The Impact of FDI on Banking

The impact of FDI on banking

The global banking industry weathered turbulent times in 2007 and 2008. The impact of the economic slowdown on the banking and insurance services sector in India has so far been moderate. The Indian financial system has very little exposure to foreign assets and their derivative products and it is this feature that is likely to prove an antidote to the financial sector ills that have plagued many other emerging economies.

Owing to at least a decade of reforms, the banking sector in India has seen remarkable improvement in financial health and in providing jobs. Even in the wake of a severe economic downturn, the banking sector continues to be a very dominant sector of the financial system. The aggregate foreign investment in a private bank from all sources is allowed to reach as much as 74% under Indian regulations.

The insurance sector has also been fast developing with substantial revenue growth in the non-life insurance market. However, despite its enormous population, India only accounts for 3.4% of the Asia- Pacific general insurance market’s value. The cap on foreign companies’ equity stakes in insurance joint ventures is 26%, but is expected to rise to 49%.

The third quarter of 2008 saw the beginning of negative net capital inflows into the country. Notwithstanding this bleak scenario, the investment pattern with regard to foreign direct investment (FDI) and inflows from non-resident Indians remains resilient and FDI inflows into the country grew by an impressive 145% between fiscal 2006 and 2007 and by a respectable 46.6% between fiscal 2007 and 2008. However, owing to the economic downturn, the growth in FDI inflows in fiscal 2009 slowed to 18.6% from the previous fiscal.

Despite the surge in investments, the stringent regulatory framework governing FDI has proved to be a significant hindrance. However, FDI norms have been relaxed to a considerable extent with respect to certain sectors. Private banks, for instance.

Foreign investment, in addition to technological innovation and expertise, brings with it a plethora of risks. An unwarranted increase in the size of foreign holding in the banking and insurance sector will inevitably expose the country to risks not commensurate with those that an emerging market economy such as ours is equipped to grapple with.

At the same time, it is important to recognize that FDI in banking can address several issues pertaining to the sector such as encouraging development of innovative financial products, improving the efficiency of the banking sector, better capitalization of banks and better ability to adapt to changing financial market conditions.

Single policy for FDI in banking, insurance soon

India will unveil a single policy for foreign direct investment, including in sectors such as financial services, insurance and banking by

March 31, Commerce and Industry Minister Anand Sharma has disclosed.

After 3 days of discussions with senior Obama [ Images ] administration officials, Sharma acknowledged that "it's true that we were slow

off the block when we started the process of economic reforms and liberalization," but asserted in the past few years, "it would be

appreciated that India [ Images ] has moved much faster."

"India works on a very small negative list and the FDI which comes into India - the majority of the sectors - are in the automatic route,"

he said.

Sharma argued that for all of the criticism and whining, "When you look at the pace at which some of these sectors - financial services,

insurance and banking - have been opened, then India has done far better than many of the countries, including in Europe and here, in

these sectors."

He pointed out that "you have more US bank branches in India. You have more British bank branches in India, or for what matter, of the

other countries, and there are partnerships of the major insurance companies with the premier insurance companies in India."

"So, it is, I'd say, an incremental movement. Whatever decisions India has taken have been after careful consideration and evolutionary �

by building a consensus and these policy decisions are enduring ones."

Sharma said however that come March 31, there would be a crystallization of certain steps his ministry had initiated to open out to more

flows of FDI with more relaxed limits that would be attractive to investors.

"Our last FDI policy on the upper limit of FDI in these sectors, which are not in the automatic mode, where the Foreign Investment

Promotion Board approval was required since 1996 was Rs 600 crore (Rs 6 billion). Now, we have through a cabinet decision on the

initiative of my ministry, doubled the cap from Rs 600 crore to Rs 1,200 crore (Rs 12 billion), and what is even more significant was that

earlier, Rs 600 crore used to be the cost of the project, but now it is not the cost of the project but net FDI inflows."

Sharma also said that "we will also in the next few days come out with a single FDI policy document," and pointed out that "when we

started the opening up of the Indian economy and inviting FDI, all policy decisions were communicated through what we call the press

notes and every year had its series of press notes."

"We had 177 press notes detailing the FDI policy. It was clear that we needed greater clarity, predictability and a policy document,

which is easy to comprehend. We had started this process - a draft was put out in the last week of December 2009 for stakeholders

consultations inviting responses, for inputs from industry, globally from investors throughout the world and by the stakeholders in India,

the chambers of commerce and industry."

Sharma said that this consultative process was now completed and on March 31, "we will come out with a single FDI policy document,

which has subsumed all 177 press notes."

He said that in order to make this operational, "We have also set up - with government and industry in partnership - through a cabinet

decision, an entity, a non-profit company called Invest India and FICCI is the partner with the Indian government and we also intend to

give some equity at the appropriate time to all the states of the Indian union to bring them on board."

Sharma said that "we are in the process of rationalizing and bringing a greater degree of uniformity when it comes to various mandated

approvals for investors."

Guidelines for FDI in Banking

This article provides a preview on the Guidelines for FDI in Banking. Limits to FDI in the banking sector have been increased to 74%. FDI in the banking sector is allowed under the automatic route in India.

Guidelines for FDI in Banking at a Glance-

In the private banking sector of India, FDI is allowed up to a maximum limit of 74 % of the paid-up capital of the bank. On the other hand, Foreign Direct Investment and Portfolio Investment in the public or nationalized banks in India are subjected to a limit of 20 % in totality. This ceiling is also applicable to the investments in the State Bank of India and its associate banks. FDI limits in the banking sector of India were increased with the aim to bring in more FDI inflows in the country along with the incorporation of advanced technology and management practices. The objective was to make the

Indian banking sector more competitive. The Reserve Bank of India governs the investment matters in the banking sector. 

According to the guidelines for FDI in the banking sector, Indian operations by foreign banks can be executed by any one of

the following three channels -

Branches in India Wholly owned subsidiaries. Other subsidiaries.

In case of wholly owned subsidiaries (WOS), the guidelines for FDI in the banking sector specified that the WOS must involve a capital of minimum ` 300 crores and should ensure proper corporate governance.

Problems Faced by the Indian Banking Sector-

FDI in Indian banking sector resolves the following problems often faced by various banks in the country:

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 market Ensure better and improved risk management in the banking sector Assures better capitalization Offers financial stability in the banking sector in India

Non-Banking Financial Companies (NBFC)

49% FDI is allowed from all sources on the automatic route subject to guidelines issued from RBI from time to time.

a. FDI/NRI/OCB investments allowed in the following 19 NBFC activities shall be as per levels indicated below:

i. Merchant bankingii. Underwritingiii. Portfolio Management Servicesiv. Investment Advisory Services

v. Financial Consultancyvi. Stock Brokingvii. Asset Managementviii. Venture Capitalix. Custodial Servicesx. Factoringxi. Credit Reference Agenciesxii. Credit rating Agenciesxiii. Leasing & Financexiv. Housing Financexv. Foreign Exchange Brokeringxvi. Credit card businessxvii. Money changing Businessxviii. Micro Creditxix. Rural Credit

b. Minimum Capitalization Norms for fund based NBFCs:

i) For FDI up to 51% - US$ 0.5 million to be brought upfront

ii) For FDI above 51% and up to 75% - US $ 5 million to be brought upfront

iii) For FDI above 75% and up to 100% - US $ 50 million out of which US $ 7.5 million to be brought upfront and the balance in 24 months

c. Minimum capitalization norms for non-fund based activities:

Minimum capitalization norm of US $ 0.5 million is applicable in respect of all permitted non-fund based NBFCs with foreign investment.

    d.   Foreign investors can set up 100% operating subsidiaries without the condition to disinvest a minimum of 25% of its equity to Indian entities, subject to bringing in US$ 50 million as at b) (iii) above (without any restriction on number of operating subsidiaries without bringing in additional capital)

    e.  Joint Venture operating NBFC's that have 75% or less than 75% foreign investment will also be allowed to set up subsidiaries for undertaking other NBFC activities, subject to the subsidiaries also complying with the applicable minimum capital inflow i.e. (b)(i) and (b)(ii) above.

   f.   FDI in the NBFC sector is put on automatic route subject to compliance with guidelines of the Reserve Bank of India.  RBI would issue appropriate guidelines in this regard.

Foreign Direct Investment in Banking Sector- A Boon in Disguise

Foreign Direct Investment as seen as an important source of non-debt inflows, and is increasing being sought as a vehicle for technology flows and as a means of attaining competitive efficiency by creating a meaningful network of global interconnections.

FDI plays a vital role in the economy because it does not only provide opportunities to host countries to enhance their economic development but also opens new vistas to home countries to optimize their earnings by employing their ideal resources.

India has sought to increase inflows of FDI with a much liberal policy since 1991 after decade's cautious attitude. The 1990's have witnessed a sustained rise in annual inflows to India. Basically, opening of the economy after 1991 does not live much choice but to attract the foreign investment, as an engine of dynamic growth especially in view of fast paced movement of the world forward Liberalization, Privatization and Globalization.

Limits for FDI

FDI in the banking sector has been liberalized by raising FDI limit in private sector banks to 74 per cent under automatic root including investment by foreign investment in India. The aggregate foreign investment in a private bank from all sources will be 74 per cent of paid-up capital of the bank. 

FDI and Portfolio investment in nationalized banks are subject to overall statutory limit of 20 per cent. The same ceiling also applies in respect of such investment in State Bank of India and its associate banks. 

The Present Banking Scenario 

In recent times economy is been pushing to increase the role of multi-national banks in the banking and insurance sector, despite, the concern expressed by the left communist parties are opposing the finance minister move to raise overseas investment limits in the insurance business. The government wants to fulfill a pledge to allow companies like New York Life Insurance, Met Life Insurance to raise investment in local companies to 49 per cent from 26 per cent. 

But it is opposed on the front that it will lead to state run insurers loosing business and workers their job. Left do not want foreign investors to have greater voting rights in private banks and oppose the privatization of state run pension fund. 

There are several reasons why such move is fraught with dangers. When domestic or foreign investors acquire a large share holding in any bank and exercise proportionate voting rights, it creates potential problems not only of excursive concentration in the banking sector but also can expose the economy to more intensive financial crises at the slightest hint of panic.

Opposition is not considering the need of present situation. FDI in banking sector can solve various problems of the overall banking sector. Such as –

i) Innovative Financial Productsii) Technical Developments in the Foreign Marketsiii) Problem of Inefficient Management iv) Non-performing Assetsv) Financial Instabilityvi) Poor Capitalizationvii) Changing Financial Market Conditions

If we consider the root cause of these problems, the reason is low-capital base and all the problems is the outcome of the transactions carried over in a bank without a substantial capital base. In a nutshell, we can say that, as the FDI is a non-debt inflow, which will directly solve the problem of capital base. Along with that it entails the following benefits such as –

Technology Transfer

As due to the globalization local banks are competing in the global market, where innovative financial products of multinational banks is the key limiting factor in the development of local bank. They are trying to keep pace with the technological development in the banks. Now a days banks have been prominent and prudent in the rapid expansion of consumer lending in domestic as well as in foreign markets. It needs appropriate tools to assess (how such credit is managed) credit management of the banks and authorities in charge of financial stability. It may need additional information and techniques to monitor for financial vulnerabilities. FDI's tech transfers, information sharing, training programs and other forms of technical assistance may help meet this

need. 

Better Risk Management

As the banks are expanding their area of operation, there is a need to change their strategies exert competitive pressures and demonstration effect on local institutions, often including them to reassess business practices, including local lending practices as the whole banking sector is crying for a strategic policy for risk management.

Through FDI, the host countries will know efficient management technique. The best example is Basel II. Most of the banks are opting Basel II for making their financial system more safer.

Financial Stability and Better Capitalization

Host countries may benefit immediately. From foreign entry, if the foreign bank re-capitalize a struggling local institution. In the process also provides needed balance of payment finance. In general; more efficient allocation of credit in the financial sector, better capitalization and wider diversification of foreign banks along with the access of local operations to parent funding, may reduce the sensitivity of the host country banking system and lead towards financial stability.

                                          Source : "Economic Review", RBI Annual Report 2005-06.

So due to the aforesaid benefits economy has consistent flow of FDI over the past few years. In addition to that, the govt. has also taken step to enhance the FDI (eg. Telecom, civil aviation) FDI up to 100% through the Reserve Bank's automatic route was permitted for a no. of new sectors in 2005-06 such as Greenfield airport projects, export trading. All these measures have been contributing towards increasing direct investment. 

                                          Source : "Economic Review", RBI Annual Report 2005-06.

This overall FDI is evident from the above graph.

'FDI & FII have risen sharply during the 1990s reflecting the policies to attract non-debt creating flows.

Cumulative foreign investment flows have amounted to US & 106 billion since 1990-91 and almost evenly balanced between direct invest flows (US & 49 bn) and portfolio flows (US & 57 bn). Since 1993-94, FDI flows have exceeded portfolio flows in the 5 years while portfolio flows have exceeded FDI in the remaining 8 years. As a proportion to FDI flows to emerging market and developing countries, FDI flows to India have shown a consistent rise from 1.6% in 1998 to 3.7% in 2005'1.

India's FDI growth of above 30% during past 2 years is encouraging. Although the FDI inflows into India are small as compared to other emerging markets, their size is growing on the back of growing interest by many of the world's leading multinationals. India has improved its rank from fifteenth (in 2002) to become the second most likely FDI destination after China in 2005'1.

The IMF Study Report

The IMF's study is in supportive to the above-discussed features of FDI. This study talks about the optimism over India emanates from a contribution of following factors. 

* India contributed nearly one fifth of Asian domestic demand growth over 2000-05. Looking forward, India slated to be the second largest demand driver in the region, after China.

* India accounts for almost one quarter of the global portfolio flows to  emerging market economies, nearly $ 12 bn in 2005.

* India is the world's leading recipient of remittances, accounting for about 20% of the global flows.

Even though above discussed factors are fair enough for the development of economy. But it is a noted fact that, economy drivers are reluctant towards more liberalization for FDI in the banking sector. As the ceiling rates are not increased, FDI in Financial Sector is not getting a wholesome environment. But the foreign investment is finding its own way to come in the economy. May be the way of FII. It is evident from the diagram.

Now a days, foreign commercial and investment banks have quietly begun picking up public sector bank's bond issues. Bankers said that the funds were coming into these

bonds; some of the foreign banks were also using the banks' bonds as an arbitrage opportunity in view of the increasing liquidity.

So, therefore from last 2 years FIIs have exceeded the FDI and in portfolio investment into India since 2003-04 reflects both domestic and global factors. Compared with FII always FDI has a greater and long-term effect on the Indian market due to the whimsical nature of FII. (As it is considered as hot money)

The present scenario looks more closely at the paradigm of exponential growth and laments that India's role as an engine for global growth has been limited by the still relatively closed nature of its economy.

References

1) "Economic Review" Foreign Invest flows to India     – RBI Annual report 2005-06 (September)

2) Foreign Direct Invert in the Financial Sector of emerging market economics      "CGFS publication No.22"

3) FDI in Financial Sector     - CGFS publication No.25

4) IMF's study on India    - Business Line

5) Insurance FDI : Left to oppose like     - Business Line

6) RBI guidelines for FDI in Banking Sector    - Dr. P.K. Shrivastava

Foreign Direct Investment (FDI) in the Banking SectorFebruary 16, 2002DBOD.No.BP.BC. 68 /21.01.055/2001-02All Scheduled Commercial BanksDear Sir,Foreign Direct Investment (FDI) in the Banking SectorThe Reserve Bank of India (RBI) has received some enquiries regarding regulationspertaining to Foreign Direct Investment (FDI) in the Banking Sector. The position has been

reviewed in the light of Government policy announced from time to time as well asguidelines laid down by RBI under various statutory provisions. The present position in thisrespect is clarified as under in a consolidated form.1. Limit for FDI under automatic route in private sector banksa) In terms of the Press Note No.4 (2001 Series) dated May 21, 2001 issued by Ministryof Commerce & Industry, Government of India, FDI upto 49 per cent from all sourceswill be permitted in private sector banks on the automatic route, subject to conformitywith the guidelines issued by RBI from time to time.b) For the purpose of determining the above-mentioned ceiling of 49 per cent FDI underthe “automatic route” in respect of private sector banks, the following category ofshares will be included:(i) IPOs,(ii) Private Placements,(iii) ADRs/ GDRs, and(iv) Acquisition of shares from existing shareholders [subject to (d) below].c) It may be clarified that as per Government of India guidelines, issue of fresh sharesunder automatic route is not available to those foreign investors who have a financialor technical collaboration in the same or allied field. This category of investorsrequire FIPB approval.d) It may be further clarified that, as per Government of India guidelines, automaticroute is not applicable to transfer of existing shares in a banking company fromresidents to non-residents. This category of investors require approval of FIPB,followed by “in principle” approval by Exchange Control Department (ECD), RBI.The “fair price” for transfer of existing shares is determined by RBI, broadly on thebasis of SEBI guidelines for listed shares and erstwhile CCI guidelines for unlistedshares. After receipt of “in principle” approval, the resident seller can receive fundsand apply to ECD, RBI for obtaining final permission for transfer of shares.e) Under the Insurance Act, the maximum foreign investment in an insurance companyhas been fixed at 26%. Application for foreign investment in banks which have jointventure / subsidiary in insurance sector should be made to RBI. Such applications willbe considered by RBI in consultation with Insurance Regulatory and DevelopmentAuthority (IRDA).2f) Foreign banks having branch presence in India, are eligible for FDI in the privatesector banks subject to the overall cap of 49% mentioned above with the approval ofRBI.2. Limit for FDI in public sector banksFDI and Portfolio Investment in nationalised banks are subject to overall statutory limits of20 per cent as provided under Section 3 (2D) of the Banking Companies (Acquisition &Transfer of Undertakings) Acts, 1970/80. The same ceiling would also apply in respect ofsuch investments in State Bank of India and its associate banks.3. Voting rights of foreign investorsIn terms of the statutory provisions under the various banking acts, the voting rights, whenexercised, have been stipulated which are indicated as under:Private Sector Banks – [Section12(2) of Banking RegulationAct,1949]No person holding shares, in respect of any shareheld by him, shall exercise voting rights on poll inexcess of ten percent of the total voting rights of all

the shareholders.Nationalised Banks – [Section3(2E) of Banking Companies(Acquisition and Transfer ofUndertakings) Acts, 1970/80]No shareholder, other than the Central Government,shall be entitled to exercise voting rights in respectof any shares held by him in excess of one percentof the total voting rights of all the shareholders ofthe nationalised bank.State Bank of India (SBI) -(Section 11 of State Bank ofIndia Act,1955)No shareholder, other than RBI, shall be entitled toexercise voting rights in excess of ten percent ofthe issued capital, (Government, in consultationwith RBI can raise the above voting right to morethan ten percent).SBI Associates - [Section 19(1)and (2) of SBI (SubsidiaryBank) Act, 1959]No person shall be registered as a shareholder inrespect of any shares held by him in excess of twohundred shares.No shareholder, other than SBI, shall be entitled toexercise voting rights in excess of one percent ofthe issued capital of the subsidiary bank concerned.4. Approval of RBI and reporting requirements(i) Under extant instructions, transfer of shares of 5 per cent and more of the paid-up capitalof a private sector banking company, requires prior acknowledgement of RBI. For FDI of5 per cent and more of the paid-up capital, the private sector banking company has toapply in the prescribed form (Annexure I to this circular) to the Department of BankingOperations & Development in the Regional Office of RBI, where the bank’s Head Officeis located.(ii) Under the provisions of FEMA 1999, any fresh issue of shares of a banking company,either through the automatic route or with the specific approval of FIPB, does not requirefurther approval of Exchange Control Department (ECD) of RBI from the exchange3control angle. The Indian banking company is only required to undertake 2-stagereporting to the ECD as follows:(a) In the first stage, the Indian company has to submit a report within 30 days of thedate of receipt of amount of consideration indicating the name and address of foreigninvestors, date of receipt of funds and their rupee equivalent, name of bank throughwhom funds were received and details of Government approval, if any.(b) In the second stage, the Indian banking company is required to file within 30 daysfrom the date of issue of shares, a report in Form FC-GPR (Annexure II)together with a Certificate from the Company Secretary of the concerned companycertifying that various regulations have been complied with. The report will also beaccompanied by a Certificate from a Chartered Accountant indicating the manner ofarriving at the price of the shares issued.

5. Conformity with SEBI Regulations and Companies Act ProvisionsWherever applicable, FDI in banking companies should conform to the provisions regardingshareholding and share transfer, etc. as stipulated by SEBI, Companies Act, etc.6. Disinvestment by Foreign InvestorsIn terms of Regulations 10 and 11 of RBI Notification No. FEMA 20/2000-RB dated May 3,2000 issued under FEMA 1999, disinvestments by foreign investors would be governed bythe following:(i) Sale of shares by non-residents on a stock exchange and remittance of the proceedsthereof through an authorized dealer does not require RBI approval.(ii) Sale of shares by private arrangement requires RBI's prior approval. RBI grantspermission for sale of shares at a price that is market related and is arrived at in termsof guidelines indicated in Regulation 10 above.7. This circular supercedes the earlier instructions issued by RBI in regard to FDI in theBanking Sector.8. All commercial banks which either have foreign investments or intending to have foreigninvestments are requested to observe the above guidelines.9. Please acknowledge receipt.Yours faithfully,( B. Mahapatra )General ManagerEncls : As above

 February 14, 2005

Left Parties Note:  

On The Proposal To Enhance FDI Cap In Banking

  (Submitted to the UPA-Left Coordination Committee)

THE BACKGROUND

 On 15th December, the Finance Minister, while responding to a Calling Attention notice on changes in Banking Policy in the Lok Sabha, announced the enhancement of the FDI limit to 74% following the 5th March 2004 notification issued by the previous government and justified it by saying that “The revision in FDI limit will create an enabling environment for higher FDI inflows along with infusion of new technology and management practices resulting in enhanced competitiveness”. The Minister also said that the RBI is in the process of considering the suggestions/feedback received on its guidelines, which was issued on 2nd July 2004. It is clear by now that after its initial reservations about the move, the RBI has finally agreed to the raising of the 10% voting cap in the private sector banks and make it proportional to equity holding, whose limit in turn would be raised

to 74%. However, it is noteworthy that the removal of the cap on voting rights would require an amendment of Section 12(2) of the Banking Regulation Act. The Left Parties are opposed to this proposed amendment.

BANK DEREGULATION: THE POSITION OF THE LEFT

The Left is opposed to the moves to further deregulate the banking sector on several counts. Deregulation of the banking sector, which is a vital component of financial liberalization, greatly enhances the scope of speculative activities and exposes the financial system to the risks associated with volatile capital flows. This lesson was painfully learnt by several developing countries through the decade of the nineties. Far from contributing positively to economic growth, asset creation and employment generation, financial liberalization has precipitated crises in several countries. However, the RBI’s Report on Trend and Progress of Banking in India 2003-04, talks about the appropriate timing of the entry of foreign banks into India so as to be co-terminus with the transition to greater capital account convertibility. This shows that the economic policy establishment in India, including the RBI, has not drawn adequate lessons from the experiences of the financial crisis-affected countries. Joseph Stiglitz,[1] who was closely involved with policymaking at the international level when the spate of financial crises occurred in the late-1990s, held that “capital account liberalization was the single most important factor leading to the crisis.” He also mentions, “all too often capital account liberalization represents risk without a reward. Even when countries have strong banks, a mature stock market, and other institutions that many of the Asian countries did not have, it can impose enormous risks.”[2]

Besides, banks are the principal risk carriers in the system, taking in small deposits that are liquid and making relatively large investments that are illiquid and can be characterised by substantial income and capital risk. The observed tendency among some promoters or boards of banks to divert a substantial share of its deposits into speculative activities in which the promoter or board may be interested or into investments that are risky but promise quick returns, can increase financial fragility, lead to bank failures and if the magnitude of the failure is serious enough, can actually precipitate crisis for the entire financial system. Instances in India such as the Nedungadi Bank and the Global Trust Bank are the harbingers of what may follow if reckless deregulation of the banking sector is carried out. In fact, the experience of recurrent financial crises in the 1990s, most famously the East Asian experience, has shown how banking deregulation along with capital market liberalization often serves as recipes for financial turmoil in developing countries like ours. (A list of major financial crises since the 1990s drawn from RBI Bulletin, October 2004 is provided in the Annexure).

 It is therefore a matter of grave concern that the UPA Government is continuing with the previous government’s policies with regards to financial opening. The Left Parties are of the opinion that not only are the measures to further deregulate the financial sector and raise the FDI cap in banking unnecessary from the point of view of economic and industrial growth, they would also enhance the vulnerability of the financial system to the flows of speculative capital.             

RBI GUIDELINES ON BANK OWNERSHIP

Subsequent to the 5th March 2004 notification issued by the Ministry of Commerce and Industry under the NDA government, which had raised the FDI limit in Private Sector Banks to 74% under the automatic route, a comprehensive set of policy guidelines on ownership of private banks was issued by the Reserve Bank of India on 2nd July 2004. These guidelines stated among other things that no single entity or group of related entities would be allowed to hold shares or exercise control, directly or indirectly, in any private sector bank in excess of 10 % of its paid-up capital. Recognising that the 5th March notification by the Union Government had hiked foreign investment limits in private banking to 74%, the guidelines sought to define the ceiling as applicable on aggregate foreign investment in private banks from all sources (FDI, Foreign Institutional Investors, Non-Resident Indians), and in the interest of diversified ownership, the percentage of FDI by a single entity or group of related entities was restricted to 10%. This made the norms with regard to FDI correspond to the 10% cap on voting rights. The guidelines allowed for an acquisition equal to or in excess of 5%, so long as it was based on the RBI’s permission. The guidelines stated: “In deciding whether or not to grant acknowledgement, the RBI may take into account all matters that it considers relevant to the application, including ensuring that shareholders whose aggregate holdings are above the specified thresholds meet the fitness and proprietary tests.” These fitness and proprietary tests include the integrity, reputation and track record of the applicant in financial matters, compliance with tax laws, history of criminal proceedings if any, the source of funds for the acquisition etc. Where the applicant is a body corporate, the fit and proper criteria involves its track record of reputation for operating in a manner that is consistent with the standards of good corporate governance, financial strength and integrity. More rigorous fit and proper tests were suggested where acquisition or investment takes the shareholding of the applicant to a level of 10% or more.

It is clear from the guidelines issued by the RBI in July 2004 that despite the NDA government’s decision to raise the FDI limit in banking to 74%, it had chosen to remain extremely cautious about further opening up of the banking sector and allowing domestic or foreign investors to acquire a large shareholding in any bank and exercising proportionate voting rights. The RBI had strongly advocated diversified ownership of banks. RBI’s Report on Trend and Progress of Banking in India, 2003-04 (Chapter VIII: Perspectives) states, “The concentrated shareholding in banks controlling substantial amount of public funds poses the risk of concentration of ownership given the moral hazard problem and linkages of owners with businesses. Corporate governance in banks has therefore, become a major issue. Diversified ownership becomes a necessary postulate so as to provide balancing stakes.” It further states that “…in the interest of diversified ownership of banks, the Reserve Bank intends to ensure that no single entity or group of related entities have shareholding or control, directly or indirectly, in any bank in excess of 10 per cent of the paid up capital of the private sector banks. Any higher levels of acquisition will be with the prior approval of the Reserve Bank and in accordance with the guidelines notified on February 3, 2004.”

A more elaborate exposition of the RBI’s views on the matter came from Dr. Rakesh Mohan, the then Deputy Governor of the RBI. In a speech made at a Conference on Ownership and Governance in Private Sector Banking organised by the CII at Mumbai on 9th September 2004 he remarked (italics

added):

The banking system is something that is central to a nation’s economy; and that applies whether the banks are locally- or foreign-owned. The owners or shareholders of the banks have only a minor stake and considering the leveraging capacity of banks (more than ten to one) it puts them in control of very large volume of public funds of which their own stake is miniscule. In a sense, therefore, they act as trustees and as such must be fit and proper for the deployment of funds entrusted to them. The sustained stable and continuing operations depend on the public confidence in individual banks and the banking system. The speed with which a bank under a run can collapse is incomparable with any other organisation. For a developing economy like ours there is also much less tolerance for downside risk among depositors many of whom place their life savings in the banks. Hence from a moral, social, political and human angle, there is a more onerous responsibility on the regulator. Millions of depositors of the banks whose funds are entrusted with the bank are not in control of their management. Thus, concentrated shareholding in banks controlling huge public funds does pose issues related to the risk of concentration of ownership because of the moral hazard problem and linkages of owners with businesses. Hence diversification of ownership is desirable as also ensuring fit and proper status of such owners and directors.

It is evident that the RBI, which is the regulator of the banking sector, had a strong case for issuing elaborate guidelines on bank ownership to ensure diversification. If the government chooses to permit automatic acquisition of a 74% stake by foreign investors, a similar facility would eventually have to be provided to domestic investors as well for the sake of ensuring a level playing field, resulting in a dilution of the RBI guidelines. That is precisely why the RBI had also specified stringent FDI acquisition norms in its guidelines.

The CMP of the UPA states that “All regulatory institutions will be strengthened to ensure that competition is free and fair. These institutions will be run professionally”. It also states that “Regulation of urban cooperative banks in particular and of banks in general will be made more effective”. However, in the present case, the Government has not only disregarded the views of the RBI, which is the Regulator of the banking sector, it has forced the RBI to dilute its guidelines and thereby weaken the regulatory framework itself. Besides impairing the effectiveness of existing banking regulation, this would also create a wrong precedent whereby market players would exert undue pressure for further dilution of regulation in the future. The Left Parties therefore feel that it would be better if the UPA Government abandon its move to amend the Banking Regulation Act and maintain status quo as far as the law and the RBI guidelines are concerned.

BANKING SECTOR REFORMS: SOME CRITICAL OBSERVATIONS

The Finance Minister said in Parliament on 15th December 2004, that the hike in the foreign equity cap in banking would create an “enabling environment” for higher FDI flows, leading to “infusion of new technology and management practices” resulting in “enhanced competitiveness”. However, the Left Parties feel that neither does raising of the equity cap ensure higher FDI inflows, nor does higher FDI inflow necessarily imply infusion of such technology and management practices that are beneficial

to the economy and the people. What is more, it can curb rather than enhance competitiveness, especially when a regulatory framework meant to ensure diversified ownership is diluted to pave the way for foreign banks acquiring private Indian banks within three to four years through creeping acquisition.

The Finance Minister, in the course of his response to the Calling Attention notice on 20th December 2004 referred to the Narasimham Committee Report on Banking Reforms and posed a question for every Member of Parliament: “Has our banking sector become stronger, thanks to the reforms or not?” To buttress his point, he gave figures for the declining proportion of net NPAs of the public and private sector banks. He also mentioned about the enhanced profitability of the banks in the post-reforms period, attributing it to the successful implementation of the reforms recommended by the Narasimham Committee in 1991 and said that the UPA Government was taking “this reform process forward”. These claims are contentious.

The figures for Non Performing Assets that the Finance Minister has quoted in Parliament are ratios. While it is true that the gross and net NPAs as a percent of total assets or as a percent of gross or net advances have shown a gradual decline over the last few years, the absolute values of gross or net NPAs have continued to rise for almost all categories of banks. (Table of NPAs of Scheduled Commercial Banks provided in Annexure). This cannot be interpreted as a sign of growing strength of the banking sector. Moreover, if one further considers the fact that the trend towards window dressing balance sheets in the name of NPA management has grown considerably among all banks, including those in the public sector, the claim of growing efficiency and strength of the banking sector becomes even more suspect. If disaggregated figures of loan write offs on the one hand and cash recoveries, compromises and upgradations on the other are provided, if not for individual banks then at least the total figures for the different categories of scheduled commercial banks, it can throw more light on the true picture of the banking sector in the post-reform period. Because if loan write offs are driving the observed decline in the net or gross NPAs to net or gross advances ratios respectively, or if the banks are inflating their advances portfolio at the end of the year in order to throw up favourable ratios in order to gratify the capital markets, then it cannot be seriously considered to be symbolizing enhanced efficiency. Such ‘ever-greening’ can be financially innovative; however, such innovations serve little purpose as far as the objectives of an efficient banking system are concerned.

As far as the increased profitability of the banking sector is concerned, the RBI Report on Trend and Progress of Banking in India, 2003-04 (Chapter VIII: Perspectives) states:

Over the past few years there has been a steady decline in interest rates largely reflecting sustained reduction in inflation rates and inflationary expectations. Such reductions in interest rates occurred in an environment where credit growth remained sluggish. Consequently, there was a favourable impact on banks’ balance sheets in terms of increased operating profits from treasury operations given the asset concentration in favour of Government securities in excess of the requirement of statutory liquidity ratio (SLR). For example, treasury income of the banking sector increased

from Rs.9,541 crore in 2001-02 to Rs.19,532 crore in 2003-04 and constituted 32.0 per cent and 37.1 per cent of operating profit in the corresponding years. This in turn enabled banks to make larger loan loss provisions. Consequently, the net NPA ratio has declined from 5.5 per cent in 2001-02 to 2.9 per cent by 2003-04. While a declining interest rate scenario has positive spin offs for the banking sector, given that interest rates had touched historically low levels by 2003-04, there does not appear to be any further scope for similar trends to be observed during 2004-05. In future, therefore, an increasing proportion of banks’ income would emanate from the traditional business of lending. (emphasis added)

The only point, which remains to be added in this context, is that the lure of high profits from treasury operations is attracting foreign banks towards India today; which has dovetailed with the possibility of making quick gains by the promoters of private Indian banks by selling off their stakes to foreign banks and FIIs while their balance sheets look good; to create a pressure group which wants further opening up of the banking sector. There is no good reason why the UPA Government should frame policies to cater to the needs of such pressure groups.

While the impact of the implementation of the banking reforms in the 1990s in terms of increasing the efficiency and strength of the banking sector remain suspect, what has been unambiguous is its immediate, direct, and dramatic effect on rural credit, which the Left considers to be one of the key parameters to judge the efficacy of the banking system. There has been a contraction in rural banking in general and in priority sector lending and preferential lending to the poor in particular. The share of rural bank offices in total bank offices, which had jumped from 17.6% in 1969 to 36% in 1972 and then rose steadily to attain a peak of 58.2 % in March 1990, gradually declined to below 50 % in 1998 and thereafter. In fact, there was an absolute contraction in the number of rural bank offices in the 1990s: 2,723 rural bank offices were closed between March 1994 and March 2000. The credit-deposit ratio in rural areas fell from about 66% in 1990 to about 56% in 2002.

The target of 40% set by the RBI for priority sector lending, which was over-achieved by the scheduled commercial banks between 1985 and 1990 fell from 1991 onwards to reach at only 33% in 1996. While the share of priority sector lending shows an apparent increase to about 36% since then, this was on account of the inclusion of sectors like IT and agro processing in the definition of priority sectors. Loans to multinationals involved in agribusiness like Pepsi, Kelloggs, Hindustan Lever and ConAgra now count as priority sector advances! More recently, loans to cold storage units, irrespective of location, have also been included in the priority sector. However, the most important fact is that the share of outstanding advances to agriculture in total outstanding advances of scheduled commercial banks fell steadily from about 15% in 1989 to 10.5% in 2000.

The distress, which characterizes the Indian countryside today and the agrarian crisis that lie beneath, was to a significant extent caused by the policies of banking reforms throughout the 1990s that led to a sharp fall in rural and agricultural credit. This grim reality of rural India has to be kept in mind during discussions on banking reforms. While the Left had wholeheartedly welcomed the announced target of adding 50 lakhs institutional borrowers within one year by the Finance minister on 18th June 2004, such statements of intent needs to be backed by concrete efforts towards ensuring that the private sector and foreign banks meet their

priority sector lending targets, especially to agriculture. The share of priority sector credit in the total outstanding net credit of foreign banks was 34.2% in 2002, well below the 40% norm. Of this, about 17.7% was export credit and 11.6% was credit advanced to small sector units. All the other priority sectors, including agriculture, accounted for the remaining 4.9% of the outstanding credit of foreign banks. The CMP of the UPA states, “…the social obligations imposed by regulatory bodies on private banks and private insurance companies will be monitored and enforced strictly”. Can the Government abide by this commitment if the foreign and private ownership norms of banks are further diluted?

CONCLUSION The proposal to dilute stakes of Public Sector Banks upto 33%, which was recommended by the Second Report of the Narasimham Committee, had failed to gain Parliamentary approval. It was because the Parliament felt at that time that the process of banking deregulation and financial liberalization has already gone too far in India. The RBI itself has found through its empirical studies that there is no observable link between ownership and efficiency or profitability, as far as the Indian banking sector is concerned. The Left believes that the job of the government is well cut out as far as the banking sector is concerned; increasing the efficiency of the banking system within the existing regulatory framework and gear it up for much increased flows of credit to the credit-starved rural areas, particularly into agriculture. There is no justifiable case for another fresh dose of bank deregulation at the present juncture, especially vis-à-vis raising the foreign equity and voting rights cap in private banks. As has been mentioned earlier, the Left Parties are not in favour of any amendment of the Banking Regulation Act, which would do away with the existing cap on the exercise of voting rights by shareholders of a bank and make it proportional to equity holding, which in turn would be allowed to a maximum of 74% for FDI through the automatic route. Therefore the UPA Government should refrain from adopting the notification route to allow acquisition of shares by foreign investors above the existing guidelines and subsequently presenting the Amendment in the Parliament as a fait accompli. 

[1] He was Chief Economist, World Bank and also Chaired President Clinton’s Council of Economic Advisors.

[2] Joseph Stiglitz, Globalization And Its Discontents, p. 99, Penguin, 2002.

FDI in banking

The UPA Government had chosen to carry forward the policy of banking deregulation, following the footsteps of the NDA Government. On 28th February, 2005, the same day that the Union Budget 2005-6 was presented before the Parliament, the Reserve Bank at the instance of the Finance Minister,

released a roadmap for the presence of foreign banks in India. The RBI notification formally adopted the guidelines issued by the Ministry of Commerce and Industry under the previous government on March 5, 2004 which had raised the FDI limit in Private Sector Banks to 74 per cent under the automatic route, and went on to spell out the steps that would operationalise these guidelines. 

The RBI roadmap demarcates two phases for foreign bank presence. During the first phase, between March 2005 and March 2009, permission for acquisition of share holding in Indian private sector banks by eligible foreign banks will be limited to banks identified by RBI for restructuring. 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 such acquisition subject to the overall investment limit of 74 percent of the paid up capital of the private bank. Appropriate amending legislation will also be proposed to the Banking Regulation Act, 1949, in order to provide that the economic ownership of investors is reflected in the voting rights. Further, the notification announces that foreign banks will be permitted to establish presence by way of setting up a wholly owned banking subsidiary (WOS) or conversion of the existing branches into WOS. A clause on one-mode-presence, i.e. one form of banking presence, as branches or as WOS or as a subsidiary with a foreign investment in a private bank, has been added as the only safeguard against concentration. There are no caps specified for individual ownership (except the 74 per cent overall limit), which in the first phase would be left to RBI’s discretion.6

The second phase will commence on April 2009 after a review of the experience of the first phase. This phase would allow much greater freedom to foreign banks. It would extend national treatment to WOS, permit dilution of stake of WOS and allow mergers/acquisitions of any private sector banks in India by a foreign bank subject to the overall investment limit of 74 percent.

Regulation of Foreign Investment in India

General Rules Limiting Foreign Investment in Indian Companies

A traditional argument against foreign equity participation in domestic companies is that these

businesses involve strategic national interests and therefore, operational and strategic control must be

retained domestically (Lam, 1997). This view held sway in India until the early 1990’s and foreign

3 investment in all domestic companies was restricted and could be undertaken only with the prior approval of the Government of India.The New Industrial Policy of 1991 was the first step toward liberalization. It introduced foreign direct investment (FDI) via the “automatic route”, allowing companies in selected industries to raise new equity capital (in some industries, up to fifty-one per cent ownership) by issuing new shares in foreign markets without prior approval from the Ministry of Commerce and Industry (MCI). Banking was not one of the thirty-five industries where foreign direct investment via the automatic route was allowed.The next significant step occurred in late 1992 when foreign institutional investors were first allowed to invest in outstanding domestic securities. Such investments are referred to as foreign institutional investment (FII). Initially, the holding of any single foreign institutional investor was limited to five percent of the company’s total shares with an aggregate cap of twenty-four percent of the issued and paid-up capital for all foreign institutional ownership. These FII limits were intentionally designed to prevent a controlling interest by any foreign investor or group of investors. On April 4, 1997, the upper limit for FII was allowed to be increased up to thirty percent by the company concerned if its Board of Directors passed a resolution to that effect that was also ratified by its shareholders. Over time, the upper limit on FII was gradually increased – first to forty percent (March 1, 2000) and ultimately to the industry’s sectoral cap. In every instance,

the new upper limit was subject to the same conditions (called the “special procedure”) as the thirty percent limit. Table 1 provides additional detail on the sequence of

changes in FII limits. While FDI and FII both enable foreign institutions to invest in Indian firms, FDI and FII are quite different and are subject to very different regulatory treatment. FDI via the automatic route was viewed by the government as a source of new capital and was expected to create large block investors who would have a long term relationship with the firm and its management. On the other hand, FII did not directly generate new capital for the firm since investment was via secondary trading in existing securities and investment by any single institution was limited with the explicit objective of preventing significant influence by any foreign investor or group of investors. As a result of these different purposes and views 4 by the government, FDI and FII were regulated by different governmental bodies and were subject to separate legal limitations and regulatory procedures. The regulations were complex and allowed for different combinations of caps on FII and FDI. Depending on the industry, the caps could be independent or cumulative. Cumulative caps limited the sum of FII and FDI and the cumulative cap could be less than the sum of the two individual caps. For example, FII and FDI could each be allowed up to forty percent individually, but the sum could also be limited to a maximum of forty percent.2 A further complication is that the FDI regulation could include sub-limits based on the purchaser of the newly issued shares. For example, regulation that specified a forty percent limit on FDI could have a sub-limit of twenty percent on capital raised from foreign institutions but allow non-resident Indians (NRIs, or entities they controlled) to invest up to the full forty percent limit.

Impact of FDI on banking

India’s financial system has very little exposure to foreign assets and their derivative products and it is this feature that is likely to prove an antidote to the financial sector ills that have plagued many other emerging economies.

The global banking industry weathered turbulent times in 2007 and 2008. The impact of the economic slowdown on the banking sector in India has so far been moderate. Owing to at least a decade of reforms, the banking sector in India has seen remarkable improvement in financial health and in providing jobs. Even in the wake of a severe economic downturn, the banking sector continues to be a very dominant sector of the financial system. The aggregate foreign investment in a private bank from all sources is allowed to reach as much as 74% under Indian regulations.

The third quarter of 2008 saw the beginning of negative net capital inflows into the country. Notwithstanding this bleak scenario, the investment pattern with regard to foreign direct investment (FDI) and inflows from non-resident Indians remains resilient and FDI inflows into the country grew by an impressive 145% between fiscal 2006 and 2007 and by a respectable 46.6% between fiscal 2007 and 2008. However, owing to the economic downturn, the growth in FDI inflows in fiscal 2009 slowed to 18.6% from the previous fiscal.

Despite the surge in investments, the stringent regulatory framework governing FDI has proved to be a significant hindrance. However, FDI norms have been relaxed to a considerable extent with respect to certain sectors. Private banks, for instance.

Foreign investment, in addition to technological innovation and expertise, brings with it a plethora of risks. An unwarranted increase in the size of foreign holding in the banking sector will inevitably expose the country to risks not commensurate with those that an emerging market economy such as ours is equipped to grapple with.

At the same time, it is important to recognize that FDI in banking can address several issues pertaining to the sector such as encouraging development of innovative financial products, improving the efficiency of the banking sector, better capitalization of banks and better ability to adapt to changing financial market conditions.

Limits for FDI

FDI in the banking sector has been liberalized by raising FDI limit in private sector banks to 74 per cent under automatic root including investment by foreign investment in India. The aggregate foreign investment in a private bank from all sources will be 74 per cent of paid-up capital of the bank. 

FDI and Portfolio investment in nationalized banks are subject to overall statutory limit of 20 per cent. The same ceiling also applies in respect of such investment in State Bank of India and its associate banks.

The Present Banking Scenario

In recent times economy is been pushing to increase the role of multi-national banks in the banking sector. 

But it is opposed on the front that it will lead to state run insurers loosing business and workers their job. There are several reasons why giving foreign investors greater voting rights is fraught with dangers. When domestic or foreign investors acquire a large share holding in any bank and exercise proportionate voting rights, it creates potential problems not only of excursive concentration in the banking sector but also can expose the economy to more intensive financial crises at the slightest hint of panic. 

Opposition is not considering the need of present situation. FDI in banking sector can solve various problems of the overall banking sector. Such as –

i) Innovative Financial Products ii) Technical Developments in the Foreign Markets iii) Problem of Inefficient Management

iv) Non-performing Assets v) Financial Instability vi) Poor Capitalization vii) Changing Financial Market Conditions

If we consider the root cause of these problems, the reason is low-capital base and all the problems is the outcome of the transactions carried over in a bank without a substantial capital base. In a nutshell, we can say that, as the FDI is a non-debt inflow, which will directly solve the problem of capital base. Along with that it entails the following benefits such as –

Technology Transfer As due to the globalization local banks are competing in the global market, where innovative financial products of multinational banks is the key limiting factor in the development of local bank. They are trying to keep pace with the technological development in the banks. Now a days banks have been prominent and prudent in the rapid expansion of consumer lending in domestic as well as in foreign markets. It needs appropriate tools to assess (how such credit is managed) credit management of the banks and authorities in charge of financial stability. It may need additional information and techniques to monitor for financial vulnerabilities. FDI's tech transfers, information sharing, training programs and other forms of technical assistance may help meet this need. 

Better Risk Management

As the banks are expanding their area of operation, there is a need to change their strategies exert competitive pressures and demonstration effect on local institutions, often including them to reassess business practices, including local lending practices as the whole banking sector is crying for a

strategic policy for risk management. 

Through FDI, the host countries will know efficient management technique. The best example is Basel II. Most of the banks are opting Basel II for making their financial system more safer.

Financial Stability and Better Capitalization 

Host countries may benefit immediately. From foreign entry, if the foreign bank re-capitalize a struggling local institution. In the process also provides needed balance of payment finance. In general; more efficient allocation of credit in the financial sector, better capitalization and wider diversification of foreign banks along with the access of local operations to parent funding, may reduce the sensitivity of the host country banking system and lead towards financial stability.

So due to the aforesaid benefits economy has consistent flow of FDI over the past few years. In addition to that, the govt. has also taken step to enhance the FDI (eg. Telecom, civil aviation) FDI up to 100% through the Reserve Bank's automatic route was permitted for a no. of new sectors in 2005-06 such as Greenfield airport projects, export trading. All these measures have been contributing towards increasing direct investment.

This overall FDI is evident from the above graph.

'FDI & FII have risen sharply during the 1990s reflecting the policies to attract non-debt creating flows. 

Cumulative foreign investment flows have amounted to US & 106 billion since 1990-91 and almost evenly balanced between direct invest flows (US & 49 bn) and portfolio flows (US & 57 bn). Since 1993-94, FDI flows have exceeded portfolio flows in the 5 years while portfolio flows have exceeded FDI in the remaining 8 years. As a proportion to FDI flows to emerging market and developing countries, FDI flows to India have shown a consistent rise from 1.6% in 1998 to 3.7% in 2005'1. 

India's FDI growth of above 30% during past 2 years is encouraging. Although the FDI inflows into India are small as compared to other emerging markets, their size is growing on the back of growing interest by many of the world's leading multinationals. India has improved its rank from fifteenth (in 2002) to become the second most likely FDI destination after China in 2005'1. 

The IMF's study is in supportive to the above-discussed features of FDI. This study talks about the optimism over India emanates from a contribution of following factors. 

* India contributed nearly one fifth of Asian domestic demand growth over 2000-05. Looking forward, India slated to be the second largest demand driver in the region, after China. 

* India accounts for almost one quarter of the global portfolio flows to emerging market economies, nearly $ 12 bn in 2005. 

* India is the world's leading recipient of remittances, accounting for about 20% of the global flows. 

Even though above discussed factors are fair enough for the development of economy. But it is a noted fact that, economy drivers are reluctant towards more liberalization for FDI in the banking sector. As the ceiling rates are not increased, FDI in Financial Sector is not getting a wholesome environment. But the foreign investment is finding its own way to come in the economy. May be the

way of FII. It is evident from the diagram. 

Now a days, foreign commercial and investment banks have quietly begun picking up public sector bank's bond issues. Bankers said that the funds were coming into these bonds; some of the foreign banks were also using the banks' bonds as an arbitrage opportunity in view of the increasing liquidity. 

So, therefore from last 2 years FIIs have exceeded the FDI and in portfolio investment into India since 2003-04 reflects both domestic and global factors. Compared with FII always FDI has a greater and long-term effect on the Indian market due to the whimsical nature of FII. (As it is considered as hot money) 

The present scenario looks more closely at the paradigm of exponential growth and laments that India's role as an engine for global growth has been limited by the still relatively closed nature of its economy. 

Growth Prospect 

Advantage India – FDI 

The Reserve Bank of India (RBI), has allowed foreign players to set up branches in rural India and

take over weak banks with an investment of up to 74 per cent, and further relaxations are on the anvil

by 2010, with the second phase of opening expected to com-mence in April 2009.

Some of the biggest names in global financial services and banks like Credit Suisse, Rabo Group and

ANZ are seeking a banking license in India. The RBI has, in recent months, given fresh banking

licenses to UBS - Switzerland's largest bank, Dresdner Bank and United Overseas Bank.

ANZ and Rabobank Group, the Dutch Group, is now in the process acquiring a banking license. The

Rabobank Group already holds 18.2 per cent stake in another local private bank YES Bank. Some of

the existing players such as StanChart, Citi and HSBC, hold India as one of their top markets.

Due to current Global crisis, we expect the deadline for second phase i.e. April 2009 to be extended further. However, banking

authorities has not announced about the extension of the phase.