Entry of Foreign Banks in India Implemented in conjunction with other macroeconomic policy reforms, financial liberalization remains one

of the most controversial issues in economic literature. Financial liberalization is a process in which allocation of resources is determined by market forces rather than the state. It minimizes the role of the state in the financial sector by encouraging market forces to decide who gets and gives credit and at what price. Banking sector liberalization is an important component of financial liberalization. While making a strong case in favor of banking sector liberalization, its proponents claim that the entry of foreign banks in the poor and developing world is highly desirable and beneficial. 1 But recent empirical evidence suggests that the entry of foreign banks could lead to misallocation of credit, which in turn could negatively affect economic growth prospects as bank credit is a vital input for investment and growth. 2 Big foreign banks are not going to lend money to small and medium-sized enterprises (SMEs), small traders, informal sector and farmers. They tend to serve less risky businesses such as TNCs and big corporate groups. This has serious consequences for economic growth. In most countries, whether it is India, China, Japan, Germany or US, it is the SMEs (not big business) which are the backbone of economy. At present, the focus of the global banking industry appears to be on India and China, so it becomes important to analyze some of the recent developments taking place in these countries. Let us begin with India. Instead of liberalization pushing the opening of more bank branches in country, one finds that the trend is opposite. The total number of bank branches has declined, particularly in the rural areas (from 32939 in March 1997 to 32227 in 2004) in the post-liberalization period. 3 More importantly, the Indian banking sector has witnessed a secular decline in rural credit. The rural credit went down from 15.7 per cent in 1992 to 11.8 per cent in 2002. 4 So the entry of foreign banks has not led to increased rural credit. On the other hand, one finds that there is a growing interest among foreign banks to provide credit for non-essential items such as consumer goods. This situation could be gauged from the fact that car loans come cheaper than agricultural loans in India. In the post-liberalization period, one also finds that the lending to small and medium enterprises has declined from 15 per cent in 1991 to 11 per cent in 2003. 5 SMEs are the engines of Indias economic growth; together they contribute 40 per cent of Indias total production, 34 per cent of exports and are the second largest employer after agriculture. 6 The growing neglect of bank lending to SMEs can have adverse implications on economic growth and employment. In the case of China, the earlier strategy of limited financial liberalization has been turned upside down by WTO dictated timetables for rapid liberalization in the banking, securities and insurance sectors. 7 Several major concessions have been granted by China to foreign banks under the WTO deal. Foreign banks have been allowed to conduct all types of foreign exchange transactions with foreign clients immediately upon accession to the WTO in 2001 while there would be no geographical and client restrictions on foreign banks to operate in China by the year 2006. This would give a major boost to the foreign banks as they have been waiting to capture the banking markets of China, which have almost a trillion dollars in personal savings. In particular, foreign banks are going to

capture markets in those regions (e.g., coastal regions and cities) where bulk of banking business is concentrated. In China, big foreign banks such a Citigroup and HSBC have already made inroads into wealth market by targeting owners of foreign exchange, including local businessmen and expatriates, who have a minimum of US$50,000 in liquid assets. 8 According to banking industry estimates, the total liquid assets held by wealthy Chinese households (excluding those with less than $100,000) are set to nearly double to US$1606 billion by 2009, up from US$825 billion in 2004. No wonder, a number of global banks have lined up to tap local currency wealth business opportunities in China. Big banks such as HSBC and Citigroup would start fully licensed branches by the end of 2006 while Credit Suisse and UBS are expected to open several branches in the next two years. Given the fact that foreign banks have considerable international exposure and can launch new products (e.g., ATM, credit card, etc) besides providing better services, they are in an advantageous position to capture Chinas banking businesses. Foreign banks are also going to dominate the highly lucrative trade-related businesses. INTRODUCTION Banking system has a significant place in the nation. A banking institute is indispensable in a modern society. It is comparable to heart of the economic organism pumping in the savings and pumping out the investible funds in diverse channels. It forms the core of the financial system of a country. Although the financial system of India is still characterized by the existence of both the organized and unorganized segments, institutions in the organized financial system have grown significantly and are playing an increasingly important role. The unorganized sector comprises of the moneylenders and indigenous bankers catering to the credit needs of a large number of persons especially in the country side. Organized financial sector has a wide mixture which comprised of commercial banks, co-operative banks and the other institutions. Amongst the institutions in the organized sector, commercial banks are the oldest institutions having awide network of branches, commanding utmost public confidence and having the lions share in total banking system. Commercial bank plays a pivotal role in the economic development of a country. Economic development involves investment in the various sectors of economy. The banks collect saving from the people and moblise saving for investment in industrial projects. They are simple business or commercial concerns which provide various types of services to customers in return for payment in one form or another. They have been in existence in India for the past several decades. Historically, they were started and developed by the industrialists/ businessmen in the metropolitan cities and port towns. Banking was, therefore, concentrated mainly in big cities. Within these big cities also, it was mainly the well placed traders, businessmen and the industrialists who availed of most of the credit facilities. The small common man or the agriculture sector did not receive loan at all. As a result of this, RBI appointed a committee on the Direction of the All-India Rural Credit Survey in 1951. The committee recommended to nationalize the Imperial Bank of India to become State Bank of India. Accordingly, State Bank of India was set up on July 1, 1955. With this, a large number of branches were opened in the unbanked areas. In 1960, eight banks which were the subsidiaries of State Bank of India were also nationalised. This brought one-third of the banking segment under the direct control of the Government. Although the Indian banking system had made considerable progress in the 1950s and the 1960s, but the benefits of this did not flow down to the general public in terms of access to credit. In fact, till 1968 commercial banks were not involved to any significant extent in providing direct finance to agriculture. The Informal Group of Institutional Arrangement for Agriculture Credit suggested in 1964 that commercial banks which through their rural branches were gradually mobilizing more and more resources should deploy these resources for development activities being undertaken in rural areas. All India Rural Credit Review Committee also observed in its report in 1969 that the role played by commercial banks in the past for financing agriculture was negligible. It was against this background that the scheme of social

control over banks on December 14, 1967 was introduced. Radical transformation of banks, their organization and lending policies were the main aim of this scheme. But in many banks, peoplewho had been controlling the policies of the banks in the past still continued to exercise their influence over them in one way or the other. The study group under the chairmanship of Dr. D.R. Gadgill on Organisational Framework for the Implementation of Social Objectives highlighted the continued existence of credit gaps and revealed that bank advances continued to be earmarked for the big industry and traders. Consequently, 14 major banks were nationalized on July 19, 1969 to make the system reach out to the small man and to the remote rural areas. Further, 6 more banks in 1980 were nationalized, which brought a large segment of the banking business under Government ownership. OBJECTIVES OF THE STUDY (1) To study the contribution of public sector banks and private sector banks in financing priority sector (2) To examine the component wise lending and to evaluate the performance of commercial banks with regard to Priority Sector Lending in India. (3) To give suggestions on the basis of the study. SUGGESTIONS Public sector banks should speed up their performance regarding priority sector lending. As their performance in terms of priority sector, agricultural, small scale industrial and other priority sector advances was slower than that of private sector banks. Besides giving impetus to other priority sector advances, banks should lay stress on agricultural and small scale industries advances also, as their performance is deteriorating in this regard. Considering the importance of priority sector advances in the country like India where agriculture is the major occupation, it is suggested that both public and private sector banks should make committed efforts to achieve the national targets for agriculture sector. So that the major proportion of beneficiaries may be benefited. Financial soundness of banks 1. Increase in levels of capital adequacy 2.11 The level of capital adequacy across banks in most advanced economies was on a steady rise between 2008 and 2010 (Table II.3). By 2010, in the UK, US, Japan and Germany, Capital to Risk-weighted Assets Ratio (CRAR) was placed above 15 per cent. The ratio showed a further increase for US and German banks in the first quarter of 2011. Among the major emerging economies, however , the level of capital adequacy showed a moderate decline between 2009 and 2010, with the exceptions of China, India and Mexico. Both Mexican andChinese banks showed a moderate decline in their capital positions by March 2011. 2. Uneven decline in leverage 2.12 There was unevenness in the decline in banking sector leverage across countries after the crisis; here, the percentage of total capital (and reserves) to total assets has been taken as an indicator of leverage in the banking system2 . In the US, leverage in the banking system showed some moderation between 2008 and 2010 (Chart II.5). This trend for US banks continued further in the first quarter of 2011. A moderation in leverage could also be seen for UK banks between 2008 and 2010. Notwithstanding

this moderation, the extent of leverage for UK banks continued to be at relatively high levels. A Global Opportunity Some analylsts see in this scenario another opportunity for Indian banks. Many have recently started venturing overseas -- though some have gotten their fingers burnt in the recent meltdown. Still, the Indian banks seem relatively better off than their foreign peers. "The Indian banking sector as a whole -- whether the public or private sector -- remains safe, profitable and well capitalized," says Sukthankar of HDFC Bank. Could this be an opportunity to move faster on global plans? Should PSU banks pick up cheap banking assets abroad? "From a long-term perspective, they should explore the options, provided that has some alignment to their existing business strategy," says Kapoor. "They should not attempt to do something which is different from their core." Adds Chakrabarti of ISB: "It may be a good strategy of global expansion. In any case, major countries take forever to issue fresh branch licenses to Indian banks -- much longer than the RBI takes to allow foreign banks in -- so well-priced banking assets may provide quicker ways of getting into some markets." Roy of PwC sounds a warning note, however: "While this is an opportunity, the banks need to do suitable due diligence, what with many assets still bleeding under toxicity." At the same time, it would be wrong to treat all foreign and private banks as suspect. "All foreign banks can't be treated the same way," Naina Lal Kidwai, recently promoted as country head of HSBC India, told the economic daily Business Standard. "The ministry of finance has to factor in that all banks are not in trouble. We have been in this country for 155 years. They should not paint every bank and every country with the same brush." The private banks have winners and losers. "During this period, Yes Bank has continued to persevere, and further augment its capital and liquidity, while simultaneously de-risking, and yet demonstrating revenue sustainability," CEO Kapoor says. "Yes Bank's management philosophy during this period is to pursue 'opportunities in adversity,' and they are numerous: further human capital acquisition, learning and development, implementing waste management initiatives, further strengthening systems, controls and processes, achieving superior customer delivery, and investing in the Yes Bank brand. (We will) be in a lean and efficient position for the turnaround." Yes Bank's profit for the fourth quarter ending March 2009 was up 24%. For the entire year, the increase was 52%. Banking standard activities Large door to an old bank vault. Banks act as payment agents by conducting checking or current accounts for customers, paying checks drawn by customers on the bank, and collecting checks deposited to customers' current accounts. Banks also enable customer payments via other payment methods such asAutomated Clearing House (ACH), Wire transfers or telegraphic transfer, EFTPOS, and automated teller machine (ATM). Banks borrow money by accepting funds deposited on current accounts, by accepting term deposits, and by issuing debt securities such asbanknotes and bonds. Banks lend money by making advances to customers on current accounts, by making installment loans, and by investing in marketable debt securities and other forms of money lending. Banks provide different payment services, and a bank account is considered indispensable by most businesses and individuals. Non-banks that provide payment services such as remittance companies are normally not considered as an adequate substitute for a bank account.

Channels Banks offer many different channels to access their banking and other services:

Automated Teller Machines A branch is a retail location Call center Mail: most banks accept cheque deposits via mail and use mail to communicate to their customers, e.g. by sending out statements Mobile banking is a method of using one's mobile phone to conduct banking transactions Online banking is a term used for performing transactions, payments etc. over the Internet Relationship Managers, mostly for private banking or business banking, often visiting customers at their homes or businesses Telephone banking is a service which allows its customers to perform transactions over the telephone with automated attendant or when requested with telephone operator Video banking is a term used for performing banking transactions or professional banking consultations via a remote video and audio connection. Video banking can be performed via purpose built banking transaction machines (similar to an Automated teller machine), or via a video conference enabled bank branch.clarification

Products
A former building society, now a modern retail bank in Leeds, West Yorkshire. An interior of a branch of National Westminster Bank on Castle Street,Liverpool Retail banking

Checking account Savings account Money market account Certificate of deposit (CD) Individual retirement account (IRA) Credit card Debit card Mortgage Home equity loan Mutual fund Personal loan Time deposits ATM Card Economic functions The economic functions of banks include: 1. Issue of money, in the form of banknotes and current accounts subject to check or payment at the customer's order. These claims on banks can act as money because they are negotiable or repayable on demand, and hence valued at par. They are effectively transferable by mere delivery, in the case of banknotes, or by drawing a check that the payee may bank or cash. 2. Netting and settlement of payments banks act as both collection and paying agents for customers, participating in interbank clearing and settlement systems to collect, present, be presented with, and pay payment instruments. This enables banks to economize on reserves held for settlement of payments, since inward and outward payments offset each other. It also enables the offsetting of payment flows between geographical areas, reducing the cost of settlement between them.

3. Credit intermediation banks borrow and lend back-to-back on their own account as middle men. 4. Credit quality improvement banks lend money to ordinary commercial and personal borrowers (ordinary credit quality), but are high quality borrowers. The improvement comes from diversification of the bank's assets and capital which provides a buffer to absorb losses without defaulting on its obligations. However, banknotes and deposits are generally unsecured; if the bank gets into difficulty and pledges assets as security, to raise the funding it needs to continue to operate, this puts the note holders and depositors in an economically subordinated position. 5. Maturity transformation banks borrow more on demand debt and short term debt, but provide more long term loans. In other words, they borrow short and lend long. With a stronger credit quality than most other borrowers, banks can do this by aggregating issues (e.g. accepting deposits and issuing banknotes) and redemptions (e.g. withdrawals and redemption of banknotes), maintaining reserves of cash, investing in marketable securities that can be readily converted to cash if needed, and raising replacement funding as needed from various sources (e.g. wholesale cash markets and securities markets). 6. Money creation whenever a bank gives out a loan in a fractional-reserve banking system, a new sum of virtual money is created. 7. Size of global banking industry 8. Assets of the largest 1,000 banks in the world grew by 6.8% in the 2008/2009 financial year to a record US$96.4 trillion while profits declined by 85% to US$115 billion. Growth in assets in adverse market conditions was largely a result of recapitalization. EU banks held the largest share of the total, 56% in 2008/2009, down from 61% in the previous year. Asian banks' share increased from 12% to 14% during the year, while the share of US banks increased from 11% to 13%. Fee revenue generated by global investment banking totaled US$66.3 billion in 2009, up 12% on the previous year.[11] 9. The United States has the most banks in the world in terms of institutions (7,085 at the end of 2008) and possibly branches (82,000).[citation needed] This is an indicator of the geography and regulatory structure of the USA, resulting in a large number of small to medium-sized institutions in its banking system. As of Nov 2009, China's top 4 banks have in excess of 67,000 branches (ICBC:18000+, BOC:12000+, CCB:13000+, ABC:24000+) with an additional 140 smaller banks with an undetermined number of branches. Japan had 129 banks and 12,000 branches. In 2004, Germany, France, and Italy each had more than 30,000 branchesmore than double the 15,000 branches in the UK.[11]