Professional Documents
Culture Documents
Project on:
Submitted By-
ASHWINI PAWAR.
MCOM-II BANKING ! FINANCE" RO## NO: -$% &$'(-&$')
Submitted *o-
+NI,ERSI*- OF M+MBAI
Project Guide:
VPMs K.G. Joshi College of Arts & N.G. Bedek r !ollege of !o""er!e C0end1ni bunder ro1d2 *01ne 3" - )$$4$' *e5: &%((&)'&
ACKNOWLEDGEMENT
First and foremost, I would like to thank Almighty god for energy, strength, guidance and help that has always been with me throughout my work.
While presenting this project at this project at this juncture, I feel deeply obliged to our Mumbai Uni ersity for pro iding me with an opportunity to do this project.
!his project could not ha e seen light of the day without the inspiring " e#hortati e support of our principal, coordinator and professors beacon in the dark.
$ast but not the least% I am thankful to all my friends and colleagues for their moral support and encouragement.
!o sum up I would like to thank all those who ha e helped me in some or other way in successfully completing this project. It has been a warming e#perience for me, which will surely help me in the future.
DECLARATION
I Ashwini &awar the student of 'oshi (edekar college presently studying in M)*M+II (A,-I,. " FI,A,)/ hereby declare that I ha e completed the project on 01cenario *f Foreign (anks In India 2 in the academic year 3456+3457. !he information submitted is true and original to the best of my knowledge.
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N1me O. B1n7 A( (ank $td. !he 8oyal (ank *f 1cotland Abu 9habi )ommercial (ank $td. American /#press banking )orporation Antwerp 9iamond (ank , J (ank Internasional Indonesia (ank *f America (ank *f (ahrain" -uwait (1) (ank *f )eylon (ank *f ,o a 1cotia (arclays (ank &Ic. (,& &aribas )redit Agricole )orporate " In estment (ank )hinatrust )ommercial bank )itibank , A 9(1 (ank $td 9eutsche (ank <1() $td. ' & Morgan )hase (ank , A '1) J!( (ank -rung !hai (ank &ublic )o. $td MashreB (ank &1) MiCuho )orporate (ank $td. *man International (ank 1A*. 1hinhan (ank 1ociete .enerale 1onali (ank $td. 1tandard )harted (ank 1tate (ank *f Mauritius !he (ank *f !okyo+Mitsubishi UF' $td. U(1 A. First 8and (ank $td. United * erseas (ank $td. )ommon Wealth (ank *f Australia 1berbank )redit 1uisse A . Australia " ,ew Kealand (anking .roup $td. !otal ,o. of (ranches
Country O. Incor8or1tion (angladesh ,etherland UA/ U1A (elgium Indonesia U1A (ahrain 1ri $anka )anada United -ingdom France France !aiwan U1A 1ingapore .ermany <ong -ong U1A 8ussia !hailand UA/ 'apan 1ultanate of *man 1outh -orea France (angladesh United -ingdom Mauritius 'apan 1witCerland 1outh Africa 1ingapore Australia 8ussia 1witCerland Australia
!he guidelines for setting up of wholly owned subsidiary by foreign banks and con ersion of e#isting branches of foreign banks into wholly owned subsidiary are gi en belowI+ '" GENERA# RE:+IREMEN*S aH Foreign banks applying to the 8(I for setting up a W*1 in India must satisfy 8(I that they are subject to adeBuate prudential super ision in their home country regulator% the 8(I will ha e regard to the (asel standards bH !he setting up of a wholly+owned banking subsidiary in India should ha e the appro al of the home country regulator. cH *ther factors Gbut not limited toH that will be taken into account while considering the application are gi en belowI /conomic and political relations between India and the country incorporation of the foreign bank Financial soundness of the foreign bank *wnership pattern of the foreign bank International and home currency ranking of the foreign bank 8ating of the foreign bank by international rating agencies International presence of the foreign bank. CAPI*A#:-
aH !he minimum start+up capital reBuirement for a W*1 would be 8s. 6 billion and the W*1 shall be reBuired to maintain a capital adeBuacy ratio of 54 percent or as may be prescribed from time to time on a continuous basis, from the commencement of its operations. bH !he parent foreign bank will continue to hold 544 percent eBuity in the Indian subsidiary for a minimum prescribed period of operation. CORPORA*E GO,ERNANCE:-
aH ,ot less than :4 percent of the directors should be Indian nationals resident in India. bH ,ot less than :4 percent of the directors should be non+e#ecuti e directors
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aH !he W*1 will be subject to the licensing reBuirements and condition, broadly consistent with those for new pri ate banks. bH !he W*1 will be treated on par with the e#isting branches of foreign banks for branch e#pansion. !he 8eser e (ank may also prescribe market access and national treatment limitation consistent with international practices and the countryEs reBuirements. cH !he banking subsidiary will be go erned by the pro isions of the )ompanies Act, 5@:>, (anking 8egulation Act, 5@7@, 8eser e (ank *f India Act, 5@67, other rele ant status and the directi es, prudential regulations and other guidelinesMinstructions issued by 8(I and other regulators from time to time. CAPI*A# RE:+IREMEN*S:-
aH !he minimum net worth of the W*1 on con ersion would not be less than 8s. 6 billion and the W*1 will be reBuired to maintain a minimum capital adeBuacy ratio of 54 percent of the risk weighted assets or as may be prescribed from time to time on a continuous basis. While reckoning the minimum net worth the local a ailable capital including remittable surplus retained in India, as assessed by the 8(I will Bualify. bH 8eser e (ank will cause an inspectionMaudit to assess the financial position of the financial position of the branches operating in India and arri e at the aggregate net worth of the branches. 8(IEs assessment of the net worth will be final.
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Foreign banks wishing to establish presence in India for the first time could either choose to operate through branch presence or set up a 544O wholly owned subsidiary GW*1H, following the one+mode presence criterion. G!he guidelines are in the Anne#H. /#isting banks N (ranch e#pansion policy
For new and e#isting foreign banks, it is proposed to go beyond the e#isting W!* commitment of 53 branches in a year. !he number of branches permitted each year has already been higher than the W!* commitments. A more liberal policy for under banked areas will be followed. (ranch licensing procedure will continue to be as per current practice. )on ersion of e#isting branches to Wholly *wned 1ubsidiaries
In the first phase, foreign banks already operating in India will be allowed to con ert their e#isting branches to W*1 while following the one+mode presence criterion. G!he guidelines on con ersion of e#isting branches into W*1 are in the countryFs reBuirements. AcBuisition of 1hareholding in 1elect Indian &ri ate 1ector (anks
In order to allow Indian (anks sufficient time to prepare themsel es for global competition, initially entry of foreign banks will be permitted only in pri ate sector &olicy and &romotion. (anks that are identified by 8(I for restructuring. In such banks, foreign banks would be allowed to acBuire a controlling stake in a phased manner.
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In the second phase, the remo al of limitations on the operations of the W*1 and treating them on par with domestic banks to the e#tent appropriate will be designed and implemented after re iewing the e#perience with &hase I and after due consultations with all stakeholders in the banking sector. 9ilution of 1take in Wholly *wned 1ubsidiaries
In this phase, the W*1 of foreign banks on completion of a minimum prescribed period of operation will be allowed to list and dilute their stake so that at least 3> per cent of the paid up capital of the subsidiary is held by resident Indians at all times consistent. !he dilution may be either by way of Initial &ublic *ffer or as an offer for 1ale. Mergers and AcBuisition of any &ri ate 1ector (ank in India
In the second phase, after a re iew is made with regard to the e#tent of penetration of foreign in estment in Indian banks and functioning of foreign banks, foreign banks may be permitted, subject to regulatory appro als and such conditions as may be prescribed, to enter into merger and acBuisition transactions with any pri ate sector bank in India subject to the o erall in estment limit of ?7 percent.
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IN INDIA
!here are currently 67 foreign banks operating in India as branches. !heir balance sheet assets, accounted for about ?.>: percent of the total assets of the scheduled commercial banks as on March 65, 3454 as against @.46 per cent as on March 65, 344@. In case, the credit eBui alent of off balance sheet assets are included, the share of foreign banks was 54.:3 per cent of the total assets of the scheduled commercial banks as on March 65, 3454, out of this, the share of top fi e foreign banks alone was ?.53 per cent. !he policy on presence of foreign banks in India has followed two cardinal principles of GiH 8eciprocity and GiiH 1ingle Mode of &resence. !hese principles are independent of the form of presence of foreign banks. !herefore, these principles should continue to guide the framework of the future policy on presence of foreign banks in India. Following factors seem rele ant for any framework for future policy on presence of foreign banks in IndiaI &rima facie the branch mode of presence of foreign banks in India pro ides a ring+fenced structure as there is a reBuirement of locally assigned capital and capital adeBuacy reBuirement as per (asel 1tandards. )ertain pro isions of the (8 Act5 also delineate the separate legal identity of branches of foreign banks in India. Further, under section :;7 of the )ompanies Act, though the company incorporated outside India is dissol ed, if it has ceased to carry on the business in India, it may be wound up as an unregistered company. <owe er, e#cept for the assets specifically ring+fenced under 1ection 55G7H of the (8 Act, the claim of domestic depositors and creditors o er other assets is yet to be legally tested. -eeping the abo e in iew, on balance, the subsidiary model has clear ad antages o er the branch model despite certain downside risks. <owe er, under the e#tant policy as laid down in 344: 8oadmap, no foreign bank has approached 8(I, for setting up a subsidiary, may be due to lack of incenti es. <ence there may be a need to incenti iCe subsidiary form of presence of foreign banks. While deciding the approach towards con ersion of e#isting foreign bank branches, IndiaEs commitments to W!* will ha e to be kept in mind. It may not, therefore, be possible to mandate con ersion of e#isting branches into subsidiaries. <owe er, the regulatory e#pectation would be that those foreign banks which meet the conditions and thresholds mandated for subsidiary presence for new entrants or which become systemically important by irtue of their balance sheet siCe would oluntarily opt for con erting their branches into W*1 in iew of the incenti es proposed to be made a ailable to W*1. !he branch e#pansion of both the e#isting foreign banks and the new entrants present in the branch mode would be subject to the W!* commitments.
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)" #ICENSING OF FOREIGN BANKS India issues a single class of banking license to banks and hence does not place any undue restrictions on their operations merely on the ground that in some countries there are reBuirements of multiple licenses for dealing in local currency and foreign currencies with different categories of clientele. (anks in India, both Indian and foreign, enjoy full and eBual access to the payments and settlement systems and are full members of the clearing houses and payments system. &rocedurally, foreign banks are reBuired to apply to 8(I for opening their branches in India. Foreign banksE application for opening their maiden branch is considered under the pro isions of 1ec 33 of the (8 Act, 5@7@. (efore granting any license under this section, 8(I may reBuire to be satisfied that the .o ernment or the law of the country in which it is incorporated does not discriminate in any way against banks from India. *ther conditions as enumerated are reBuired to be fulfilled. Unlike the restricti e practices of certain foreign countries, India is liberal in respect of the licensing and operation of the foreign bank branches as illustrated by the followingI
India issues a single class of banking license to foreign banks and does not place any limitations on their operations. All banks can carry on both retail and wholesale banking. 9eposit insurance co er is uniformly a ailable to all foreign banks at a non+discriminatory rate of premium. !he norms for capital adeBuacy, income recognition and asset classification are by and large the same. *ther prudential norms such as e#posure limits are the same as those applicable to Indian banks.
%" OPENING OF BRANC6ES IN INDIA B- FOREIGN BANKS !he policy for appro ing foreign banks applications to open maiden branch and further e#pand their branch presence has been incorporated in the L8oadmap for presence of Foreign banks in IndiaE indicated in the &ress 8elease dated February 3;, 344: as well as in the liberaliCed branch authoriCation policy issued on 1eptember ;, 344:. !he branch authoriCation policy for Indian banks has been made applicable to foreign banks subject to the followingI
Foreign banks are reBuired to bring an assigned capital of U1 D3: million up front at the time of opening the first branch in India. /#isting foreign banks ha ing only one branch would ha e to comply with the abo e reBuirement before their reBuest for opening of second branch is considered. Foreign banks may submit their branch e#pansion plan on an annual basis.
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In addition to the parameters laid down for Indian banks, the following parameters would also be considered for foreign banks I Foreign banks and its groupEs track record of compliance and functioning in the global markets would be considered. 8eports from home country super isors will be sought, where er necessary. Weight age would be gi en to e en distribution of home countries of foreign banks ha ing presence in India. !he treatment e#tended to Indian banks in the home country of the applicant foreign bank would be considered. 9ue consideration would be gi en to the bilateral and diplomatic relations between India and the home country. !he branch e#pansion of foreign banks would be considered keeping in iew IndiaEs commitments at World !rade *rganiCation GW!*H. $icenses issued for off+site A!Ms installed by foreign banks are not included in the ceiling of 53.
In terms of IndiaEs commitment to W!*, as a part of market access, India is committed to permit opening of 53 branches of foreign banks e ery year. As against these commitments, 8eser e (ank of India has permitted up to 5?+ 5; branches in the past. !he (ank follows a liberal policy where the branches are sought to be opened in unbankedMunder+banked areas. *ff+site A!Ms are not counted in the abo e limit. Including off+site A!Ms, foreign banks are ha ing G as on *ctober 5:, 344?H place of business at @66 locations G 3?6 branches P >>4 off site A!MsH. !he procedure regarding appro al of proposals for opening branches of foreign banks in India has been simplified and streamlined for the sake of e#peditious disposal. A license under the pro isions of (.8. Act, 5@7@ enables the foreign banks to carry out any acti ity which is permissible to a bank in India. !his is in contrast with practices adopted in many countries, where foreign banks can carry out only a limited menu of acti ities. As against the reBuirements of achie ing 74 per cent of net bank credit as target for lending to priority sector in case of domestic banks, it has been made mandatory for the foreign banks to achie e the minimum target of 63O of net bank credit for priority sector lending. Within the target of 63O, two sub targets in respect of ad ances GaH to small scale sector Gminimum of 54OH, and GbH e#ports Gminimum of 53OH ha e been fi#ed. !he foreign banks are not mandated for targeted credit in respect of agricultural ad ances. !here is no regulatory prescription in respect of foreign banks to open branches in rural and semi+urban centers.
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>" CORPORA*E GO,ERNANCE OF FOREIGN BANK Any global entity would manage its in estments on the basis of their assessment of the risk M return trade+off and allocate resources across arious subsidiaries. !he interest of the shareholders of the parent is the dri ing force for such decisions. )oncerns may arise when the decisions taken for a subsidiary affect domestic depositors Gand domestic shareholders, if the subsidiary is listedH. Independent board members play an important role in protecting the interests of all stakeholders. (anks must include independent directors on their boards in order to make sure that management acts in the best interest of the local institution. Independent directors
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BANKING B+SINESS: !he e#change bank conducts all types of banking business. !hey accept 9eposit from the public, grant loans, discount trade bills and pro ide remittance facilities. And thus compete with Indian banks.
!hey also finance trade in many up country centers, as they opened a number of branches in the main ports and trading centers of the country.
AGENCIES SER,ICES:
$ike other commercial banks, foreign e#change bank render se eral agencies ser ices to their customers.
MERC6AN* BANKING: -
1ome e#change bank has opened merchant banking di ision to pro ide banking ser ices. For e.g.I + !he ,ational and .rind lays banks first started merchant banking ser ices in 5@>?, followed by the first ,ational )ity banking5@?4. !he e#change banks ha e been doing a profitable business in the country. !heir financial ratio. i.e. &rofit+to Income ratio is more than double that of the Indian commercial bank. !heir high profitability may be attributed to their non+fund business, such as commission, brokerage, etc. Further they mostly finance multinational corporations, and their returns are higher. Moreo er, they minute their risk in lending also.
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C6AP*ER ?
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!he entry of foreign banks in India has made India to be at an international le el. It has gi en India an international status. !hus India is mo ing towards globaliCation. Com8etitiAene99:-
After the set up foreign banks in India, the banking sector in India also become competiti e and accurti e. Em85oyment:-
As new foreign banks are doing business in India and the number of branches of foreign banks is increasing day by day. 1o it creates job opportunities for many people. !hus it makes a lot of educated unemployed people employed. Incre19e in 9t1nd1rd o. 5iAinB:-
As foreign banks ha e created job opportunities the standard of li ing of people ha e impro ed. !hey ha e become aware of the international standards. Im8roAed tec0no5oBy:-
!he foreign banks ha e brought in new and more sophisticated technology. !his has impro ed the working of banks and the work can be now done within few seconds
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F(s N Foreign (anks, &1(s N &ublic 1ector (anks, &r1(s N &ri ate 1ector (anks, 1)(s N1cheduled )ommercial (anks. SourceI !he 8eport on !rend and &rogress on (anking in India, arious issues. An analysis of return on funds indicated that the return on funds for F(s was higher than other bank groups. As at end+March 344@, F(s registered a return on funds at @.@ per cent as compared with the ratio of ;.: per cent registered by 1)(s. <owe er, it is important to note that new &r1(s as well as old &r1(s did ha e higher return on funds which was close to F(s G!able 3H. !his pointed to differences in cost of funds faced by different bank groups. !rends in cost of funds faced by the different bank groups indicated that the cost of funds was considerably lower for F(s as compared with other bank groups. While the cost of funds was 7.3 per cent for F(s at end+March 344@, it was :.: per cent for 1)(s as a whole.
*1b5e &: Return on Fund9 Gper centH -e1r 3446+47 FB9 ;.7 PSB9 ;.3 Ne3 PrSB9 O5d PrSB9 ?.? ;.: SCB9 ;.3
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Note: 8eturn on funds is calculated as Ginterest on ad ances P interest on in estments HMGtotal ad ances P total in estmentsH. F(s N Foreign (anks, &1(s N &ublic 1ector (anks, &r1(s N &ri ate 1ector (anks, 1)(s N 1cheduled )ommercial (anks. SourceI !he 8eport on !rend and &rogress on (anking in India, arious issues. ,otably, new &r1(s as well as old &r1(s registered considerably higher cost of funds at end+ March 344@ !he decomposition of cost of funds of 1)(s indicated that F(s had the lowest cost of deposits of 7.6 per cent as at end+March 344@ as compared with the cost of deposits of 1)(s at :.? per cent during the same year. It may be noted that &r1(s registered the highest cost of deposits of >.6 per cent at end+March 344@. <owe er, deposits were costlier than borrowings for all bank groups including F(s. In this conte#t, it is interesting to note that the dependence of F(s on costly funds, iC., deposits was relati ely less. In contrast, deposits were the major source of funds for other 1)(s. !hus, it is clear that the lower dependence on deposits as well as access to low cost deposits enabled F(s to register higher profits than other bank groups in India
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!his study probed the BuestionI why F(s are more profitable than other bank groups in IndiaA !he analysis in the study indicates that the access to low cost funds by F(s is the most important factor which is making a difference to the profitability of F(s is+R+ is other bank groups in India. !he cost of deposits for F(s is the lowest among the bank groups in India. <owe er, the deposits were costlier in comparison with borrowings for all the bank groups including F(s. In this conte#t, it is important to note that the dependence of F(s on deposits is relati ely lower than the other bank groups. Another major factor determining the profitability of F(s is di ersification of income achie ed by them. !he other income to total income ratio is higher for F(s than other bank groups. F(s raised almost @ per cent of their total income through net profit on e#change transactions. As a result, F(s are able to meet their entire operating e#penses through their other income. !o ascertain the determinants of &rofitability in the banking sector, the study has done a panel data regression analysis. !he regression results showed that efficiency of fund management measured as the amount of interest e#penses reBuired for generating one rupee interest income determined profits to a large e#tent. !he operating e#penses and other income are other important factors determining profitability in the banking sector. In terms of fund management and other income, F(s were well ahead of domestically owned banks in India, thus, pro iding a cue about the higher profitability of F(s in comparison with domestically owned banks. <owe er, profitability is only one factor which is important while preparing the roadmap for the presence of F(s in India. !he roadmap may take a holistic iew by considering aspects such as soundness of F(s, financial performance of their parent banks, global financial inter+linkages and also their contribution in achie ing social objecti es of banking in India.
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For se eral years in the past, they where no subject to legal restrictions or statutory obligations. FOREIGN DIREC*ORS:-
!heir directors, go erning bodies and shareholders were entirely foreign. INADE:+A*E CAS6 RESER,E: -
For se eral years in the past, e#change bank did not maintain adeBuate cash reser e. MONOPO#-:
!ill recently, the e#change bank enjoyed a substantial monopoly in financing foreign trade of the country. !hey e#ploited their ad antage and earned high profits. !hey also forced Indian e#porters and importers to gi e business to the foreign shipping companies, insurance companies, while accommodating them. !his restricted the scope of growth of Indian enterprises in shipping and insurance. +NFAIR COMPE*I*ION:-
!hey ha e entered into unfair competition with the Indian bank by attracting 9eposits in India by under Buoting Indian bank DIFFEREN*IA# *REA*MEN*:
/#change banks gi e differential treatment in financing the e#port trade of the country by 9MA bills Gi.e. documents against acceptanceH and the import trade by 9M& bills GGi.e. documents against paymentsH.!hey, thus discriminate between Indian and foreign firms. !hey gi e foreign importers the benefits of lower rates of interest pre ailing in the $ondon money markets, which is denied to Indian importers.
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NO PROPER INFORMA*ION:
!hey do not pro ide any guidance information regarding foreign market, prices, etc. to the Indian e#porter. 6AMPERING *6E DE,E#OPMEN* OF INDIAN BANKS: -
(y e#tending their business from financing of foreign trade to banking in the upcountry centers, they restrict the growth of Indian commercial banks. SP#**ING *6E MONE- MARKE*: -
!he e#change bank due o their monopolistic in the financed of foreign trade ha e split the money market into /uropean and Indian. #ACK OF INDIANISA*ION:-
1till, now the e#change bank did not ha e any Indian in the higher posts, e#pects on the clerical side.
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