Impact of FDI on the Efficiency of Commercial Banks of ...joics.org/gallery/ics-2867.pdf · performers that Non-FDI firm in international economics. Therefore, the impact of FDI on

Impact of FDI on the Efficiency of Commercial Banks

of India: An Analytical Study

*Arpan Mahapatra

Research Scholar, Sri Sri University, Cuttack, Odisha

[email protected]

Abstract

From the progression of liberalization and reform in the financial sector in 1991,

banking sector has undergone major transformation. The essential objectives of the

reform were to craft the banking system more competitive, productive and profitable.

The input to success in the competitive environment has increased productivity and

profitability. Banking zone provisions the support money that supports and fosters

growth in all the industries. FDI is a device for economic growth through its raise of

domestic capital, productivity and employment. FDI also shows business a vital role in

the up gradation of expertise, skills and managerial capabilities in a variety of sectors of

the economies. This paper discusses the FDI Equity inflows in Service Sector in India

and highlights banking Sector in the form of FDI. This paper analyzes the FDI inflows

and impacts in Banking Sector from January, 2000 to December, 2015. The impact of

FDI on Indian banks is measured on the performance a factor, i.e., its productivity. The

productivity of all banks, in turn, is measured by foreign direct investment inflows,

number of employees, total Expenditure, total earnings, assets, liabilities, amount of

deposits and advances.

.Key Words: FDI equity inflows, Commercial Banks & Productivity

1. Introduction

Indian Federal Government has opened up the banking sector for foreign investors

raising the ceiling of foreign direct investment in the Indian private sector banks to 49

percent. However, the ceiling of FDI in the country's public sector banks remains

unchanged at 20 percent. Foreign banks having branches in India are also entitled to

acquire stakes up to 49% through "automatic routes". It is to be noticed that under

"automatic route" fresh shares would not be issued to foreign investors who already have

financial or technical collaboration in banking or allied sector. They would require FIPB

approval. Foreign Direct Investment has become sin-quo-non for the economic

development of both developed and developing countries. Today, Indian banks are as

technology savvy as their counterparts in developed countries. As a result of

liberalization, privatization and globalization model, Indian banks have entered

international market and global banks have become part of Indian market. Furthermore,

FDI in the banking sector ensures to provide the benefits of technology transfer, better

Journal of Information and Computational Science

Volume 10 Issue 4 - 2020

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risk management, financial stability and better capitalization, integration into global

economy, knowledge transfer and rising competition. Foreign Direct Investment in India

is one of the major monetary sources for economic development in India. Foreign

companies invest in India to take benefits of lower wages and changing business

environment of India. Economic liberalization started in wake of the 1991 economic

crisis and since then FDI has steadily increased in India. But in the banking sector, being

a service sector is the one of the most attractive area for FDI. The FDI in banking sector

should be increased or not depends on their performance. FDI leads to generation of

employment opportunities. There is a positive correlation between FDI inflows with

GDP growth in India. The FDI inflow increases the GDP growth. So growth of Indian

GDP is largely influenced by FDI mentioned that due to FDI the competitive and reform

force have led to the emergence of internet, e-banking, credit cards, mobile banking,

ATMs etc. JayashreePatil (2014) found out that ROA and total business is positively

growing in case of FDI into banks than Non-FDI into public and private banks. study by

Yinggi Wei and V.N. FDI in banking is raised to 74% from the earlier limits of 49% to

further liberalize the FDI norms in the Banking Sector. The revision in FDI limit may

create an enabling environment for higher FDI inflows along with infusion of new

technology and management practices resulting in enhanced competitiveness by FDI

inflow in Banking in developing countries in recent years. FDI firms are better

performers that Non-FDI firm in international economics. Therefore, the impact of FDI

on productivity, profitability and efficiency of Indian banking needs to be studied. There

is a liberalization of FDI policy from 49% to 74% in 2005, so it become necessary to

check if there was an impact of FDI and liberalized FDI policy on the Indian banking

industry. Foreign Direct Investment has become sin-quo-non for the economic

development of both developed and developing countries. This paper aimed at

examining the impact of foreign direct investment on performance of scheduled

commercial banks. Multiple Linear

Regression technique was adopted to study the impact. This paper found that FDI in

scheduled commercial banks has insignificant impact on total business per branch, net

profit per branch, total business per employee, net profit per employee.

Objectives of the Study:

To analyze the Foreign Direct Investment inflows in Banking Sector

To study the impact of FDI on productivity of Scheduled commercial banks in

India

Research Hypothesis

H01: Regression Coefficient of productivity of SCBs in India on FDI

inflows in banking sector is insignificant.

H02 Regression Coefficient of productivity of SCBs in India on FDI inflows in

banking sector is significant



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2. Review of Literature

Dr. Rajni Saluja(2017) has observed Foreign Direct Investment has become sin-quo-non

for the economic development of both developed and developing countries. As a result

of liberalisation, privatization and globalization model, Indian banks have entered

international market and global banks have become part of Indian market. Furthermore,

FDI in the banking sector ensures to provide the benefits of technology transfer, better

risk management, financial stability and better capitalization, integration into global

economy, knowledge transfer and increasing competition.

Samad (2015) used the credit-deposit ratio for measuring liquidity characteristics of the

banks in India. Return on Assets (hereafter, ROA) was used as a measure of the banks'

profitability and a significant impact of the loan-deposit ratio on ROA has been found in

his study. The credit-deposit ratio, introduced by Reserve Bank of India (RBI), is used as

a measure of capacity of the banks to lend from their available resources for generating

the revenues and improving the market share and it is also referred as loan-deposit ratio.

Patil (2014) investigated the performance of Indian FDI and non-FDI banks and found

that the productivity of Indian banks had increased to some extent in the FDI liberalized

period and showed a significant positive impact on return on assets (ROA) and total

business of the banks, but showed a negative impact on the total net profits and income

of the banks. He evaluated the productivity performance of Indian banks in the post

liberalization era with FDI contents and found that the new private sector banks are

mainly the banks with more FDI than other sub-groups, it is showing mixed effects of

FDI time and content dummy that could be mainly due to the staff components of the

productivity parameter as staff for these banks is continuously growing since they are

new entrants to the business. The study revealed that foreign banks improve the

profitability and overhead expenses of public sector banks. However, the study further

claimed that it deteriorates asset quality of banking sector.

Gosh (2012) analysis favors foreign bank presence for improving profitability and asset

classes of Indian domestic banks. The study concludes by accepting foreign banks more

as assets than as a liability for India. Indian market is attractive to foreign investors for a

variety of reasons including customer base, a relatively developed financial sector and

high economic growth. It empirically examined the impact of FDI model on borrower

account, bank branches, time deposits and profitability of domestic and foreign banks. In

the study, he suggested that FDI must be considered in poverty reduction, unemployment

reduction and primary education and priority sectors of banking. Finally, he concluded

that the LPG sponsored FDI model's impact on foreign banks and Indian bank's

profitability is positive. The impact of FDI on Indian banking sector is negative except

profitability.

Tanna (2008) stated that the aggregate inflows of the FDI yield productivity changes in

the banking sector's effect on the economy and this may have a positive or negative

effect on banks' technological progress and established the association between inward

foreign direct investment (FDI) and bank level productivity changes. The results

indicated that inward FDI has a negative short-term effect, but a positive long-term effect



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on total factor productivity change. FDI in Indian banking sector and recognized that

FDI in banking can address several issues pertaining to the sector such as encouraging

development of innovative financial products, improving the efficiency of banking sector

and better ability to adapt to changing financial market conditions.

Singh J. (2010), "Economic Reforms and Foreign Direct Investment in India: Policy,

Trends and Patterns", in the context of increasing competition among nations and sub

national entities to attract Foreign Direct Investment (FDI), the present paper tries to find

out the rising trends and patterns of FDI inflows into India in attraction to various policy

measures announced by the Indian government since mid-1980 and after. The

experiential analysis tends to suggest that the FDI inflows, in general, show an increasing

trend during the post-reform period. Furthermore, country-wise comparison of FDI

inflow also indicates that FDI inflow into India has increased considerably in comparison

to other developing economies in the recent years.

3. Research Methodology

The study is secondary based and the time period of the study is from 2001-02 to2014-

15.The various sources of data were: Statistical Tables Relating to Banks in India, Basic

Statistical Returns of Scheduled Commercial Banks, Report on Trend and Progress of

Banking in India published by RBI. Multiple linear regression analysis technique was

used to study the impact of FDI on performance of scheduled commercial banks in India.

4. Data Analysis

Productivity was measured by taking into consideration the variables such as total

business per branch, net profit per branch. Employee productivity is calculated on the

basis of total business per employee, net profit per employee.

Performance= f (FDI, EMPLY, TEXP, TEA, ASS, LIAB, DEP, ADV) where,

Performance = Productivity

FDI= foreign direct investment

EMPLY= Employees

TEXP= Total Expenditure

TEA= Total Earnings

ASS= Assets

LIAB=Liabilities

DEP= Deposits

ADV= Advances

To study the impact of FDI on performance of scheduled commercial banks, the

following multiple linear regression model has been used:



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Ў = β0 + β1X1 + β2X2 +…….. + βnXn

Where,

Ў= Predicted or expected value of the dependent variables X123.n= Distinct independent

or predicted variables

β0= the value of Ў when all of the independent variables (X1to n) are equal to zero.

β 123.n =The estimated regression coefficients

Table 1: Financial year –wise FDI Inflows in Banking Sector



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Source: Reserve Bank of India, Monthly Bulletin, Various Issues

Table 1 indicates that compound annual growth rate of FDI in RBI is 15.38 and that of

total FDI inflows is 29.73.compound annual growth rate is low in case of FDI in RBI as

compared to total FDI inflows in India.



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Table 2: Multiple Linear Regression Results of Impact of FDI on Total Business per

Branch of SCBs in India

F-Statistic: 202.382 on 8 and 6 DF, p value .000

Multiple Regression Equation:

Y= -7.348+.00001(FDI) + .000009(EMPLY) - .00001(TEXP) + .00001(TEA)-

.00000004(LIAB) +.001(DEP) +.00004(ADV)

a. Dependent Variable: TBB

Table 2 shows the multiple linear regression results of impact of FDI on total business

per branch (TBB) of SCBs in India. It can be seen from multiple linear regression

results that FDI in banking sector is positive and t-value is 1.019 and p-value is .348

which is more than 0.05 (at 5%level of significance). Since p-value is more than 0.05,

the null hypothesis is accepted. It is observed that one unit change in FDI leads to

negative effect of 7.348 on total business per branch. Hence it can be concluded that

FDI in banking sector has no statistical significant impact on the total business per



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branch of the bank. The R-square value .996 states that the dependent variable of total

business per branch is influenced by all the independent variables by 99.6 percent.

Table 3: Multiple Linear Regression Results of Impact of FDI on net profit per

Branch of SCBs in India

F Statistic: 151.530 on 8 and 6 DF, p value .000


Y= .446 + .000004(FDI)-.0000004(EMPLY)-.000001(TEXP) +.000002(TEA)-

.0000001(ASS) +.00000003(LIAB)-.000006(DEP)+.00009(ADV)

a. Dependent Variable: NPB

Table 3 shows the multiple linear regression results of impact of FDI on net profit per

branch (NPB) of SCBs in India. It can be seen from multiple linear regression results that

FDI in banking sector is positive and t-value is 2.726 and p-value is .034 which is less

than 0.05 (at 5%level of significance). Since p-value is less than 0.05, the null hypothesis

is rejected and alternative hypothesis accepted. Hence it can be concluded that FDI in



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banking sector has statistical significant impact on the net profit per branch of the bank.

It is also inferred that one unit change in FDI leads to positive effect of .446 on net

profits per branch. The R-square value .995 states that the dependent variable of net

profit per branch is influenced by all the independent variables by 99.5 percent.

Table 4: Multiple Linear Regression Results of Impact of FDI on Total business

per employee of SCBs in India



Y= -.579+.0000003(FDI)+.0000006(EMPLY)- .000001(TEXP)+.000001(TEA)-

.00000002(ASS)-.00000001(LIAB)+.000(DEP)+.000(ADV)

a. Dependent Variable: TBE

Table 4 shows the multiple linear regression results of impact of FDI on total business

per employee (TBE) of SCBs in India. It can be seen from multiple linear regression

results that FDI in banking sector is positive and t-value is .222 and p-value is .831



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which is more than 0.05 (at 5%level of significance). Since p-value is more than 0.05,

the null hypothesis is accepted. Hence it can be concluded that FDI in banking sector has

no statistical significant impact on the total business per employee of the bank. It is

inferred that one unit change in FDI leads to negative effect on total business per

employee. The R-square value .995 states that the dependent variable of total business

per employee is influenced by all the independent variables by 99.5 percent.

Table 5: Multiple Linear Regression Results of Impact of FDI on net profit per

employee of SCBs in India



Y= -.002+.0000004(FDI)-.000000007(EMPLY)-

.00000001(TEXP) +.0000002(TEA)-.00000002(ASS) +.000000000

a. Dependent Variable: NPE

Table 5 shows the multiple linear regression results of impact of FDI on net profit per

employee (NPE) of SCBs in India. It can be seen from multiple linear regression results

that FDI in banking sector is positive and t-value is 2.400 and p-value is .053 which is

more than 0.05 (at 5%level of significance). Since p-value is more than 0.05, the null

hypothesis is accepted. Hence it can be concluded that FDI in banking sector has no

statistical significant impact on the net profit per employee of the bank. It is observed

that one unit change in FDI leads to negative effect of .002 on net profit per employee. It

is also inferred that one unit change in FDI leads to the R-square value .990 states that



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the dependent variable of net profit per employee is influenced by all the independent

variables by 99.0 percent.

It is concluded from regression analysis that H01 that regression coefficient is

productivity of SCBs in India on FDI inflows in banking sector is insignificant is

partially accepted on the basis of total business per branch, total business per employee,

net profit per employee, indicators of productivity of SCBs in India.

The null hypothesis H01 is partially rejected on the basis of indicators of productivity

such as net profit per branch, and alternative hypothesis H02 is accepted that is regression

coefficient of productivity of SCBs in India to FDI Inflows in banking sector is

significant.

5. Conclusions

It is concluded that there are mixed results of impact of FDI on overall performance of

scheduled commercial banks in India. FDI in scheduled commercial banks has

significant impact on total business per branch, total business per employee and net

profit per employee. FDI in scheduled commercial banks has a significant impact on net

profit per branch. Hence, FDI in the banking sector can be welcomed to accelerate the

performance of scheduled commercial banks.

References

1. Garg R (2013) “Role of Foreign Direct Investment in the Indian Banking Sector”,

International Journal of Research in Finance and Marketing, Vol. 3, Issue. 2, pp. 63-68.

2. Jaiswal Preeti (2016) “ FDI Reforms in Banking Sector”, Anveshana’s International

Journal of Research in Regional Studies, Law, Social Sciences, Journalism and

Management Practices, Vol. 1, Issue. 8, pp. 150-154.

3. Laghane K.B (2007), “Foreign Direct Investment & Indian Banking Sector”, Recent

Advances in Management, Marketing, Finances, ISBN: 978-960-474-168-7.

4. Dr.Kunal Badade & Ms. Medha Katkar (2011), “Foreign Direct Investment in

Banking Sector-A Boon in Disguise”,

5. Sirari Singh Arjun and Bohra Singh Narendra (2011), “Foreign Direct Investment in

Indian Service Sector –A Study of Post Liberalization”, International Journal of

Economic Review, March –April, 2011, pp. 10-18.

6. Sabitha. G(2011), “The Role of FDI in Indian Banking Sector: Country wise

Analysis”, ASM’s International E-Journal of Ongoing Research in Management and IT,

e-ISSN-2320-0065.

7. Ramakrishna. H(2011), “Foreign Direct Investment In India and China: Some

Lessons for India”, Indian Journal of Finance, December, 2011, pp. 4-12.

8. Chandrasekhar. C.P (2012), “Thirst for Foreign Capital”, Economic & Political

Weekly, Vol. XLVII, No. 4, pp. 1015.



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Websites:

9. http://www.dipp.nic.in

10. http://www.sianewsletter.in

11. http://www.rbi.nic.in

12. http://www.allbankingsolutions.com

13. http://www.dipp.nic.in/fdi-statistics



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