Foreign Banks in India

1. Foreign Banks In India Assignment on Contemporary Issues in Financial System By: Matewos Kebede Punjabi University Patiala (2013/14 )

2. 1. Introduction Banks constitute the major component of financial system in most developing and emerging Economies. Banking institutions categorized on the basis of purpose : Commercial Banks, Industrial or Investment Banks Rural Banks . The most active sector in most developing countries, including India, is the commercial banking sector . ( Ibrahim,2011) In the context of India commercial banks are classified as scheduled non- scheduled CBs

3. 1. Introduction As per RBI cited on Indian brand equity foundation (2013) there are 87 scheduled commercial banks. Of these, 26 are public sector banks , 20 are private banks 41 are foreign banks

4. 2 . Foreign Banks in India Foreign banks are those banks incorporated outside of India and operate through branch or subsidiary in India. Though the number of foreign banks has been increasing in response to liberalization of the Indian economy in 1990s, the presence of such bank according to dated a decades back . (Pahareti,2011 )

5. Foreign Banks in India(cont’d) According to Ashok KApor ( na ) the history of banking in India is highly associated with foreign banks, though their number and extent of business differs across time. Foreign banks in India can be viewed in four differed phases

6. 2.1. Foreign Banks in India(1786 to 1935) Until 1935 there were about 18 foreign banks that had been facilitating the foreign trade of India . The foreign banks operating in this period were called as “exchange Banks ” for the fact that they focused mainly on foreign exchange and foreign trade business . Their share in deposit mobilization and credit market had also been substantial.

7. 2.2. Foreign Bank in India 1935 to 1969 This period was marked by the establishment of Reserve Bank of India in 1935 E nhanced regulation of foreign banking business i n a bid to protect the economy from negative effects of foreign bank operation . Acording to Ashok KApor ( na ) compared with the previous periods the business of foreign banks had been in a steady decline during this period.

8. 2.3. Foreign Bank in India 1969 to 1991 T heir share in total asset, deposit mobilization, and credit witnessed a decline To ensure their survival foreign banks designed a strategic diversification of services such as: foreign currency loan, investment banking , portfolio management They also followed a niche marketing strategy on retail banking whereby they focused only on limited cites with high net worth customer.

9. 2.4. The fourth phase is 1991 onwards Economic liberalization, deregulation of the finance sector and other economic reforms contributed for the surge of FDI in India, including in the banking sector The number of foreign banks offices increased from 145 in 1990 to 324 in march 2013. the increasing foreign direct investment in the banking sector brought significant change on the structure of the banking sector Though there number is increasing their share is in between 5-7% ( M. Thyagarajan & Woudaya Kumar)

10. 3. Mode of Entry Foreign banks who wish to open up branches in India have to apply to the RBI and satisfy the RBI licensing requirements: The banks should also get permission from their home country to set up branches in India . the foreign banks seeking to set up business in India should have a minimum start-up capital of $25 million

11. Cont’d Other factors to be considered in approving foreign bank operation includes: Financial soundness of the foreign banks Economic and political relations between the home country of the foreign banks and India. International ranking of the bank Home country ranking of the bank International presence of the bank Rating given to the bank by international rating agencies ( www.vitt.in/banks/foreign)

12. 4. Reasons for Foreign Bank Expansion India's GDP has been growing at a robust rate and it is expected to maintain the pace over the next few years, throwing up opportunities for the banking sector to profit from . The credit of banks has risen and the growth momentum is expected to continue over the next four to five years .  RBI is following a liberal branch licensing policy for those foreign banks who want to go to the unbanked pockets. RBI has also been further liberalizing its policy on foreign bank entry and operation

13. 5. The Role of Foreign Banks in India Enhance competition in the banking sector Technology and skill transfer Both foreign and Local banks has been investing on finical innovation Modern banking services expanded Enhanced customer satisfaction Enhanced Provision of foreign currency to corporations Foreign banks participation in foreign exchange and money market contribute for deepening of financial system

14. 6. Observations on the performance of Foreign Banks Table 1: Number of Foreign Commercial Banks and Their Branch size Year Total Number of Foreign Banks Number of Foreign Bank offices 2008 31 272 2009 32 279 2010 33 295 2011 36 317 2012 41 324

15. Table 3: Foreign Bank Branch Distribution year Rural Semi urban Urban Metropolitan 2011 7 8 62 242 2012 7 8 62 247 Table 3: Area wise Distribution Foreign Bank Branch year Rural Semi urban Urban Metropolitan 2005 1 37 251 2006 1 37 211 2007 2 44 277 2008 2 49 226 2009 4 4 52 233 2010 5 6 60 237 2011 7 8 62 242 2012 7 8 62 247

16. Table 4: List of Top 10 foreign Banks in India based on Number of Branches Rank Name of the bank Entered Indian Market Number of Branches in India 1 Standard Chartered Bank 1969 96 2 HSBC 1959 50 3 City Bank 1902 50 4 Royal Bank Of Scotland 1921 31 5 Douches Bank 1980 16 6 DBSB   12 7 Barclays   10 8 BNP Paris   8 9 Credit Agricola corporate and Investment 1981 6 10 Bank of America 1981 5

17. Year The share of foreign bank in total commercial bank Deposit 2001-02 5.36% 2007-08 6.4% 2009 4.73 2010 5.00 2011 4.29

18. Profitability   Year Operating Profit Net profit 2008 60.15 14.22 2009 62.82 13.45 2010 67.2 10.96

19. Summary and conclusion The history of Indian banking system is associated with foreign banks The post 1990 economic liberalization period in India resulted in increasing number of foreign bank operations Foreign banks contributed to the banking sector and entire economy The growth in Indian economy coupled with emerging educated middle class showed that the banking sector could have further potential for foreign banks in India. Though their advantage foreign bank has been criticized for their profit supremacy over social banking