Amar Project

FINAL PROJECT REPORT ON
GROWTH OF FOREIGN BANK IN INDIA AFTER 1995
THE INDIAN INSTITUTE OF PLANNING & MANAGEMENT
SUBMITTED BY: AMAR NIRANJAN SF-7 ROLL NO. TS12-F-148 ISBE-B (SS 10-12)
SUBMITTED TO: Amir Hossain
The Indian Institute of Planning & Management
EXECUTIVE SUMMARY
This project is regarding, Growth of foreign bank in India after 1995which would enable the person to know the exact scenario of market and impact on Indian economy. The study is conducted with the following objective. 1. To know whether foreign bank sector is profitable. 2. To know what are the feature that helps in selling the foreign bank product. 3. To know the marketing strategies of foreign bank sector. 4. To know consumers buying behavior. 5. To find the problem face by customers and its impact on market. Foreign bank are trading specific segment of consumer for both personal and commercial usage. They are here to take advantage of opportunities indicated by demand for easy to use & quick to use banking product range, which will be helpful for the life on the road kind of population in India. Their basic objective is to position themselves both as a commercial & personal alternative to most of the current Indian bank which either focus on any one of the above consumer segment. The basic objective of the study is know about the growth of foreign bank and its impact on Indian economy & also to know about the problem and challenges faced by foreign bank in India. A healthy banking system is essential for any economy striving to achieve good growth and yet remain stable in an increasingly global business environment. The Indian banking system, with one of the largest banking networks in the world, has witnessed a series of reforms over the past few years like the deregulation of interest rates, dilution of the government stake in public sector banks (PSBs), and the increased participation of private sector banks. The growth of the retail financial services sector has been a key development on the market front. Indian banks (both public and private) have not only been keen to tap the domestic market but also to compete in the global market place. New foreign banks have been equally keen to gain a foothold in the Indian market.
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The momentum in credit growth has been maintained during 2005-06 due to two factors: The corporate sector has stepped up its demand for credit to fund its expansion plans; there has also been a growth in retail banking. However, even as the opportunities increase, there are some issues and challenges that Indian banks will have to contend with if they are to emerge successful in the medium to long term. This report discusses these issues and challenges -- both intrinsic and external, such as Risk management and Basel II Consolidation Overseas expansion Technology Government reforms Non Performing Assets (NPAs) Skilled manpower Consumer protection the report concludes with thrust areas for future growth.
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Subject From To Cc Sent
PROJECT THESIS TOPIC APPROVAL

Project Thesis amar.niranjan@gmail.com Dipti Sharma; hina.sachdeva@iipm.edu 28 March 2012 PM 03:04
ISBE B (SS 10-12 ) Project thesis topic approval

Dear AMAR NIRANJAN, This is to inform you that the approved topic for project thesis is - GROWTH OF FOREIGN BANKS IN INDIA AFTER 1995. This email is an official confirmation that you would be doing your project thesis work genuinely and shall try to achieve the said objectives mentioned in the synopsis. You must always use the thesis title as approved and registered with us. Your project thesis id Number is TS12-F-148. You are required to correspond with your Internal Guide MS.HINA SACHDEVA (hina.sachdeva@iipm.edu) at regular intervals before sending the thesis final draft to her. Regards, Dipti Sharma The Indian Institute of Planning and Management dipti.sharma@iipm.edu Phone: 0124 42789995 ________________________________________________________________________ For any query please contact:
Mandavi Singh
Phone:-01130168412
e-mail: projectthesis1012@gmail.com ISBE-B (SS 10-12)

TS12-F-148
ACKNOWLEDGEMENT
No research can blossom from single persons mind without proper guidance, assistance and inspiration from various quarters. My project was given its present shape by assistance of many people whom I am greatly indebted to. I owe deep intellectual debt to the numerous people who through their rich and various contributions have greatly improved my understanding of various concepts of my project. This project is a result of endless effort and immense degree of toil by many great minds. I would like to thank all those people who graciously helped me by sharing their valuable time, experience and knowledge. I would like to express heartiest thanks to Mr. Amir Hossain & Ms. Hina Sachdeva for his stimulate discussion, constructive and valuable suggestions that helped me a lot in the successful completion of this project. I would like to dedicate this work to my revered institute IIPM, New Delhi where I am getting the shape of a future business manager. Last but not the least, I express my gratitude to my Parents, God, Family and Friends who give me full moral and physical support during the period of my project.
Amar Niranjan
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TABLE OF CONTENTS
SNO. 1. 2. 3. 4. 5. 6. 7. 8. 9.
TOPICS INRODUCTION FOREIGN BANK IN NIDIA GROWTH OF FOREIGN BANKS IN INDIA APPLICATION OF TECHNOLOGIES COMPETITION CHALLENGES AND FUTURE ASPECTS SWOT ANALYSIS CONCLUSION BIBLOGRAPHY
PAGE NO. 7-10 11-20 21-44 45-48 49-56 57-62 63-66 67-70 71-end
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Chapter
INTRODUCTION
1.1 Overview of Banking Sector in India

With the Indian economy moving on to a high growth trajectory, consumption levels soaring and investment riding high, the Indian banking sector is at a watershed. Further, as Indian companies globalize and people of Indian origin increase their investment in India, several Indian banks are pursuing global strategies. The industry has been growing faster than the real economy, resulting in the ratio of assets of commercial banks to GDP increasing to 92.5 per cent at end-March 2007. The Indian banks have also been doing exceptionally well in the financial sector with the price-to-book value being second only to china, according to a report by Boston Consultancy Group. Consequently, the degree of leverage enjoyed by the banking system, as reflected in the equity multiplier (measured as total assets divided by total equity), has increased from 15.2 per cent at end March 2006 to 15.8 per cent at the end of March 2007. Growth A burgeoning economy, financial sector reforms, rising foreign investment, favorable regulatory climate and demographic profile has led to India becoming one of the fastest growing banking market in the world. The overall banking industry's business grew at a CAGR of about 20 per cent from US$ 469.4 billion as of March 2002, to US$ 1171.29 billion by March 2007. Aggregate bank deposits of banks increased by US$ 129.26 billion (22.1 per cent) at the end of March 2007 over the corresponding in 2006. In the current fiscal, aggregate bank deposits
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increased by 23.8 per cent, year-on-year, as of January 4, 2008 as against 21.5 per cent a year ago. While aggregate demand deposits increased by 15.6 per cent, aggregate time deposits increased by 25.3 per cent in the same period, indicating migration from small savings schemes of the Government. Similarly, aggregate deposits of the scheduled commercial banks (SCB), after growing by 17.8 per cent and 24.6 per cent in 2005-06 and 2006-07, rose by 25.2 per cent, year-on-year, as on January 4, 2008. In fact, the absolute increase of US$ 96.34 billion (14.6 per cent) in the current fiscal year up to January 4 2008, was higher than the US$ 70.59 billion (13.2 per cent) increase in the same period last year. Simultaneously, loans and advances of SCBs rose by over 30 per cent (i.e. 33.2 per cent in 200405, 31.8 per cent in 2005-06 and 30.6 per cent in 2006-07) in the last three financial years, underpinned by the robust macroeconomic performance. The growth has continued in the current fiscal with non-food credit by SCBs increasing by 22.2 per cent, year-on-year, as on January 4, 2008. Significantly, the asset quality of the banks has also improved over this period. The gross nonperforming asset (NPA) as a per cent of total assets has declined from 4 per cent as of March 2002 to 1.46 per cent as of March 2006. Simultaneously, the capital adequacy ratio of all SCBs has improved from 11.1 per cent as of March 2002 to 12.3 per cent by March 2007. Potential While this growth has been very impressive, the potential banking market waiting to be tapped in India is still fairly huge. Out of the 203 million Indian households, three-fourths, or 147 million, are in rural areas and 89 million are farmer households. In this segment, 51.4 per cent have no access to formal or informal sources of credit, while 73 per cent have no access to formal sources of credit.
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In fact, according to a report by Boston Consultancy Group, India has the second largest financially excluded households of about 135 million, which is next only to china. Also, about 60 million new households are expected to be added to India's bankable pool between 2005 and 2009. With such a large untapped market, the Indian banking industry is estimated to grow rapidly, faster than even china in the long run.
1.3 Changing Scenario since Liberization
1991 and After: The Reform Years The reform in the financial sector was attuned to the reform of the economy, which now signified opening up. Greater opening up underscores the importance of moving to international best practices quickly since investors tend to benchmark against such best practices and standards. Since 1991, the Indian financial system has undergone radical transformation. Reforms have altered the organizational structure, ownership pattern and domain of operation of banks, DFIs and NBFCs. The main thrust of reforms in the financial sector was the creation of efficient and stable financial institutions and markets. Reforms in the banking and non banking sectors focused on creating a deregulated environment, strengthening the prudential norms and the supervisory system, changing the ownership pattern, and increasing competition. The policy environment was stanced to enable greater flexibility in the use of resources by banks through reduced statutory pre-emptions. Interest rate deregulation rendered greater freedom to banks to price their deposits and loans and the Reserve Bank moved away from micromanaging the banks on both the asset and liability-side. The idea was to impart operational flexibility and functional autonomy with a view to enhancing efficiency, productivity and profitability. The objective was also to create an enabling environment where existing banks could respond to changing circumstances and compete with new domestic private and foreign institutions that were permitted to operate. Instead, the Reserve Bank focused on tighter prudential norms in the form of capital adequacy ratio, asset recognition norms, provisioning requirements, exposure norms and improved level of transparency and disclosure standards. As the market opens up, the need for monitoring and supervising becomes even more important systemically. The greater flexibility and the prudential regulation were fortified by 'on-site inspections' and 'off-site surveillance'. Furthermore, moving away from the closed economy objectives of ensuring appropriate credit planning and credit allocation, the inspection objectives and procedures, have been redefined to evaluate the banks safety and
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soundness; to appraise the quality of the Board and management; to ensure compliance with banking laws and regulation; to provide an appraisal of soundness of the bank's assets; to analyze the financial factors which determine bank's solvency and to identify areas where corrective action is needed to strengthen the institution and improve its performance. A highpowered Board for Financial Supervision (BFS) was constituted in 1994, with the mandate to exercise the powers of supervision and inspection in relation to the banking companies, financial institutions and non-banking companies. Currently, given the developing state of the financial system, the function of supervision rests with the Reserve Bank.
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Chapter
FOREIGN BANKS IN INDIA
2.1 Entry in India
The presence of foreign banks does not imply negligence of particular sectors of the economy. In India, foreign banks are required to comply with priority sector lending norms, where the commitments are lower than those applicable to domestic banks under a tailor-made structure suitable to them. The experience is that foreign banks adhere to the Reserve Bank prescriptions. Generally, however, due to their limited knowledge of the local industry and branch network, foreign banks are very conscious about their asset quality and a major shift in the share of foreign banks may result in neglect of the credit requirements of small and medium-sized businesses, whose development is crucial for emerging markets, but which are perceived as carrying relatively higher risks. At present, there are 29 foreign banks operating in India with a network of 273 branches and 871 off-site ATMs. The facts indicate that the regulatory regime followed by the RBI in respect of foreign banks is non-discriminatory, and is, in fact, very liberal by global standards. India issues a single class of banking license to foreign banks and does not require them to graduate from a lower to a higher category of banking license over a number of years as is the practice followed in certain other jurisdictions. This places them virtually on the same footing as an Indian bank and does not place any restrictions on the scope of their operations. This is in contrast with practices in many other countries. No restrictions have been placed on the establishment of non-banking financial subsidiaries in India by foreign banks or their group companies. Deposit insurance cover is uniformly available to all foreign banks at a non-discriminatory rate of premium. In many other countries there is a discriminatory regime. The prudential norms applicable to foreign banks for capital adequacy, income recognition and asset classification are, by and large, the same as for the Indian banks. Unlike some of the countries where overall exposure limits have been placed on the foreignISBE-B (SS 10-12)
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country related business, India has not placed any restriction on the kind of business that can be routed through the branches of foreign banks. This has been advantageous to foreign bank branches as the entire home-country business is generally routed through these branches. Substantial FII business is also handled exclusively by foreign banks. In fact, some Indian banks contend that a certain amount of positive discrimination exists in favour of foreign banks by way of lower priority sector lending requirement at 32 per cent of the adjusted net bank credit as against a level of 40 per cent required for Indian banks. Unlike in the case of Indian banks, the sub-ceiling in respect of agricultural advances is also not applicable to foreign banks whereas export credit granted by foreign banks can be reckoned towards priority sector lending obligation, which is not permitted for Indian banks. At the end of June 2007, foreign banks had a 6.11 per cent share in total deposits in the Indian commercial banking system and 6.83 per cent in terms of advances. Foreign banks were far more dominant in the off-balance sheet business with a market share of as high as 72.66 per cent. Besides foreign banks, there are also two large Indian private sector banks in which the non-resident ownership is very close to the 74 per cent permitted, which is why they can be considered as incorporated in India but predominantly foreign-owned banks. These banks together with the foreign banks, have a combined market share in the deposits, advances and off-balance-sheet business of 17.46, 18.65 and 76.63 per cent, respectively, which, by no means, are insignificant levels. Moreover, there are also about 10 large listed public sector banks (PSBs) in which the nonresident/FII shareholding was close to the permitted ceiling of 20 per cent, as at March-end 2007. In these PSBs, resident private shareholding would thus be close to 30 per cent only. In the foreign exchange market, these banks had a 41 per cent share in the total forex turnover in 2005-06 and this rose to 52 per cent in the first half of 2007-08. Another dimension of the foreign banks' functioning in India is the returns generated from their Indian operations. The net profit per branch for foreign banks in India for the year 2005-06 was Rs 11.99 Cr. (Rs 119.9 million) as against the corresponding figure of Rs 0.33 Cr. (Rs 3.3 million) for PSBs. Further, for the year 2006-07, the Return on Assets (ROA) of foreign banks was 1.65 per cent while the Return on Equity (ROE) was 14.02 per cent, as against the corresponding figures of 0.82 per cent and 13.62 per cent for PSBs. These returns need to be viewed in the context of the international benchmarks for these parameters, which are generally considerably lower. Yet another aspect of the foreign banks' operations is the authorization of their branches in India.
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As per India's existing WTO commitments, our obligation is to permit to foreign banks only 12 licenses per year, including new entrants and existing banks - this does not include ATMs. During the period 2003 to October 2007, RBI authorized as many as 75 branches of foreign banks in India, excluding the off-site ATMs set up by them. In this context, an illustration would be revealing of the ground realities. Between 2003 and October 2007, India had granted 19 authorizations to US-based banks, most of which also stand utilized. However, during the same five-year period, the US did not authorize any office of Indian banks in US territory, vis--vis the requests for setting up three branches, two subsidiaries and nine representative offices. Some of the requests have been pending with US authorities for more than five years. Yet another aspect of foreign participation in the Indian financial sector is the foreign ownership of NBFCs operating in India. As of August 2007, in systemically important nondeposit-taking (ND-SI) NBFCs, those with some element of foreign ownership had an asset base of Rs 87,542 Cr. (Rs 875.42 billion) and accounted for more than 26 per cent of the total assets of this class of NBFCs. Thus, the current policy environment enables a fair level of foreign participation even in the non-banking financial sector of the country. Foreign banks constantly evaluate the political, economic and financial climate in financial markets and vary their investment/lending decisions. While the credit risk management processes and practices vary among banks, all internationally active banks have centralized policies and country and transfer risk monitoring, reporting and limiting mechanisms. While the traditional scope encompassed only sovereign and transfer risk, large flows of loans to non-G10 countries commercial entities have induced banks to broaden the scope of country and transfer risk management to incorporate the potential default of foreign private sector counterparties arising from country specific economic factors. In response to the Asian crisis and more recent events, banks in India are required to strengthen their country and transfer risk monitoring and analysis in an effort to identify incipient problems and to adjust exposures more promptly and systematically. Domestic banks account for 92% of total banking assets in India. Given the size of the country and the policy to ensure that foreign banks. Market share does not exceed 15%, domestic banks are likely to dominate the banking markets.
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The existence of only a few large banks potentially exposes the system to undue risk, as even a bank-specific liquidity crisis could trigger systemic problems. Ideally, the banking system should comprise a few large banks to ensure a healthy competitive environment and smaller banks and sector-specific financial institutions to cater to the needs of small business and agriculture. The domestic and foreign banks are covered under a uniform regulatory and supervisory regime. Foreign banks are also covered by the deposit insurance arrangements applicable to domestic banks. As lender of last resort, the Reserve Bank has not faced any problem with foreign banks as their operations and asset size are very limited. There have been no major difficulties experienced in coordination with the home country supervisors of foreign banks. The open and competitive environment provides opportunities and challenges to the banks. The narrowing spreads force banks to assume more risks. At the same time, banks should ensure an appropriate trade-off between risks and returns. Recognizing the need for effective risk management systems, the Reserve Bank has issued comprehensive guidelines on risk management systems and banks are required to address risk management in a structured manner. The implementation of risk management guidelines is also a key supervisory concern. The large size of banks is a systemic issue and the monetary authorities are often compelled to act as lender of last resort to obviate dislocation in the payment and settlement systems. Banks, especially large banks, should therefore be adequately capitalized, put in place strong internal control and risk management systems, supported by proper disclosure, and so forth. The banking sector in India is robust and its standards are broadly in conformity with international standards. In further enhancing its efficiency and stability to the best global standards a two-track and gradualist approach will be adopted. One track is consolidation of the domestic banking system in both public and private sectors. The second track is gradual enhancement of the presence of foreign banks in a synchronized manner. The policy decisions announced on March 5, 2004 on FDI, FII and the presence of foreign banks will be implemented in a phased manner. This will also be synchronized with the two-track approach and will be consistent with Indias commitments to the WTO.
2.2 Strategic Alliance with Indian Banks
In India, foreign banks account for only around 8% of the total assets of the banking system. Further, domestic households are not allowed to place deposits abroad. Similarly, conditions
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for accessing overseas capital markets by domestic corporate have been stringent, in terms of size, maturity, pricing, etc. The impact of the entry of foreign banks on domestic banks is likely to depend on various factors such as the structure, strength and competitiveness of domestic banks, the share of foreign banks, and the regulatory/supervisory framework. While the entry of foreign banks could definitely improve the competitive environment, they are not likely to weaken domestic banks. With better technology and expertise in offering specialized banking products such as derivatives, advisory services, trade finance, etc, the entry of foreign banks can enhance healthy competition and has a positive spill over effect on the domestic banks. The domestic banks would be under peer pressure to improve operational efficiency. It needs, however, to be recognized that the banking system in India is quite competitive with the presence of public, private and foreign banks.
Thus, the major forces for change in the Indian context have been the following: Consistent and strong regulatory and supervisory framework; structural reforms in the real and financial sectors; commitment to adopt and refine regulatory and supervisory standards on a par with international best practices; and Competition from foreign banks and new-generation private sector banks.
Domestic mergers Under the Banking Regulation Act, banking companies cannot merge without the approval of the Reserve Bank of India. The government and the Reserve Bank do not play a proactive role in either encouraging or discouraging mergers. It is our endeavour that the government and the RBI should only provide the enabling environment through an appropriate fiscal, regulatory and supervisory framework for the consolidation and convergence of financial institutions, at the same time ensuring that a few large institutions do not create an oligopolistic structure in the market. Mergers should be based on the need to attain a meaningful balance sheet size and market share in the face of heightened competition and driven by synergies and location and business-specific complementarities. While there is no regulatory deterrence to bank mergers, their incidence has not been significant and hence no problems have occurred in India.
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Mergers of banks help to reduce the gestation period for launching/promoting new places of business, strengthen product portfolios, minimize duplication, gain competitive advantage, etc. They are also recognized as a good strategy for enhancing efficiency. Ideally, mergers ought to be aimed at exploiting synergies, reducing overlap in operations, .right-sizing. And redeploying surplus staff either by retraining, alternate employment or voluntary retirement, etc. As banks are leveraged and the credibility of the top management has tremendous supervisory implications, we prefer consensual mergers to hostile takeovers. The takeover codes should, therefore, reflect the supervisory concerns. Impact of consolidation Since the consolidation process has not gone very far in India, its impact has not been significant. Mergers of certain foreign banks at the global level have also not affected the Indian market, as their market share is currently very low. However, the deregulation process has brought in more competition in the banking sector, resulting in delivery of innovative financial products at competitive rates. The consolidation of banks may not significantly affect the functioning of various segments of the financial markets. In a liberalised environment, the mere size of the bank may not be an enabling condition for distorting the pricing mechanisms or liquidity in the market. The presence of large banks would result in more competition and narrowing spreads. Behaviour of foreign banks The presence of foreign banks does not imply negligence of particular sectors of the economy. In India, foreign banks are required to comply with priority sector lending norms, where the commitments are lower than those applicable to domestic banks under a tailor-made structure suitable to them. The experience is that foreign banks adhere to the Reserve Bank prescriptions. Generally, however, due to their limited knowledge of the local industry and branch network, foreign banks are very conscious about their asset quality and a major shift in the share of foreign banks may result in neglect of the credit requirements of small and medium-sized businesses, whose development is crucial for emerging markets, but which are perceived as carrying relatively higher risks. Foreign banks constantly evaluate the political, economic and financial climate in financial markets and vary their investment/lending decisions. While the credit risk management processes and practices vary among banks, all internationally active banks have centralized policies and country and transfer risk monitoring, reporting and limiting mechanisms. While the traditional scope encompassed only sovereign and transfer risk, large flows of loans to non-G10 countries. Commercial entities have induced banks to broaden the scope of country and transfer risk management to incorporate the
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potential default of foreign private sector counterparties arising from country-specific economic factors. In response to the Asian crisis and more recent events, banks in India are required to strengthen their country and transfer risk monitoring and analysis in an effort to identify incipient problems and to adjust exposures more promptly and systematically.
Competition from foreign banks While entry of foreign banks is bound to affect the overall competitive situation in the market, much depends on the policy of the sovereign in regard to their entry/expansion, the existing share of domestic banks, etc. One of the main thrusts of the banking sector reforms in India has been to introduce more competition in the banking industry. With regard to mergers, only very few foreign banks operating in India have gone through the process of global mergers. The impact of mega mergers taking place at the global level on the competitive position of the Indian banking system has been minor, in view of foreign banks limited share in the financial system. At the same time, foreign banks have the potential, even without mega mergers, to improve their market share, given their use of sophisticated technology and capability of introducing innovative products. Systemic stability The existence of only a few large banks potentially exposes the system to undue risk, as even a bank-specific liquidity crisis could trigger systemic problems. Ideally, the banking system should comprise a few large banks to ensure a healthy competitive environment and smaller banks and sector-specific financial institutions to cater to the needs of small business and agriculture. The domestic and foreign banks are covered under a uniform regulatory and supervisory regime. Foreign banks are also covered by the deposit insurance arrangements applicable to domestic banks. As lender of last resort, the Reserve Bank has not faced any problem with foreign banks as their operations and asset size are very limited. There have been no major difficulties experienced in coordination with the home country supervisors of foreign banks. The open and competitive environment provides opportunities and challenges to the banks. The narrowing spreads force banks to assume more risks. At the same time, banks should ensure an appropriate trade-off between risks and returns. Recognizing the need for effective risk management systems, the Reserve Bank has issued comprehensive guidelines on risk management systems and banks are required to address risk management in a structured manner. The implementation of risk management guidelines is also a key supervisory concern.
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The large size of banks is a systemic issue and the monetary authorities are often compelled to act as lender of last resort to obviate dislocation in the payment and settlement systems. Banks, especially large banks, should therefore be adequately capitalized, put in place strong internal control and risk management systems, supported by proper disclosure, and so forth. The financial sector reforms have brought about significant improvements in the financial strength and the competitiveness of the Indian banking system. The prudential norms, accounting and disclosure standards, risk management practices, etc are keeping pace with global standards, making the banking system resilient to global shocks. The consolidation and convergence of banks in India has, however, not kept pace with global phenomena. The efforts on the part of the Reserve Bank of India to adopt and refine regulatory and supervisory standards on a par with international best practices, competition from new players, gradual disinvestment of government equity in state banks coupled with functional autonomy, adoption of modern technology, etc are expected to serve as the major forces for change. In the emerging scenario, the supervisors and the banks need to put in place sound risk management practices to ensure systemic stability. The financial sector reforms have provided the necessary platform for the banking sector to operate on the basis of operational flexibility and functional autonomy, thereby enhancing efficiency, productivity and profitability. The reforms also brought about structural changes in the financial sector and succeeded in easing external constraints on its operation, introducing transparency in reporting procedures, restructuring and recapitalizing banks and enhancing the competitive element in the market through the entry of new banks. The ongoing revolution in information and communication technology has, however, largely bypassed the Indian banking system given the low initial level of automation. The competitive environment created by financial sector reforms has nonetheless compelled the banks to gradually adopt modern technology, albeit to a limited extent, to maintain their market share. Banks continue to be the major financial intermediaries with a share of 64% of total financial assets. However, non-bank financial companies and development finance institutions are also emerging as alternative sources of funding.
Foreign Banks In India
Foreign banks have brought latest technology and latest banking practices in India. They have helped made Indian Banking system more competitive and efficient. Government has come up with a road map for expansion of foreign banks in India.
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The road map has two phases. During the first phase between March 2005 and March 2009, foreign banks may establish a presence by way of setting up a wholly owned subsidiary (WOS) or conversion of existing branches into a WOS. The second phase will commence in April 2009 after a review of the experience gained after due consultation with all the stake holders in the banking sector. The review would examine issues concerning extension of national treatment to WOS, dilution of stake and permitting mergers/acquisitions of any private sector banks in India by a foreign bank. Major foreign banks in India are: ABN-AMRO Bank The history of ABN Amro Bank dates back to the year 1924, when King Williem I issued a Royal Decree declaring the establishment of the Nederlandsche Handel-Maatschappij (Netherlands Trading Society, NTS). The NTS had been established with an aim to promote the trade between the Netherlands and the Dutch East Indies. Abu Dhabi Commercial Bank Ltd. Abu Dhabi Commercial Bank (ADCB) is one of the most prominent nationalized banks of the United Arab Emirates (UAE). Three different banks viz. the Khalij Commercial Bank, the Emirates Commercial Bank and the Federal Commercial Bank merged in the month of July 1985, leading to the incorporation of the Abu Dhabi Commercial Bank. American Express Bank Ltd With its headquarters located in New York, U.S., American Express Company is a global financial services provider, also known as AmEx in short. American Express had been established in the year 1850, and is well known all around the world for its dedicated Credit Card, Travellers Cheque and Charge Card services. BNP Paribas BNP Paribas is one of the oldest banks in the continent of Europe, and the largest bank in the Eurozone (consortium of countries having adopted Euro as their primary currency), as reported by The Banker magazine. The bank is present in 87 countries with a 162,700-strong workforce offering its services to the bank. Citibank Citibank is one of the largest banks in the U.S., and is a part of the financial services company Citigroup. Citibank had been founded in the year 1812. Initially its name was City Bank of New York, which was later changed to First National City Bank of New York.
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DBS Bank Ltd DBS Bank is a Singapore-based bank, and is known to be one of the largest banks to exist in South East Asian region by asset value. The government of Singapore established the DBS Bank in the year 1968, and it was primarily aimed at providing development oriented financial services. Deutsche Bank Deutsche Bank, headquartered at Frankfurt in Germany, ranks among the global leaders in corporate banking and securities, transaction banking, asset management, and private wealth management. It is one the world's leading international financial service providers with roughly EURO 2.2 trillion in assets and approximately 80,000 employees. HSBC Ltd HSBC Bank is a subsidiary of HSBC Holdings plc, a London based banking giant which, according to the Forbes magazine, is the largest banking group in the world, and the 6th largest company in the world as of April 2009. Standard Chartered Bank Standard Chartered Bank is a London based bank, currently operational within over 70 nations with more than 1,700 branches and 73,000 strong workforce as of April 2009. Although the bank is located in Britain, still a huge chunk of its revenues originate from the continents of Asia, Africa and Middle East. Barclays Bank Barclays GRCB India is led by Samir Bhatia as its Managing Director. In a short period of just two and a half years, Barclays GRCB India has placed itself amongst the most respected foreign banks in the country that is serving more than 830,000 clients.
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Chapter
GROWTH OF FOREIGN BANKS IN INDIA
3.1 Growth Rate in India

India has come a long way from its inward-looking economic strategy of over 50 years ago. Economic liberalization and the gradual opening up to the world have boosted growth and lifted millions of people out of poverty. This paper argues that the continuation of the reform process will allow India to stay on a high growth path of roughly 6% per year on average over the next 10 to 15 years. If reforms were pursued more aggressively, real GDP growth could reach 7%-8% per year. India will thus become the fastest growing economy out of 34 developed and emerging markets during that period and the worlds third largest economy by 2020. Moreover, its GDP per capita will double, from roughly USD 2,500 today (at purchasing power parity) to almost USD 5,000 in 2020. Favourable demographics, increasing investment in education and infrastructure and further integration with the world economy are the factors behind our projections. The implications of the projected growth trajectory are manifold. First, a larger, richer consumer market will emerge. Second, consumption patterns will change, with expenditure on healthcare and transport and communications growing substantially. Third, household savings will increase, given the large amount of people entering the working years phase. Fourth, there will be rising demand for diversified financial instruments to invest those savings. IT-related services, textiles, the auto-ancillary industry and pharmaceuticals are expected to gain dynamism given Indias comparative advantages and current sect oral trends. The banking sector has an enormous catch-up potential which is likely to be unleashed by the new domestic investment landscape, gradual privatization and opening up to foreign banks. India is increasingly attracting the worlds interest as a result of the countrys impressive economic performance, brought about by the liberalization process of the past two decades and the start of the march toward a functioning market economy.
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As reforms progressed, economic growth rose from an average of 3.7% in the 50s and 60s the Hindu rate of growth to a healthy 6% in the 90s. At least as importantly, social indicators also improved significantly. The poverty ratio dropped from more than 50% of the population in the 1950s to about 26% in recent years.1 Infant mortality as recorded by the UNDP almost halved from 127 per 1,000 live births in 1970 to 67 in 2002. We expect India to keep the steady growth pace of the last decade, i.e., roughly 6% per year, over the next 10 to 15 years. Favourable demographics, increasing investment in education and infrastructure and further integration with the world economy are the factors on which our projections are based. This performance will make India the fastest growing economy among 34 developed and developing countries, as highlighted in a recent comparative study by DBR2. Thus, GDP will double every 12 years and Indias economy will be the worlds third largest by 2020 (in purchasing power parity or PPP terms, i.e., excluding exchange rate effects), trailing only the US and China. In PPP terms, Indias GDP level will be approximately 40% of that of the United States in 2020, up from 27% in 2002. In the rest of this paper, we examine Indias likely economic picture over the next 10 to 15 years. Using DB Researchs proprietary quantitative growth model combined with qualitative analysis, we study the structural factors that support Indias economic growth potential and the obstacles that constrain the move towards an even higher growth rate. We also depict alternative growth scenarios. Finally, we assess possible future patterns in domestic consumption, savings and investment and analyze the implications for certain sectors, including the banking industry.
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Source: Morgan Stanley Research
Growth in Foreign Banking Sector in India

The foreign banking sector has scored over its counterparts not only in developing but even in developed world such as Japan, Singapore and Australia on significant parameters. According to Moodys Investors Services data, Indian lenders have posted highest ROE of 20.38% (system average of three years), closely followed by Indonesia at 20.19% and New Zealand 18.83%. Japan, the biggest economy in Asia posted negative returns of 6.42%, implying that the banks there made losses. Banks of Phillippines and Australia have posted an ROE of just 4.40% and 11.44% respectively. Risk management framework is a key strength for sustainable growth of banks. How have we performed in this area? Respondents rated Indias Risk management systems more advanced than China and Russia; at par with Japan, and less advanced than Singapore, UK and USA. This shows we need to work out this but we are not too far. It is with this confidence we are going ahead with the challenge of implementing Basel II by April 2007. 83% of our respondents highlighted that Basel II implementation would take us a step ahead in global competitiveness.
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Technology has given birth to a new era in banking. Technology can be the key differentiator between two banks and a major factor to attain competitive edge. Though slow in the beginning, Indian banks seem to have paced up in adoption of advanced technology, as is evident from our survey results. Technological systems of foreign banks in India have rated more advanced than China and Russia; at par with Japan, but less advanced than Singapore, UK and USA. While enhancement of credit is an important function of the Banks, it is equally imperative to keep a check on the quality of credit to ensure good health of the banking system and effective functioning of market for distressed assets.
One of the key fundamentals of Indian banking sector Credit Quality too has been rated fairly well in comparison with other countries. Majority of respondents quoted credit quality of foreign banks in India better in comparison with China, Japan and Russia; at par with Singapore but below par with UK and USA. As a percentage of GDP, the Net NPA of Indian banks stands mere to just 1.4% as on March 2006 as compared with 3.1% in 2004-05. As a percentage of GDP, gross NPA in India is just 1.9 % compared with 6.7% in China as on March 2005.
It is evident that India fares well on these critical parameters. But are the existing International banks happy doing business here? Well, our foreign bank respondents seem to be happy here and wish to expand further. 75 per cent of the foreign banks respondents rated their working experience in India as extremely good. Given Indias potential over the next decade and beyond, all the foreign banks respondents stated that they have formulated strategies for future expansion in India.
New Business Opportunities With the interest income coming under pressure, banks are urgently looking for expanding feebased income activities. Banks are increasingly getting attracted towards activities such as marketing mutual funds and insurance policies, offering credit cards to suit different categories of customers and services such as wealth management and equity trading. These are indeed
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proving to be more profitable for banks than plain vanilla lending and borrowing. 69 per cent of respondents stated that 20 30 % proportion of their total Income is constituted by fee-based incomes.
Banc assurance and selling of mutual funds were recognized as the most tapped business opportunities by the bankers closely followed by Forex Management. Out of these selling of mutual funds was identified as the most profitable venture by 47 per cent of respondents.
Penetration of Banking Services Today, India has 83000 HNWIs, a 19.3% increase in number over 2004. This data clearly exemplifies the fact that the number of wealthy individuals in the country is growing at a rapid pace. However, presently, there are only a handful of entities which offer high-end private banking in India. Just about 21.5 per cent of our survey respondents stated of having tapped this opportunity. This area has a huge potential for growth. The penetration of banking services to Indian households stands at a mere 35.5%. According to the data released by the Census office, even relatively prosperous states like Maharashtra,
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Gujarat and Karnataka have less than half of their total households operating a bank account. Delhi was ranked 8th with only 51% of the population having access to banking facilities.
Some of the efforts highlighted to increase this penetration level were:
Tapping the Rural markets (87.5 per cent respondents) It is time that Indian banks capitalize upon the untapped potential of the rural markets. Rural India is now being viewed more as an opportunity than as a challenge. 44 per cent of respondent banks perceived rural markets as difficult but Profitable market whereas 43 per cent view it as Lucrative and Profitable Market. Improving macro indicators like better education, higher income levels and comfort with technology clearly indicates the rural Indias potential of massive economic upsurge.
Opening more branches in Tier II and Tier III towns (62.5 per cent respondents) Fierce competition in the business of banks in metro cities has brought into sharp focus the untapped potential in the emerging markets of the Tier-II and Tier III cities across the country. In fact, analysts have forecasted that the next retail boom is waiting to happen in these smaller towns and cities, as the urban markets have now saturated. Many public sector banks are now enhancing their focus towards the Tier-II cities, as most of them have lost their considerable market share in the metros to their private sector and foreign counterparts.
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Innovation and Customization: New Products and Services By 2015, market will become intensely customer centric and dominated by global mega banks and densely populated by specialist financial services providers. Innovation in products, processes, relationships and business models will be the primary path to sustainable growth. Consumer today is open to ideas, demands flexibility and is looking for innovation and new products. On an average an Indian bank sells 1.4 products to every customer whereas in Spain it is 1.8, in UK 2.6, in Norway it is about 2.7 and in France it is about 3. Foreign banks acknowledged the need to expand their product portfolio as endorsed by 94 per cent of our survey respondent banks. The respondents also highlighted a few hindrances faced by them in churning products in tandem with their counterparts in other countries. Effective delivery channels (80 per cent) was identified as one of the major hindrance being faced at the time of introducing new products or schemes followed by closed customer mindset (40 per cent). Regulatory support and Knowledge and efforts made by the ground level personnel were other factors earmarked by the respondents.
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(Amount in Rs. Cr.) 2006 Item Amount 1 Liabilities 1. Capital 2. Reserve and Surplus 3. Deposits 3.1. 3.2. 3.3. Demand Deposits Savings Bank Deposits Term Deposits 8,940.17 15,373.68 1,13,744.99 38,696.61 18,783.18 56,265.20 38,411.31 4.48 7.71 57.06 19.41 9.42 28.22 19.27 11.48 100.00 12,999.36 20,076.09 1,50,793.58 43,256.75 21,839.14 85,697.69 50,966.06 43,181.39 2,78,016.49 4.68 7.22 54.24 15.56 7.86 30.82 18.33 15.53 100.00 2 Per cent 2007 Amount 4 Per cent to total 5
to total 3
4. Borrowings
5. Other Liabilities and Provisions 22,887.87 Total Liabilities Assets 1. Cash and balances with RBI 2. Balances money at call and short notice 3. Investments 3.1 In Government 52,383.57 40,880.14 with banks and 8,108.24 18,752.17 1,99,358.03
4.07 9.41
12,144.71 26,674.26
4.37 9.59
26.28 20.51
71,469.30 56,230.61
25.71 20.23
Securities (a+b)
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a. In India b. Outside India 3.2 In Other Approved
40,880.14 84.85
20.51 0.04
56,230.61 84.99
20.23 0.03
Securities In Securities Non-Approved
3.3
11,418.58 97,561.93
5.73 48.94 4.78
15,153.70 1,26,338.57 11,543.78
5.45 45.44 4.15
4. Loans and Advances 4.1 Bills purchased and
discounted Cash Overdrafts, etc. Term Loans Credits,
9,520.08
4.2 4.3
41,169.28 46,872.57 2,412.12 20,139.99 1,99,358.03
20.65 23.51 1.21 10.10 100.00
52,568.83 62,225.96 3,000.85 38,388.80 2,78,016.49
18.91 22.38 1.08 13.81 100.00 Nil/Negligible.
5. Fixed Assets 6. Other Assets Total Assets ()
Source: Balance Sheets of respective banks.
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Deposits of Foreign Banks in India
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3.2 Employment Opportunities

British banking giant Barclays' plan to shift thousands of jobs to India is the latest in a series of such decisions by European and American banks that are expected to hire more than 50,000 professionals in the country over the next three years. The combined headcount of ABN Amro and UK's Barclays Plc is set to expand by up to 10,000 employees in India following the $91 billion takeover of the Dutch banking major. Together with Barclays-ABN Amro, about a half a dozen foreign banks such as Citigroup, HSBC and Standard Chartered could hire over 50,000 employees in India in the next three years. These would be across various operations, including back-end jobs, to be moved from high-cost developed countries. Seeking to expand their presence in the world's second-fastest growing major economy and benefit from low-cost opportunities in IT enabled back-end operations, foreign banks are increasingly going bullish with their headcount expansion plans in India, an industry observer said.
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While announcing their $91-billion cash and stock merger deal, Barclays and ABN Amro on Monday said they would move 10,800 jobs to low-cost locations like India. The deal would also result in net reduction of 12,800 jobs from their combined workforce of 2, 17,000 employees. As a result, sources close to the two firms said, the combined entity could create 8,000-10,000 jobs in India. This would include jobs offshore from other locations and previous hiring plans announced separately by Barclays and ABN Amro. ABN has about 2,000 people on its payrolls in India. It had said last month it planned to double this number in one year. Barclays, which has close to 1,000 employees in India, also said last month it would move over 200 jobs to India after closing a call centre in the Besides, the world's largest financial services firm Citigroup, which recently announced a massive reduction of over 17,000 jobs worldwide, is planning to move thousands of jobs to low-cost locations like India. The Indian payrolls of the US firm, which already employs over 22,000 people in the country, is likely to increase by 5,000-8,000 employees following this restructuring. Another British banking giant HSBC is also planning to increase India headcount by about 8,000 employees to take its employee strength to 30,000 by next year. UK-based Standard Chartered Bank also plans to double it are over 5,000-strong India headcount in the next three years. Besides, a number of European banks, such as Dresdner Bank of Allianz Group and Royal Bank of Scotland, which was one of the suitors for ABN Amro, are seeking to expand their presence into India. Their entry would also result in thousands of new jobs being created here. Besides the usual B-School graduates, banking jobs are being pursued by engineers from institutions like IITs as well in the country. According to a recent survey conducted by ACNielsen and ORG-Marg, investment banking was named in the top five industries preferred by the students of premier engineering colleges of the country, while investment banking giants like Goldman Sachs and Lehman Brothers were named to the top 10 list of most coveted employers. HSBC Bank in India will be hiring over 3,500 this year to support its expansion programmes in retail, small and Medium Enterprises (SMEs) and corporate banking sectors.
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The bank, which has been traditionally hiring from its competitors, will now focus on alternative channels of recruitment by sourcing people from sectors such as retail, Fast Moving Consumer Goods (FMCG) and telecom, Ms Tanuj Kapilashrami, Head, Human Resource, HSBC Bank (India), told Business Line over phone from Mumbai. They have big aspirations in hiring this year and are looking at taking our headcount in India from the present 7,500 to 10,000 by the end of December, she said. However, the bank would continue to hire from competitors and campuses of 35 top business schools in the country apart from Indian Institutes of Management and Indian School of Business (ISB) for top executive positions, she said. Last year, HSBC bank had hired over 150 from the campuses. A majority of the proposed recruitment would be for frontline sales positions. The bank, which has over 7,500 employees on its rolls at present plans to bring educational institutions located in tier-II cities under campus recruitment programmes. ``We believe that there is talent available in these places which can be trained further. We are in the process of organising HSBC Leadership Initiative programmes in these cities, she said. Diversification of its workforces is a priority area for the bank. Our endeavour has been to ensure a good presence of women in our work force. We will give preference to women in relationship positions, the HSBC Bank official said. The men-women ratio in its work force is at 70:30 at present. It is targeting women who are planning to come back to work after a break due to personal/professional reasons. Population and demographic trends: Indias growth dividend India has a population of just below 1.25bn today, the 2nd largest in the world after China, increasing at roughly 1.5% per year. Our model shows that while the growth rate is expected to moderate to around1.3% by 2020, India will still have the 2nd fastest population growth in our sample of 34 developed and developing economies. Importantly, India has a young population. As of 2002, roughly 33% of its population was below the age of 15 while only around 5% was above the retirement age of 65. This implies that over the next 10 to 15 years a big portion of the countrys population will be within the working age group, implying a significant increase in the supply of labour. Moreover, this advantage is likely to remain for a long period since the dependency ratio (i.e., the share of the population either younger than 15 or older than 64 years) will decline steadily in the coming years. Between 2003 and 2020, we estimate that India will be adding about 250 m workers to the labour pool. This means roughly 15 m on average
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per year. To put this into perspective, in two years, India would be adding all of Germanys labour force!
3.3 Impact on Indian Economy

Impacts of FDI in host countries financial systems and economies The entry of foreign banks brings large benefits to host countries financial systems and economies at large. Benefits stem from efficiency gains brought about by new technologies, products and management techniques as well as from increased competition stimulated by new entrants. Moreover, as foreign banks may have greater access to resources from abroad, they have more stable funding and lending patterns than domestic banks. They also hold a more geographically diversified credit portfolio and hence would not be as affected during periods of stress in the host country. Another important issue for EME is related to impacts on connected lending practices by banks. In EME where wealth is highly concentrated it is common that banks board members, stockholders and large borrowers are closely related. Foreign banks do not get involved in connected lending both because they do not have related parties in the host country and their widely held equity structure does not encourage this kind of behaviour, it is also worth mentioning that foreign banks brought new capital to many EME which experienced severe financial crises and that they also import supervision from their home country authorities. At the same time, foreign investment in the financial sector raises some concerns. The greater participation of foreign institutions might expose host economies to events taking place in other countries where their foreign banks operate. On one hand, international banks have access to more investment alternatives and thus are more prone to cut and run than domestically owned banks when their investments are not performing as expected. On the other hand, local stockholders in EME face greater transactions costs and usually have vested interest that prevent them from unloading their financial investments. Further concerns arise because modern technologies used by large foreign banks rely mainly on hard data not always available in EME especially for small and medium enterprises; therefore banks could end up rationing credit to this type of firms or increasing risks borne by domestic institutions attempting to serve more opaque customers as a result of greater competition. International banks might also engage in regulatory arbitrage seizing differences in regulations around the world. Host country regulators may be overwhelmed by the complexities associated with the supervision of large and complex financial institutions, understanding new products
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and operations and by difficulties to achieve effective coordination with their counterparts located in home or other host countries. Conflicts of interests among parent companies and their subsidiaries may arise from management actions on the host country- seeking to pursue solely the interests of the former. Lastly, foreign banks may also negatively affect the depth, liquidity and information available to market participants when they de-list shares of acquired institutions. With the Indian economy moving on to a high growth trajectory, consumption levels soaring and investment riding high, the Indian banking sector is at a watershed. Further, as Indian companies globalize and people of Indian origin increase their investment in India, several Indian banks are pursuing global strategies, The industry has been growing faster than the real economy, resulting in the ratio of assets of commercial banks to GDP increasing to 92.5 per cent at end-March 2007. The Indian banks have also been doing exceptionally well in the financial sector with the price-to-book value being second only to china, according to a report by Boston Consultancy Group. Consequently, the degree of leverage enjoyed by the banking system, as reflected in the equity multiplier (measured as total assets divided by total equity), has increased from 15.2 per cent at end March 2006 to 15.8 per cent at the end of March 2007. A burgeoning economy, financial sector reforms, rising foreign investment, favourable regulatory climate and demographic profile has led to India becoming one of the fastest growing banking markets in the world. The overall banking industry's business grew at a CAGR of about 20 per cent from US$ 469.4 billion as of March 2002, to US$ 1171.29 billion by March 2007. Aggregate bank deposits of banks increased by US$ 129.26 billion (22.1 per cent) at the end of March 2007 over the corresponding in 2006. In the current fiscal, aggregate bank deposits increased by 23.8 per cent, year-on-year, as of January 4, 2008 as against 21.5 per cent a year ago. While aggregate demand deposits increased by 15.6 per cent, aggregate time deposits increased by 25.3 per cent in the same period, indicating migration from small savings schemes of the Government. Similarly, aggregate deposits of the scheduled commercial banks (SCB), after growing by 17.8 per cent and 24.6 per cent in 2005-06 and 2006-07, rose by 25.2 per cent, year-on-year, as on January 4, 2008. In fact, the absolute increase of US$ 96.34 billion (14.6 per cent) in the current fiscal year up to January 4 2008, was higher than the US$ 70.59 billion (13.2 per cent) increase in the same period last year. Simultaneously, loans and advances of SCBs rose by over 30 per cent (i.e. 33.2 per cent in 2004-05, 31.8 per cent in 2005-06 and 30.6 per cent in 2006-07) in the last three financial years, underpinned by the robust macroeconomic performance. The growth has continued in the current fiscal with non-food credit by SCBs increasing by 22.2 per cent, year-on-year, as on January 4, 2008. Significantly, the asset quality of the banks has also improved over this period. The gross non-performing assets (NPA) as a per cent of total assets
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have declined from 4 per cent as of March 2002 to 1.46 per cent as of March 2006. Simultaneously, the capital adequacy ratio of all SCBs has improved from 11.1 per cent as of March 2002 to 12.3 per cent by March 2007. 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 fulfil 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.
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But it is opposed on the front that it will lead to state run insurers loosing business and workers their job. Left does 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 1. Innovative Financial Products 2. Technical Developments in the Foreign Markets 3. Problem of Inefficient Management 4. Non-performing Assets 5. Financial Instability 6. Poor Capitalization 7. 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 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
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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 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 (e.g. 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. 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. Cumulative foreign investment flows have amounted to US & 106 billion since 1990-91 and almost evenly balanced between direct invest flows (US & 49bn) and portfolio flows (US & 57bn). 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.
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Upcoming Foreign Banks in India

By 2009 few more names is going to be added in the list of foreign banks in India. This is as an aftermath of the sudden interest shown by Reserve Bank of India paving roadmap for foreign banks in India greater freedom in India. Among them is the world's best private bank by Euro Money magazine, Switzerland's UBS. The following are the list of foreign banks going to set up business in India

Royal Bank of Scotland Switzerland's UBS US-based GE Capital Credit Suisse Group Industrial and Commercial Bank of china.
Merrill Lynch is having a joint venture in Indian investment banking space -- DSP Merrill Lynch. Goldman Sachs holds stakes in Kotak Mahindra arms. GE Capital is also having a wide presence in consumer finance through GE Capital India. India's GDP is seen growing at a robust pace of around 7% over the next few years, throwing up opportunities for the banking sector to profit from. The credit of banks has risen by over 25% in 2004-05 and the growth momentum is expected to continue over the next four to five years. Participation in the growth curve of the Indian economy in the next four years will provide foreign banks a launch pad for greater business expansion when they get more freedom after April 2009.
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FOREIGN BANKS IN INDIA
Foreign Banks operating in India are banks of other countries having their branches in India. At present, there are about 50 foreign banks having a total of more than 250 branches in most of the big cities of the country. These foreign banks have a flourishing business and earn large profits. Indian banks also have their branches in other countries and they too are doing well. . Some economists are of the view that foreign banks should not be allowed to operate in the country. But permission to such banks to operate in the country is unavoidable on the basis of reciprocity. This is certainly the view of the Reserve Bank of India, and it is justified by the success of Indian banks operating in foreign countries.
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Foreign Banks were established in India quite early during the British rule and have been around for over a century now. As a result of globalisation of Indian economy, the number of foreign banks is likely to increase in the coming years. The foreign banks are also called foreign exchange banks, as they also finance the foreign trade of India. Of late, a sort of competition has developed between various foreign banks and Indian commercial banks because the foreign banks, which previously dealt only in big money, have now also started performing the day-to-day banking functions, which were previously performed only by the Indian commercial banks. These day-to-day banking functions include acceptance of deposits, creation of credit by fixing lending rate in accordance with the RBI policies, etc. ANZ Grindlay Bank has its presence in a number of Indian cities with as many as 56 branches in the country. The Standard and Chartered Banks has 24 branches while Hong Kong Bank has 21 branches in various Indian cities. One peculiar feature of these foreign banks is that they concentrate on the corporate clientele and have specialised in areas of international banking.
There is no denying the fact that the foreign banks are playing a pivotal role in Indian economy. They help the economy by financing the import and export trade of the country. They also receive deposits from the public as fixed deposits and current account deposits. They also give roans and advances to the traders and businessmen. They also issue bank drafts, TTs cheques and Mail Transfers to the customers. Further, they also help in internal trade, by giving credit facilities to their customers for the procurement of raw materials for transporting goods between manufacturing and trade centres in the country. In this way, they are offering a stiff competition to the Indian commercial banks.
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Foreign banks have opened up several options for the developing countries to attain economic growth. The achievement of this objective has been made possible partly by foreign exchanges transactions. Like every other facility, the foreign banks also create both advantages and disadvantages. The advantage is that the foreign banks help finance exports and imports under letter of credit, the medium of D.A. Bills and D.P. Bills, and by promoting internal trade. In this way they help in earning foreign exchange. As the foreign banks have branches in almost all the other countries of the world, they are able to maintain business links with all those countries for various purposes. Thus, through these banks, Indian businessmen are also able to maintain their contacts with their counterparts in other countries. So far as standard of performance is concerned foreign banks are considered to be more efficient and more competent than their Indian counterparts. However, one great disadvantage of foreign banks is that their attitude towards Indian businessmen is discriminatory. These banks have more or less monopolized the financing of Indias external trade through which they earn large sums of money as commission or brokerage, etc. They also extend preferential treatment to foreign institutions in the matter of grant of loans and advances. They also charge excessive commission for the currencies of those countries which do not have their own bank branches in India. The Indian capital invested in these banks is misused in the sense that their capital, instead of being utilised for the benefit of Indian business, is used for the purchase of shares and bonds from road, thus diminishing the profit share of India. Foreign banks are required to obtain license from the Reserve Bank of India but the RBI has failed to exercise an effective control over these banks, with the result that these banks have acquired large amounts of money in the London money market, thus rendering the Indian money market ineffective. Under the provisions of Banking Companies Act of 1949, foreign banks are required to keep in India as least 75 per cent of their Demand and Time Deposits in such assets as eligible Bills or Promissory Notes. However, the problem for us is how to regulate the functioning of these banks so as to make them function more effectively in the interest of the development needs of the country. There is urgent need to make both structural as well as functional adjustments so as to fulfil the needs of the dynamic Indian economy. The guidelines issued by the Reserve Bank in this behalf lay down that all banks should be required to have a reasonable minimum reserve in the form of cash or deposits; the number of financial institutions should be kept as small as possible, effective control should be maintained over the foreign banks; foreign banks should be compelled to sell their shares in India and the like. In terms of efficiency, proficiency, profitability, productivity, etc., the top nine banks in the country are the foreign banks. These banks may be having a small number of branches, but they enjoy a sizeable presence in the non-fund business and are earning huge profits. In the days to come, the presence of foreign banks and new private banks in the country is sure to increase. During 1995-96, the deposits with the foreign banks increased by 10.2 per cent and their aggregate profit increased from Rs.
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632 Cr. in 1994-95 to Rs. 757 Cr. in 1995-96 and it has increase by around 200% in 2005-06. Thus foreign banks also playa significant role in the economic growth of the country. Capital formation is the foremost requirement of economic growth and foreign banks promote capital formation by encouraging savings and investments. They help the entrepreneurs to increase their productive capacity. It will thus be seen that the foreign banks have played a significant role in the growth of Indian economy during the post-Independence period. But at the same time, it is also a fact that in conditions of political and financial instability, especially in developing countries including India, foreign banks, with their vast resources and political influence abroad, can hold the national currencies and economies to ransom. The banking scams of the Harshad Mehta fame could not have been made possible without the manipulation of foreign banks operating within the country. The Indian commercial banks have neither the resources nor the freehand to finance such gigantic and scandalous transactions and deals. In the East-Asian countries also, when the foreign banks found the national economies in a state of confusion, they played havoc with the economies of the host countries by suddenly withdrawing huge amounts of money from the national economies thereby engineering economic disasters in those countries. Foreign banks are very helpful in the development of India. It is necessary and desirable for us to maintain and encourage foreign banks in India to promote investments and finance international trade. But we should utilize their loans properly in the productive way as after economic development we have to repay their loans in time. It is equally important to exercise strict vigilance and control over their activities lest they should create another Indonesia or Thailand in India.
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Chapter
APPLICATIONOFTECHNOLOGIES
6.1 e-banking
Introduction The Internet banking is changing the banking industry and is having the major effects on banking relationships. Even the Morgan Stanley Dean Witter Internet research emphasized that Web is more important for retail financial services than for many other industries. Internet banking involves use of Internet for delivery of banking products & services. It falls into four main categories, from Level 1 - minimum functionality sites that offer only access to deposit account data - to Level 4 sites - highly sophisticated offerings enabling integrated sales of additional products and access to other financial services- such as investment and insurance. In other words a successful Internet banking solution offers Exceptional rates on Savings, CDs, and IRAs Checking with no monthly fee, free bill payment and rebates on ATM surcharges Credit cards with low rates Easy online applications for all accounts, including personal loans and mortgages 24 hour account access Quality customer service with personal attention
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Drivers of Change Advantages previously held by large financial institutions have shrunk considerably. The Internet has leveled the playing field and afforded open access to customers in the global marketplace. Internet banking is a cost-effective delivery channel for financial institutions. Consumers are embracing the many benefits of Internet banking. Access to one's accounts at anytime and from any location via the World Wide Web is a convenience unknown a short time ago. Thus, a bank's Internet presence transforms from 'brouchreware' status to 'Internet banking' status once the bank goes through a technology integration effort to enable the customer to access information about his or her specific account relationship. The six primary drivers of Internet banking includes, in order of primacy are: Improve customer access Facilitate the offering of more services Increase customer loyalty Attract new customers Provide services offered by competitors Reduce customer attrition
Foreign Banks On Web The banking industry in India is facing unprecedented competition from non-traditional banking institutions, which now offer banking and financial services over the Internet. The deregulation of the banking industry coupled with the emergence of new technologies, are enabling new competitors to enter the financial services market quickly and efficiently. Indian banks are going for the retail banking in a big way. However, much is still to be achieved. This study which was conducted by students of IIML shows some interesting facts: Throughout the country, the Internet Banking is in the nascent stage of development (only 50 banks are offering varied kind of Internet banking services).
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In general, these Internet sites offer only the most basic services. 55% are so called 'entry level' sites, offering little more than company information and basic marketing materials. Only 8% offer 'advanced transactions' such as online funds transfer, transactions & cash management services.
Foreign & Private banks are much advanced in terms of the number of sites & their level of development.
Emerging Challenges Information technology analyst firm, the Meta Group, recently reported that "financial institutions who don't offer home banking by the year 2000 will become marginalized." By the year of 2002, a large sophisticated and highly competitive Internet Banking Market will develop which will be driven by Demand side pressure due to increasing access to low cost electronic services. Emergence of open standards for banking functionality. Growing customer awareness and need of transparency. Global players in the fray, close integration of bank services with web based Ecommerce or even disintermediation of services through direct electronic payments (ECash). More convenient international transactions due to the fact that the Internet along with general deregulation trends eliminates geographic boundaries. Move from one stop shopping to 'Banking Portfolio' i.e. unbundled product purchases.
Certainly some existing brick and mortar banks will go out of business. But that's because they fail to respond to the challenge of the Internet. The Internet and its underlying technologies will change and transform not just banking, but all aspects of finance and commerce. It represents much more than a new distribution opportunity. It will enable nimble players to leverage their brick and mortar presence to improve customer satisfaction and gain share. It will force lethargic
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players who are struck with legacy cost basis, out of business-since they are unable to bring to play in the new context.
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Chapter
COMPETITION
7.1 Competition with Domestic Bank
Indian banks are outperforming their counterparts in Asia and the rest of the world in crucial parameters, according to two new surveys on the Indian banking system. The Indian banking market is growing at an "astonishing rate", with assets expected to reach US$1 trillion by 2010, declared one of the surveys "Overview of Indian Banking Market" by Celent, a Boston-based financial research and consulting firm. An expanding economy, a more prosperous 320 million-strong middle class and technological upgrades are feeding this growth, according to the 44-page Celent report released on December 12. The Celent findings come in the wake of a comprehensive survey of the Indian banking system by global consulting firm McKinsey Personal Finances Services, which put a global perspective on Indian banking. The survey studied how traditional government-owned Indian banks measured up to competition from new private and foreign banks across various parameters - ranging from customer satisfaction, profitability, innovation and managerial skills to cope with emerging challenges. The McKinsey survey profiled 13,000 customers in 12 Asian markets, of which it covered 5,300 in India in both urban and rural areas with interviews and 150 questions. It covered 14 leading banks in India - seven public sector banks, four private sector banks, and three foreign banks. "The Indian banking sector has grown at a CAGR [compound annual growth rate] of 24% from 2001 to 2006," Prathima Rajan, author of the Celent report, told Asia Times Online. She said she expects Indian banks to reach the $1 trillion by 2010. "Total assets of the Indian banking sector as of the end March 2006 were $602 billion," she said. Rajan said the pan-Asian and global implications on the phenomenal growth of Indian banking will cut both ways: more foreign
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banks entering India as well as domestic Indian banks expanding to overseas markets. "Overall global banks will see more competitors with diversified products and services," she said. Twenty-nine foreign banks presently operate in India, with approximately 268 offices across the country, according to the Reserve Bank of India (RBI) annual report for the year ending June 2007. Standard Chartered has the largest presence with 87 offices, followed by HSBC with 47, Citibank 39 and ABN Amro with 28 offices in India. Thirty-four other foreign banks run Indian operations through representative offices. "Although the Indian banking sector is growing at an impressive rate, the industry should target having a small number of large players that can compete globally rather than having a large number of fragmented players," Dana Lautin of Celent's New York office told Asia Times Online, quoting the Celent report. "Currently the State Bank of India is the only bank that is among the top 100 banks globally." Realizing the importance of having a global presence, Indian banks are turning to mergers and acquisitions to "take advantage of economies of scale and/or to comply with the Basel II Capital Accord", said the Celent report. The Basel II accord of 2004 sets an international standard for banking regulators to manage capital reserves against market risks, the aim being to protect global financial systems from domino effects such as when a major bank collapses. India has been "quite generous and not merely liberal" with foreign banks, V Leeladhar, deputy governor of the regulator RBI said at the Bankers' Conference 2007 in Mumbai on November 26. Leeladhar said that India's licensing and operational guidelines for foreign banks were generous by both global and World Trade Organization standards. In association with the Indian Banks Association, the McKinsey report titled "India Banking: Towards Global Best Practices, Insights from Industry Benchmarking Surveys" surveyed 13,000 customers in 12 Asian markets, including 14 leading banks in India, covering both urban and rural areas. The McKinsey report said that the customer satisfaction level with financial institutions in India is the highest in Asia. "However, it is significantly lower in the metros," it observed. Dubbing foreign and private banks as "attackers" and the traditional government-owned Indian banks as "legacy banks", the report concluded that customer satisfaction was higher with the older Indian banks.
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"Customers of newer banks have experienced higher negative moments of truth relative to legacy banks," McKinsey said in a statement to the media while releasing the report. However, the McKinsey findings contrast with the RBI, which slammed Indian banks, saying that the quality of service has deteriorated badly since June 2006. A December 10 report in the financial daily Livemint, published in association with Wall Street Journal, claimed a 500% surge in complaints against banks in the period between July 2006 and June 2007, increasing from 34, 499 complaints in this period compared to 5,772 complaints in the previous 12 months. The RBI report said that it registered 8,597 complaints against India's largest bank, the stateowned State Bank of India, 5,048 complaints against the largest private sector bank ICICI and 1,182 complaints against Citibank. The complaints were filed with the RBI. Government-owned banks - referred to as "public sector banks - banks have seen the most increase in complaints, according to RBI. The number of complaints against public sector banks increased 537%. New private banks that began operations in the mid-1990s had a 525% increase in complaints against them. Foreign banks suffered a 332% rise in complaints against their services. The RBI figures are an indicator to banking customer base in India growing disproportionately to customer service infrastructure. "Indian banks achieved the highest growth in the region and have maintained high profitability," concluded the McKinsey report, and said that India's older banks scored better over foreign and private banks in retail banking deposits, a key to retail banking profitability. "In fact, incumbent banks enjoy a staggering ROE [return on equity] of about 33% on their retail banking portfolios," said the 38-page McKinsey report. "Attackers on the other hand are investing heavily in building large scale retail franchises." The McKinsey report also said that Indian banks had the highest pre-tax ROE in Asia for the financial year 2006. India had 17.9% ROE, compared to Malaysia with 16.3%, China with 15.1%, Thailand following with 9.1%. But India's older banks suffer badly in the skills parameter, compared to newer banks, and that is bad news for their future. "The survey shows that the extent of the problem is acute and crippling for these banks," said the McKinsey report. Renny Thomas, a partner with McKinsey, told Reuters news agency that the Indian government's goal to make banking more accessible to the poor would by itself require around 500,000 more managers.
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Both the McKinsey and Celent report agreed that India offers massive untapped banking market potential, particular among the rural middle class, saying that over 50% of the banking market is still to be harvested. The RBI annual report also underlined the need for banks in India to service rural areas. The Celent report pointed out that India's rural market is "more of an opportunity than a challenge, with the Indian rural market consists of 74% of the total population, of which 30% is consumer middle class with 58% of disposable income". Happily for the banking market, Indians rank among the highest savers in the world, saving as much as 32.4% of household incomes, according to McKinsey. "Household savings account for 69% of India's gross national savings, significantly more than in most countries."
In 2006, India compared favorably to France that had 55% of household savings in gross
national savings, China with 44%, Mexico 37%, Japan 24%, South Korea 20% with the US at the bottom with 16%. The Celent and McKinsey reports did not explain why household savings are so high in India. Two reasons could be that education of children and often painfully high wedding expenses in arranged marriages, particularly of daughters, are two primary middle class family responsibilities in India, and this will have influenced India's higher household savings percentage compared to the rest of the world. Traditionally, India is a conservative spending nation with a culture uncomfortable with flashy lifestyles, and with household savings an important aspect of domestic economics. Foreign banks in India already are achieving a return on assets of 3 percent, as against a 1 percent return for the world's biggest banks. So their eagerness to expand their businesses in India, by acquisition as well as organically, is understandable. Add into the equation that among Brazil, Russia, India and China - the BRIC economies - India is seen as the one having the greatest potential: an average annual growth rate of 8 percent over the last three years, bank credit growth of 30 percent a year and an expanding middle class of 250 million to 300 million people in need of financial services. The combination is clearly exciting.
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7.2 Competition within Foreign Bank
By 2009 few more names is going to be added in the list of foreign banks in India. This is as an aftermath of the sudden interest shown by Reserve Bank of India paving roadmap for foreign banks in India greater freedom in India. Among them is the world's best private bank by Euro Money magazine, Switzerland's UBS.
The following are the list of foreign banks going to set up business in India

Royal Bank of Scotland Switzerland's UBS US-based GE Capital Credit Suisse Group Industrial and Commercial Bank of China
Merrill Lynch is having a joint venture in Indian investment banking space -- DSP Merrill Lynch. Goldman Sachs holds stakes in Kotak Mahindra arms. GE Capital is also having a wide presence in consumer finance through GE Capital India. India's GDP is seen growing at a robust pace of around 7% over the next few years, throwing up opportunities for the banking sector to profit from. The credit of banks has risen by over 25% in 2004-05 and the growth momentum is expected to continue over the next four to five years. Participation in the growth curve of the Indian economy in the next four years will provide foreign banks a launch pad for greater business expansion when they get more freedom after April 2009. The share of foreign banks as a percentage of the assets of India's banking sector currently stands at around 49 per cent against the mandated World Trade Organisation requirement of just 15 per cent. However, the country has not put any restrictions on the entry of new foreign banks, since it wants a reciprocal gesture as Indian banks increasingly are plan to expand overseas. RBI Deputy Governor, V Leeladhar, in his speech at the annual Bankers' Conference 2007 here today, said the RBI has not autonomously invoked the WTO commitment to deny licences to new foreign foreign banks, seeking to dispel the impression that the Indian central bank was restricting the growth of foreign banks.
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The market share of foreign banks in the Indian commercial banking system at end-June 2007 in deposits and advances stood at 6.11 and 6.83 per cent, respectively. However, foreign banks were far more dominant in the off-balance sheet business with a market share of as high as 72.66 per cent. Besides foreign banks, there are also two large Indian private sector banks in which the nonresident ownership is very close to 74 per cent permitted, which could therefore be considered as incorporated in India but predominantly foreign-owned banks. These banks, together with the foreign banks, have a combined market share in the country in the deposits, advances and off-balance-sheet business of 17.46, 18.65 and 76.63 per cent respectively, which, by no means, are insignificant levels. Furthermore, the share of foreign banks in the foreign exchange market in India is also significant and has registered a rising trend. For instance, as against their share of 41 per cent in the total foreign exchange turnover during 2005-06, their share during the first half of 200708 stood at 52 per cent. Thus, viewed in totality, it would be extremely difficult to justify the notion that the foreign and non-resident participation in the Indian banking market is insignificant or restricted and that the policy or regulatory environment is not conducive to it, explained Leeladhar. He said the facts indicate that the regulatory regime followed by the RBI in respect of foreign banks is non-discriminatory, and is, in fact, very liberal by global standards, a statement seen as an indication of what's likely to emerge from a review the central bank is scheduled to undertake in 2009 as part of its roadmap for presence of foreign banks in India. The roadmap had said the RBI would consider granting local branch status for subsidiary banks in India of foreign banks and also stipulate listing of such subsidiaries, but after a review to be undertaken on the situation prevailing then. Dwelling on why the RBI considers feelings in certain quarters that foreign banks are being discriminated against are unfounded, Leeladhar said India issues a single class of banking licence to foreign banks and does not require them to graduate from a lower to a higher category of banking licence over a number of years, as is the practice followed in certain other jurisdictions. Also, the single class of licence places them virtually on the same footing as an Indian bank and does not place any restrictions on the scope of their operations.
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Thus, a foreign bank can undertake, from the very first day of its operations, any or all of the activities permitted to an Indian bank and all foreign banks can carry on both retail as well as wholesale banking business. This is in contrast with practices in many other countries. In addition, no restrictions have been placed on establishment of non-banking financial subsidiaries in India by the foreign banks or of their group companies. Unlike some of the countries where overall exposure limits have been placed on the foreigncountry related business, India has not placed any restriction on the kind of business that can be routed through the branches of foreign banks. This has been advantageous to the foreign bank branches as the entire home-country business is generally routed through these branches. Substantial FII business is also handled exclusively by the foreign banks. Seeking to expand their presence in the world's second-fastest growing major economy and benefit from low-cost opportunities in IT enabled back-end operations, foreign banks are increasingly going bullish with their headcount expansion plans in India, an industry observer said. Together with Barclays-ABN Amro, about a half a dozen foreign banks such as Citigroup, HSBC and Standard Chartered could hire over 50,000 employees in India in the next three years. These would be across various operations, including back-end jobs, to be moved from high-cost developed countries.
State Bank of India (SBI) (BSE: 500112, LSE: SBID) is the largest banking and financial services company in India, by almost every parameter - revenues, profits, assets, market capitalization, etc. The bank traces its ancestry to British India, through the Imperial Bank of India, to the founding in 1806 of the Bank of Calcutta, making it the oldest commercial bank in the Indian Subcontinent. The Government of India nationalized the Imperial Bank of India in 1955, with the Reserve Bank of India taking a 60% stake, and renamed it the State Bank of India. In 2008, the Government took over the stake held by the Reserve Bank of India.
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SBI provides a range of banking products through its vast network of branches in India and overseas, including products aimed at NRIs. The State Bank Group, with over 16,000 branches, has the largest banking branch network in India. With an asset base of $260 billion and $195 billion in deposits, it is a regional banking behemoth. It has a market share among Indian commercial banks of about 20% in deposits and advances, and SBI accounts for almost one-fifth of the nation's loans. SBI has tried to reduce over-staffing by computerizing operations and "golden handshake" schemes that led to a flight of its best and brightest managers. These managers took the retirement allowances and then went on to become senior managers in new private sector banks. The State bank of India is the 29th most reputed company in the world according to Forbes. State Bank of India is the largest of the Big Four Banks of India, along with ICICI Bank, Axis Bank and HDFC Bank its main competitors.
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Chapter
CHALLENGES AND FUTURE ASPECTS
8.1 Challenges to Foreign Banks
The bar for what it means to be a successful player in the sector has been raised. Four challenges must be addressed before success can be achieved. First, the market is seeing discontinuous growth driven by new products and services that include opportunities in credit cards, consumer finance and wealth management on the retail side, and in fee-based income and investment banking on the wholesale banking side. These require new skills in sales & marketing, credit and operations. Second, banks will no longer enjoy windfall treasury gains that the decade-long secular decline in interest rates provided. This will expose the weaker banks. Third, with increased interest in India, competition from foreign banks will only intensify. Fourth, given the demographic shifts resulting from changes in age profile and household income, consumers will increasingly demand enhanced institutional capabilities and service levels from banks. The interplay between policy and regulatory interventions and management strategies will determine the performance of Indian banking over the next few years. Legislative actions will shape the regulatory stance through six key elements: industry structure and sector consolidation; freedom to deploy capital; regulatory coverage; corporate governance; labour reforms and human capital development; and support for creating industry utilities and service bureaus. Management success will be determined on three fronts: fundamentally upgrading organizational capability to stay in tune with the changing market; adopting value-creating M&A as an avenue for growth; and continually innovating to develop new business models to access untapped opportunities. Through these scenarios, we paint a picture of the events and outcomes that will be the consequence of the actions of policy makers and bank managements. These actions will have dramatically different outcomes; the costs of inaction or insufficient action will be high. Specifically, at one extreme, the sector could account for over 7.7 per cent of GDP with over Rs... 7,500 billion in market cap, while at the other it could account for just 3.3 per cent of GDP with a market cap of Rs. 2,400 billion. Banking sector intermediation, as
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measured by total loans as a percentage of GDP, could grow marginally from its current levels of ~30 per cent to ~45 per cent or grow significantly to over 100 per cent of GDP. In all of this, the sector could generate employment to the tune of 1.5 million compared to 0.9 million today. Availability of capital would be a key factor the banking sector will require as much as Rs. 600 billion (US$ 14 billion) in capital to fund growth in advances, non-performing loan (NPL) write offs and investments in IT and human capital up gradation to reach the high-performing scenario. In this scenario, policy makers intervene only to the extent required to ensure system stability and protection of consumer interests, leaving managements free to drive far-reaching changes. Changes in regulations and bank capabilities reduce intermediation costs leading to increased growth, innovation and productivity. Fifth, competent staff can be found easily. A populated country with a high percentage of educated, competent and English-speaking labor, including technicians and engineers, can be found without much difficulty and at reasonable wage rates.
8.3 R & D Activities

Internet banking The Internet banking is changing the banking industry and is having the major effects on banking relationships. Even the Morgan Stanley Dean Witter Internet research emphasized that Web is more important for retail financial services than for many other industries. Internet banking involves use of Internet for delivery of banking products & services. It falls into four main categories, from Level 1 - minimum functionality sites that offer only access to deposit account data - to Level 4 sites - highly sophisticated offerings enabling integrated sales of additional products and access to other financial services- such as investment and insurance. Credit Cards and Smart Cards Over the years, credit cards have become one of the most common forms of payment for ecommerce transactions. In the early years of B2C, many consumers were apprehensive of using their credit cards over the internet because of fear that their credit card numbers would get
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stolen. However, due to increased security with credit card companies such as VISA, American Express, and MasterCard there is widespread use of credit card use over the internet, especially in North America. Electronic funds transfer Electronic funds transfer or EFT refers to the computer-based systems used to perform financial transactions electronically. The term is used for a number of different concepts: Cardholder-initiated transactions, where a cardholder makes use of a payment card. Electronic payments by businesses, including salary payments. Electronic check (or cheque) clearing.
E-CRM or Web based CRM Self Service CRM Self service CRM (e-CRM) software Enables web based customer interaction, automation of email, call logs, web site analytics, campaign management. Survey Management Software Survey Software automates an enterprise's Electronic Surveys, Polls, Questionnaires and enables understand customer preferences. Customer Service Call Center Software Help Desk Software
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Partner Relationship Management Contract Management Software Distribution management Software Outsourcing of Banking Activities: Challenges and Opportunities Outsourcing has become the latest mantra for companies to stay ahead of competitors in this highly competitive business environment. Banks too are not lagging behind in this. There has been a drastic change in the way banks operate in recent years. The growing competition in the banking sector has forced banks to outsource some of their activities to maintain their competitive edge. Of late Indian banks have also started outsourcing their non-core services to safeguard themselves from the increasing competition. The outsourcing services include maintaining of hardware and software, hosting, managing data centres, software application support, disaster management and management of ATM networks across the country. The article also opines that decision to outsource arises from the fact that many banks do not have the required human and personnel resources that can cater to these activities. Our decision to outsource was mainly on cost considerations and also the lack of expertise in maintaining the whole gamut of services of ATM facilities. D Krishnamurthy, GM (IT), Bank of India. Outsourcing has become the latest mantra for companies to stay ahead of competitors in this highly competitive business environment. Banks too are not lagging behind in this latest mania. There has been a drastic change in the way banks operate in recent times. The increasing competition in the banking sector has forced banks to protect their eroding margins by retaining their customers by providing value-added services through outsourcing. Outsourcing helps in attaining strategic objectives by reducing cost and increasing the efficiency through the unburdening of the non-core service activities. In effect, the outsourcing of banking activities is accelerating at a rapid pace. In order to have a competitive edge, banks have started outsourcing huge volumes of their non-core services. A recent study by Deloitte revealed that about $356bn worth of US financial services will be outsourced to offshore locations in the coming years. However, there are numerous risks involved in the process of outsourcing to a third party, as it requires a complete security mechanism to deal with the voluminous amount of data that they have with them. Relying too much on the third party may also lead to certain risks such as complying with regulations, loss# of control over the business, leakage of important data, etc.
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Challenges ahead
Selecting the right vendor is one of the most critical aspects for any bank because of the nature of complexities such as potential to transfer risk, management, and# compliance to third parties who may not be regulated, and who may operate offshore. Also, the legal contract should be approved after the quantification of benefits, which can be done by analyzing financial and infrastructure resources. The vendors domain knowledge about a particular industry is important for customizing its IT requirements. It is because reliable service, timely delivery, data privacy and security, and adherence to quality, are of strategic importance to banks while looking for outsourcing partners. The major concern for banks is security. Securityphobia is more perceived in public-sector banks. Risks such as ineffective service, service providers acquiring knowledge of the banking system and misusing it for other benefits, are always there. Recently in India, some employees of a UK-based BPO Company stole the passwords of that particular firms customers and misused it. Relying too much on the third party can also lead to leakage of confidential information of clients. Such leakage can result in severe damage to the banks reputation. Banks should also have realistic expectations from service providers because overestimation of the economic benefits can put single service providers in trouble. To cope with the challenges, RBI has proposed that the board of directors must be held responsible for the outsourcing policy as well as activities undertaken by a bank. Meanwhile, the government and the banking industry are taking proper initiatives to curb unethical practices of misusing data collected by making and amending cyber laws. To curb the lacunae in the existing outsourcing operations, RBI is going to formulate a policy of check and balance for each bank by seeking approval of its board on outsourcing. These regulatory norms will cover operational risk and data security related to outsourcing. Future Outlook Outsourcing in the financial sector is in its nascent stage, but it has a promising and bright future ahead. To make the outsourcing industry more vibrant and competitive and to overcome the issues associated with it, proper participation is required from the government, academic, and industry sectors. For IT, banking is considered to be the second largest segment, next to manufacturing. So, there is a huge potential for the third party outsourcing service providers in the banking segment. More and more banks are embracing this growing trend of outsourcing to stave off competition. Indian companies need to capitalize on the size of their economy and growth potential, besides leveraging their strong IT infrastructure and cheap labour. The government has to speed up its infrastructure development efforts to maintain the momentum
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of growth in the outsourcing industry. Besides, the industry and regulators the government should draft proper data privacy and security norms. The industry needs to move up the value chain, and infrastructure bottlenecks and data security issues must be resolved. All these measures will help the banking industry to unleash its full potential for outsourcing.
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Chapter
7
Definition:
SWOT ANALYSIS
SWOT is an abbreviation for Strengths, Weaknesses, Opportunities and Threats. SWOT analysis is an important tool for auditing the overall strategic position of a business and its environment. Once key strategic issues have been identified, they feed into business objectives, particularly marketing objectives. SWOT analysis can be used in conjunction with other tools for audit and analysis, such as PEST analysis and Porter's Five-Force analysis. It is also a very popular tool with business and marketing students because it is quick and easy to learn. The Key Distinction Internal and External Issues
Foreign Banks has a several powerful strengths on which to build, but our major weakness is the lack of brand awareness. The major opportunity is growing demand for small cities that delivers quick solution to the banks better than the traditional utilities. There are many threats that can pull Foreign Banks down. External Environment (Opportunities & Threats) Analysis A business unit has to monitor key microenvironment forces (Demographic-economic, natural, technological, political, legal, and socio-cultural) and significant microenvironment factors (customers, competitors, suppliers, distributors, dealers etc) that affects its profit earning ability. The business unit should set up a marketing intelligence system (MIS) to track trends and important developments. For each trend or development, management needs to identify the associated
opportunities and threats.
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A major purpose of environmental scanning is to discern new opportunities. In many ways, good marketing is the art of finding, developing and profiting from opportunities. A marketing opportunity is an area of buyer need and interest in which there is a higher probability that a company can profitably satisfy that needs. There are three main sources of market opportunities a. To supply something that is in short supply. b. To supply an existing product is a new or superior way. c. To supply a totally new product.
Some developments in the external environment represent threats. A threat is a challenged posed by an unfavorable trend and development that would leads, in the absence of defensive marketing plan, to lower sale or profit. Threats should be classified according to the seriousness and frequency of occurrence. Opportunities The followings are the major opportunities for Foreign Banks India in the banking sector, 1. Increasing Demand: Most of the Indian market segments are still a virgin market because of the stereotypes. Now that the middle class Indian are increasing this stereotype is breaking may be because of the lack of time. 2. Hybrid products: A company may benefit from converging industry trends and introduce hybrid product that are new to market. For example: saving A/c with Insurance. 3. E-Commerce: The Company can make the buying process more convenient and efficient. Example: Use of Internet to find more books than ever and search for the lowest price with a few clicks. 4. 5. 6. Customization: The Company can suggest the buyer on its requirement. Delivery: The Company can deliver the product faster. After- sale Service: The only way to survive in any sector is to provide better after-sale service.
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Threats These are the major threats that Foreign Banks have to face in banking sector, 1. Increased Competition: The players in the Indian banking market are well established. And the brand awareness is also too big as compared to Foreign Banks. 2. Downward pressure on Pricing: The competition and market share strategy is leading to a fall in price of banking products. 3. Compressed PLC: Every day technology is changing and the introduction of new hybrid products is squeezing the product life cycle. For example: Banc assurance, credit card, smart card, debit card etc.
Internal Environment (Strength / Weakness) Analysis: It is one thing to find attractive opportunities and another to be able to take advantage of them. Each business needs to evaluate its internal strengths and weaknesses.
Strengths The following are the major strengths of Foreign Banks in India, 1. Product Quality: As a global giant it has got better-experienced workforce to give an edge over the other competitors. 2. Distribution Effectiveness: As a big company it can easily expand its distribution channels to capture greater geographical area. 3. Product Innovativeness: Because of a global presence Foreign Banks has got the aegis of a strong R&D department to provide it with latest models of products to cater the mass. 4. Promotion Effectiveness: With a strong sales force which grows too many associates, promoting its product will not be a big deal for Foreign Banks. 5. Sales Force Effectiveness: A global sales force of thousands is enough to reach the mass of any nation.
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6.
Facilities: Foreign Banks with 240 subsidiaries, presence in about 100 countries around the globe, 110-design center, etc has got best facilities in the world.
7.
Economies of Scale: As a big company Foreign Banks can easily achieve economies of scale through volume production.
8.
Able, Dedicated Work Force: A work force of 50000 globally can be the best asset for any enterprise.
9.
Ability to produce on time: A globally recognized work force equipped with highly advance technology makes Foreign Banks a big competitor for any company.
10.
Flexibility: with a product mix of about 96 categories Foreign Banks has got the flexibility to invade the Indian small appliances market space.
Weaknesses The following are the loopholes in the foreign banks, 1. Brand Awareness: Foreign Banks India is been launched in India in 1990s, just around 20 years back and establish themselves very slowly. So most of the Indian dont have any idea about the products, their quality and price. 2. Lack of good associates: As a new company retailer hesitate to keep Foreign Banks banking products. 3. Pricing: Unlike most of the Chinese company Foreign Banks product are of premium range, which may goes against Foreign Banks. 4. Geographical coverage: As a startup company Foreign Banks presence is not felt outside metros.
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Chapter
CONCLUSION
Foreign Banks in India always brought an explanation about the prompt services to customers. After the set up foreign banks in India, the banking sector in India also become competitive and accretive. India is expected to find a place in the strategy of these banks given the country's growth prospects. There have been cases of foreign banks closing shops in India too. India's GDP is seen growing at a robust pace of around 7 per cent over the next few years, throwing up opportunities for the banking sector. Participation in the growth curve of the Indian economy in the next four years will provide foreign banks a launch pad for greater business expansion when they get more freedom after few years. The presence of foreign banks does not imply negligence of particular sectors of the economy. In India, foreign banks are required to comply with priority sector lending norms, where the commitments are lower than those applicable to domestic banks under a tailor-made structure suitable to them. At present, there are 34 foreign banks operating in India with a network of 273 branches and 871 off-site ATMs. The facts indicate that the regulatory regime followed by the RBI in respect of foreign banks is non-discriminatory, and is, in fact, very liberal by global standards. Foreign banks constantly evaluate the political, economic and financial climate in financial markets and vary their investment/lending decisions. In India, foreign banks account for only around 8% of the total assets of the banking system. Further, domestic households are not allowed to place deposits abroad. Similarly, conditions for accessing overseas capital markets by domestic corporate have been stringent, in terms of size, maturity, pricing, etc. The impact of the entry of foreign banks on domestic banks is likely to depend on various factors such as the structure, strength and competitiveness of domestic banks, the share of foreign banks, and the regulatory/supervisory framework. While the entry of foreign banks could definitely improve the competitive environment, they are not likely to weaken domestic banks. With better technology and expertise in offering specialized banking products such as derivatives, advisory services, trade finance, etc, the entry of foreign banks can enhance healthy competition and has a positive spill over effect on the domestic banks. The domestic banks would be under peer pressure to improve operational efficiency. It needs,
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however, to be recognized that the banking system in India is quite competitive with the presence of public, private and foreign banks. India has come a long way from its inward-looking economic strategy of over 50 years ago. Economic liberalization and the gradual opening up to the world have boosted growth and lifted millions of people out of poverty. This paper argues that the continuation of the reform process will allow India to stay on a high growth path of roughly 6% per year on average over the next 10 to 15 years. If reforms were pursued more aggressively, real GDP growth could reach 7%-8% per year. India will thus become the fastest growing economy out of 34 developed and emerging markets during that period and the worlds third largest economy by 2020. Moreover, its GDP per capita will double, from roughly USD 2,500 today (at purchasing power parity) to almost USD 5,000 in 2020. Favourable demographics, increasing investment in education and infrastructure and further integration with the world economy are the factors behind our projections. British banking giant Barclays' plan to shift thousands of jobs to India is the latest in a series of such decisions by European and American banks that are expected to hire more than 50,000 professionals in the country over the next three years. The combined headcount of ABN Amro and UK's Barclays Plc is set to expand by up to 10,000 employees in India following the $91 billion takeover of the Dutch banking major. Together with Barclays-ABN Amro, about a half a dozen foreign banks such as Citigroup, HSBC and Standard Chartered could hire over 50,000 employees in India in the next three years. These would be across various operations, including back-end jobs, to be moved from high-cost developed countries. India has a population of just below 1.1bn today, the 2nd largest in the world after China, increasing at roughly 1.5% per year. Our model shows that while the growth rate is expected to moderate to around1.3% by 2020, India will still have the 2nd fastest population growth in our sample of 34 developed and developing economies. Importantly, India has a young population. As of 2002, roughly 33% of its population was below the age of 15 while only around 5% was above the retirement age of 65. This implies that over the next 10 to 15 years a big portion of the countrys population will be within the working age group, implying a significant increase in the supply of labour. Moreover, this advantage is likely to remain for a long period since the dependency ratio (i.e., the share of the population either younger than 15 or older than 64 years) will decline steadily in the coming years. Between 2003 and 2020, we estimate that India will be adding about 250 m workers to the labour pool. This means roughly 15 m on average
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per year. To put this into perspective, in two years, India would be adding all of Germanys labour force!
Foreign Banks has a several powerful strengths on which to build, but our major weakness is the lack of brand awareness. The major opportunity is growing demand for small cities that delivers quick solution to the banks better than the traditional utilities. There are many threats that can pull Foreign Banks down.
List of Foreign bank branches operating in India- Country-wise S.No. 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 Name of bank ABN AMRO Bank Abu Dhabi Commercial Bank Ltd. Arab Bangladesh Bank Ltd. American Express Bank Ltd. Antwerp Diamond Bank N.V. Bank International Indonesia Bank of America Bank of Bahrain & Kuwait BSC Bank of Nova Scotia Bank of Tokyo- Mitsubishi Ltd. BNP Paribas Bank of Ceylon Barclays Bank Plc. Calyon Bank Citi Bank N.A Shinhan Bank Chinatrust Commercial Bank Deutsche Bank Branches in India 28 2 1 7 1 1 5 2 5 3 8 1 4 5 39 2 1 11
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19 20 21 22 23 24 25 26 27 28 29
DBS Bank Ltd. HSBC J.P.Morgan Chase Bank N.A Krung Thai Bank Public Co.Ltd. Mizuho Corporate bank Ltd. Mashreq bank PSC. Oman International Bank SAOG Standard Chartered Bank (SCB) Sonali Bank Societe Generale State Bank of Mauritius
2 47 1 1 2 2 2 83 2 2 3
In the foreign exchange market, these banks had a 41 per cent share in the total forex turnover in 2005-06 and this rose to 52 per cent in the first half of 2007-08. Another dimension of the foreign banks' functioning in India is the returns generated from their Indian operations. The net profit per branch for foreign banks in India for the year 2005-06 was Rs 11.99 Cr. (Rs 119.9 million) as against the corresponding figure of Rs 0.33 Cr. (Rs 3.3 million) for PSBs. Further, for the year 2006-07, the Return on Assets (ROA) of foreign banks was 1.65 per cent while the Return on Equity (ROE) was 14.02 per cent, as against the corresponding figures of 0.82 per cent and 13.62 per cent for PSBs. Domestic banks account for 92% of total banking assets in India. Given the size of the country and the policy to ensure that foreign banks. Market share does not exceed 15%, domestic banks are likely to dominate the banking markets.
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Chapter
09
Books: i. ii.
BIBLOGRAPHY
The lists of reference for the purpose of completing this Final project are as given below:
Author (Kotler Philip and Keller Kelvin) Marketing Management, 12th edition, Pearson Publication, 2006, Random Pages.
Internet: i. ii. iii. iv. v. vi. vii. viii. ix. x. xi. Journals: Reserve Bank of India. Annual Report (various Issues), RBI: Mumbai Reserve Bank of India. Report on Trend and Progress of Banking in India (various years), RBI: Mumbai www.Tutor2u.com/Marketing www.hsbc.com www.standardchartered.com www.citibank.co.in www.rbi.gov www.db.com www.adcbindia.com www.chinatrust.com.tw www.bnpparibas.com www.scotiabank.com www. google. Com
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FINAL PROJECT REPORT ON

GROWTH OF FOREIGN BANK IN INDIA AFTER 1995

THE INDIAN INSTITUTE OF PLANNING & MANAGEMENT

SUBMITTED TO: Amir Hossain

The Indian Institute of Planning & Management

ISBE-B (SS 10-12)

The Indian Institute of Planning & Management

ISBE-B (SS 10-12)

The Indian Institute of Planning & Management

Subject From To Cc Sent

PROJECT THESIS TOPIC APPROVAL

ISBE B (SS 10-12 ) Project thesis topic approval

e-mail: projectthesis1012@gmail.com ISBE-B (SS 10-12)

The Indian Institute of Planning & Management

ISBE-B (SS 10-12)

The Indian Institute of Planning & Management

ISBE-B (SS 10-12)

The Indian Institute of Planning & Management

1.1 Overview of Banking Sector in India

The Indian Institute of Planning & Management

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The Indian Institute of Planning & Management

1.3 Changing Scenario since Liberization

The Indian Institute of Planning & Management

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The Indian Institute of Planning & Management

FOREIGN BANKS IN INDIA

2.1 Entry in India

The Indian Institute of Planning & Management

The Indian Institute of Planning & Management

The Indian Institute of Planning & Management

2.2 Strategic Alliance with Indian Banks

The Indian Institute of Planning & Management

ISBE-B (SS 10-12)

The Indian Institute of Planning & Management

ISBE-B (SS 10-12)

The Indian Institute of Planning & Management

The Indian Institute of Planning & Management

Foreign Banks In India

ISBE-B (SS 10-12)

The Indian Institute of Planning & Management

The Indian Institute of Planning & Management

ISBE-B (SS 10-12)

The Indian Institute of Planning & Management

GROWTH OF FOREIGN BANKS IN INDIA

3.1 Growth Rate in India

ISBE-B (SS 10-12)

The Indian Institute of Planning & Management

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The Indian Institute of Planning & Management

Source: Morgan Stanley Research

Growth in Foreign Banking Sector in India

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The Indian Institute of Planning & Management

The Indian Institute of Planning & Management

Source: Morgan Stanley Research

The Indian Institute of Planning & Management

Some of the efforts highlighted to increase this penetration level were:

ISBE-B (SS 10-12)

The Indian Institute of Planning & Management

Source: Morgan Stanley Research

The Indian Institute of Planning & Management

Source: Morgan Stanley Research