank

III. Ownership pattern of the foreign bank

IV. International and home country ranking of the foreign bank

V. Rating of the foreign bank by international rating agencies

VI. International presence of the foreign bank

Entry Norms

Following category of banks may be mandated entry in India only

by way of setting up a Wholly Owned Subsidiary (WOS):

i) Banks incorporated in a jurisdiction that has legislation

which gives deposits made/ credit conferred, in that jurisdiction a

preferential claim in a winding up.

ii) Banks which do not provide adequate disclosure in the home

jurisdiction.

iii) Banks with complex structures,

iv) Banks which are not widely held, and

v) if the Reserve Bank of India is not satisfied that Supervisory arrangements and market discipline in the country of

their incorporation are adequate.

Existing Bank Branches

It would be mandatory for Banks which opt for branch

mode of presence to convert themselves into WOS,

if:

• They meet the parameters set out in the previous

slide

OR

• They become systemically important by virtue of their

balance sheet size, i.e. once their assets become

0.25% of the total assets of all Scheduled Commercial

Banks in India

Capital Requirement

WOS of foreign banks would be treated at par with the new private sector banks in regard to minimum capital requirement (i.e. initial minimum capital of Rs.300 crore)

The WOS shall be required to maintain a minimum capital adequacy ratio of 10 per cent of the risk weighted assets.

For foreign banks with branch mode of presence - capital requirements will continue for the present i.e USD 25 million.

Corporate Governance

• Not less than 50 percent of the directors should be indian nationals resident in India,

• Not less than 50 percent of the directors should be non-executive directors,

• 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

• 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 the road map released in February 2005.

Branch ExpansionWOS would be enabled to open branches in Tier 3 to 6 centres except at a few locations

considered sensitive on security considerations (New concession).

• Their application for setting up branches in Tier 1and Tier 2 centres would also be dealt with in a manner and on criteria similar to those applied to domestic banks (New concession).

• The expansion of the branch net work of foreign banks in India - both existing and new entrants - who are present in branch mode would be strictly under the WTO commitments of 12 branches per year.

Measures to Contain Dominance ofForeign BanksIt is proposed that when the capital and reserves of the foreign banks in India including WOS and

branches exceed 25% of the capital of the banking system, restrictions would be placed on

(i) further entry of new foreign banks,

(ii) branch expansion in Tier I and Tier II centres of WOS ,and

(iii) capital infusion into the WOS - this will require RBI’s prior

approval.

• Under present WTO commitment, licenses may be denied to new foreign banks if the assets of foreign bank branches exceed 15% of the total assets in India.

DIFFERENTIAL LICENSING

• As a policy RBI has not so far encouraged banks which do not support financial inclusion in general.

• Reserve Bank of India would not consider granting differential license to foreign banks seeking entry in 'niche markets’.

PROBLEMS FACED BY INDIAN BANKING SECTOR

• Inefficiency in management

• Instability in financial matters

• Innovativeness in financial products or schemes

• Technical developments happening across various foreign markets

• Non-performing areas or properties

• Poor marketing strategies

• Changing financial market conditions

Benefits of FDI in Banking sector in India

• Transfer of technology from overseas countries to the domestic markets

• Ensure better and improved risk management in the banking sector

• Assure better capitalization

• Offers financial stability in the banking sector in India

THANK YOU