Professional Documents
Culture Documents
ON
“IMPLICATIONS OF WTO ON
INDIAN BANKING”
By:
Ashish Chatrath
PGDM 07-09
FT-07-529
FINAL DISSERTATION
DECLARATION FORM
submitted by me for the partial fulfillment of the Post Graduate Diploma in Business
Noida is my own original work and has not been submitted earlier either to IILM GSM
or to any other Institution for the fulfillment of the requirement for any course of study. I
also declare that no chapter of this manuscript in whole or in part is lifted and
incorporated in this report from any earlier / other work done by me or others.
Programme.
Submitted by
Ashish Chatrath
LIST OF TABLES
Table Subject Page
No. No.
Table 1 Foreign investment in public sector banks in 2004 28
and 2006
Table 2 Foreign investment in private sector banks in 2004 28
and 2006
Table 3 Return on Net Worth% of Indian and foreign banks 43
in 2006 and 2007
Table 4 Operating Profit of Indian and foreign banks in 2006 44
and 2007
Table 5 ROA% of Indian and foreign banks in 2006 and 2007 45
Table 6 Net Profit of Indian and foreign banks in 2006 and 46
2007
Table 7 Interest Income of Indian and foreign banks in 2006 47
and 2007
Table 8 Total Income of Indian and foreign banks in 2006 47
and 2007
Table 9 TIER I Capital of Indian and foreign banks in 2006 48
and 2007
ABSTRACT
The project deals with analyzing the impact of WTO on the Indian
banking sector. The need of growth of the developing economies gives
opportunities to the foreign banking players to enter into the new markets
in new economies and expand their businesses on global level. The entry
of the foreign banks in the developing economies helps them to grow at a
faster pace. Foreign banks also bring with them the latest technology
being used in the developed economies which helps the developing
economies to take advantage of the technological advancements being
used in the other nations. Hence it is very essential for the developing
economies to open their economies for the international trade by allowing
foreign banks to establish their businesses over there.
This project will help the reader to know about the change in the
regulations made by RBI for the foreign banks to liberalize the trade in
services in the Indian banking sector. The reader will also come to know
about the future prospects of the Indian banking system and the
improvement in the financial performance of Indian and foreign banks.
1. The Project
1.1 Introduction
The WTO came into existence on January 1, 1995, with many countries
joining it with immediate effect. It has its headquarters in Geneva,
Switzerland. The WTO was born to usher in a new era of global economic
cooperation, reflecting the widespread desire to operate in a fairer and
more open multilateral trading system for the benefit and welfare of
member countries’ principles.
1.2 Objectives
To access the role of WTO in helping trade flow of banks with no
undesirable side-effects.
To study the organizational structures of banks with global
requirements.
To analyze the “simplification and harmonization of international
banking trade procedures” to trade in a more effective manner.
To evaluate the implications of WTO and services agreement on
the Indian banking system.
To evaluate the performance of foreign banks in the Indian
economy.
1.3 Limitations
The quantified data regarding banks available may have been
manipulated.
The study is limited and does not cover all banks considering the
time frame.
1.4 Methodology
Usage of Secondary Data: The secondary data has been
collected from the various sources like journals, articles, magazines,
newspapers and internet. The magazines studied includes magazines
dealing in the financial services like Business World, Business India and
newspapers like Financial Times, Economic Times, Business Line,
Financial Review, The Hindu. The data collected was then analyzed in
respect of the impact of policies laid down by WTO and its effects on
the Indian banking sector which indirectly affects the financial sector of
the whole Indian economy. The data
2.1 Introduction
WTO is the only global international organization dealing with the global
rules of trade between nations and ensuring trade flows as smoothly,
predictably and freely as possible therefore resulting into a more
prosperous, peaceful and accountable economic world.
The final act was signed on 1 April 1994, at Marrakech in Morocco, which
resulted in the formation of World Trade Organization (WTO) w.e.f. January
1, 1995 with 123 members, including India. Now there are 151 members
including China, Vietnam and Saudi Arabia.
2.6 WTO & GATT
Decisions of the Dispute Resolution Mechanism are binding on
member countries. Therefore provides a neutral forum for grievance
redress to all countries irrespective of economic clout.
A rules-based, member-driven organization — all decisions are
made by the member governments, and the rules are the outcome of
negotiations among members. In effect, every member country has a
veto, i.e. a ‘no’ vote from any member can scuttle a deal.
GATS do not compel any State either to accept or continue to accept any
obligations under the agreement. Is any State feels it would be beneficial
by the GATS, it might accept its obligations Any State is free to opt out of
GATS if its interests are adversely affected.
MODE I
Cross-border trade corresponds with the normal form of trade in goods
and maintains a clear geographical separation between seller and buyer.
In this case, services flow from the territory of another member crossing
national frontiers. (e.g. banking or architectural services transmitted via
telecommunications or mail). For instance, a user in India receives services
from abroad through its telecommunications or postal infrastructure. Such
supplies may include consultancy or market research reports, tele-medical
advice, distance training, or architectural drawings.
MODE II
MODE III
MODE IV
Foreign banks in India now have a share of only around 7 per cent of total
banking assets. The RBI has released an ambitious road map for increasing
the presence of foreign banks in India. As per the guidelines, the
aggregate foreign investment from all sources will be allowed up to a
maximum of 74 per cent of the paid up capital of the private bank. The
roadmap is divided into two phases:
First phase (Between March 2005 and March 2009): Foreign banks
will be permitted to establish presence in the Indian economy by way of
setting up a wholly owned banking subsidiary (WOS) or conversion of the
existing branches into a WOS. Permission for acquisition of shareholding in
Indian private sector banks by eligible foreign banks will be limited to
banks identified by the RBI for restructuring.
4. Government equity in banks has been reduced and strong banks have
been allowed to access the capital market for raising additional capital.
6. New private sector banks have been set up and foreign banks permitted
to expand their operations in India including through subsidiaries. Banks
have also been allowed to set up Offshore Banking Units in Special
Economic Zones.
7.New areas have been opened up for bank financing such as insurance,
credit cards, infrastructure financing, leasing, gold banking, besides
investment banking, asset management, factoring, etc.
10. Universal Banking has also been introduced in the Indian banking
sector. With banks permitted to diversify into long-term finance and DFIs
(Direct Foreign Investments) into working capital, guidelines have been put
in place for the evolution of universal banks.
13. Credit delivery mechanism has been reinforced to increase the flow of
credit to priority sectors through focus on micro credit and Self Help
Groups. The definition of priority sector has been widened to include food
processing and cold storage, software upto Rs 1 crore, housing above Rs
10 lakh, selected lending through NBFCs, etc.
14. RBI guidelines have been issued for putting in place risk management
systems in banks. Risk Management Committees in banks address credit
risk, market risk and operational risk. Banks have specialized committees
to measure and monitor various risks and have been upgrading their risk
management skills and systems.
15. The limit for foreign direct investment in private banks has been
increased from 49% to 74% and the 10% cap on voting rights has been
removed. In addition, the limit for foreign institutional investment in
private banks is 49%.
Table 1: Foreign investment in public sector banks in the year 2004 and 2006.
Table 2: Foreign investment in private sector banks in the year 2004 and 2006.
The above tables indicate that the foreign investment in the capital of
Indian banks (Both public and private sector banks) has increased because
of the liberalization policy of the government and WTO norms. This growth
in investment by foreign countries will continue for long and it will also
provide better opportunities for the Indian banks to utilize the foreign
capital efficiently so as to compete strongly with the other banks.
Encouraging foreign investment in the Indian banks will also develop
friendly relations with the other countries. The financial subsidiaries of
foreign banks have a big hand in these investments and at appropriate
time they will make their presence felt in many Indian banks after 2009,
whereafter under WTO rules these foreign banks could acquire 74 percent
shares of Indian private banks. The Indian government has acted
thoughtfully by permitting this cap already. In the same spirit the
government intends to amend the Banking Regulation Act to do away with
the restriction of voting rights to maximum 10 percent. These rules and
regulations are protected and preserved in the developed countries. The
foreign multinational banks’ objective is to acquire the local banks –
private and public. The banking policy pursued by Indian government has
encouraged the foreign banks to step up pressure. In the meanwhile,
situations are created permitting the foreign banks and their financial
subsidiaries to indulge in trading and services to increase their income and
profits. They are exempted from social banking and agricultural credit.
These burdens are put solely on the public sector banks, sapping their
income and profits. If this adverse playing field continue, they will be
rendered week and face the risk of being acquired by foreign banks.
This disturbing banking policy must be changed. Rules and regulations
applicable to public sector banks must be applied to all the banks. Existing
common regulations for payment of interest on savings account should be
governed by common rules ensuring uniform implementation. In the same
manner, common rules should govern service charges. Foreign banks
should not be permitted to establish financial subsidiaries since such
subsidiaries are being used as banking and trading companies. The
globally prevalent regulation of capping on ownership of shares and voting
rights as it exists now in India should not be disturbed. Disinvestment must
be stopped once for all and alternate mechanism of issuing bonds and
preference shares ought to be adopted to strengthen the capital base.
Each Public Sector Bank should further expand by opening new branches
since household savings are increasing significantly as can be seen from
more than 32 percent increase in bank deposits and demand for credit is
about 80 percent of deposits. These measures will go a long way in
strengthening public sector banks and will help tremendously in the
development of the overall Indian economy.
Hong Kong allowed 100% FDI in banking sector and this facilitated take
over of several banks by Singapore and Taiwanese banks.
Indonesia witnessed large scale infusion of public funds into the banking
system through a specialized restructuring agency. The banks which had
Capital adequacy ratio reduced to below 25% were marked for immediate
closure. Consolidation among banks was actively encouraged and FDI was
allowed up to 99%.
In Singapore, there are 3 main banking groups and they have given boost
to consolidation process not only within the country, but also in South
Korea and Malaysia.
Indian economy is growing at 8-10% and the growth rate is second only to
that of China. Bank credit has been increasing at a rapid pace of over 30%
in the past 2 to 3 years. The Indian economy is slowly and steadily
integrating with the global economy. The recent report of Tarapore
Committee on Fuller Capital Account Convertibility has laid a road map for
total integration with global financial markets. Trade barriers are getting
removed under WTO and the accord on services would eventually open up
Indian banking system fully to global competition. The road map for
presence of foreign banks in India announced by Reserve Bank of India
envisages a regime after 2009 when foreign banks will be allowed to
operate in India like any other private sector bank in the country.
Besides foreign banks, there are two large Indian private sector banks in
which the non-resident ownership is very close to the 74 per cent
permitted, which 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. Moreover, there are also about 10 large listed public sector
banks (PSBs) in which the non-resident/FII (Foreign Institutional
Investment) shareholding was close to the permitted ceiling of 20 per cent,
as on March 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 crore (Rs 119.9
million) as against the corresponding figure of Rs 0.33 crore (Rs 3.3
million) for PSBs.
For the year 2006-07, the Return on Assets (ROA) of foreign banks was
1.65 percent while the Return on Equity (ROE) was 14.02 percent, as
against the corresponding figures of 0.82 percent and 13.62 percent for
PSBs.
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 requirements of multiple licenses for dealing in
local currency and foreign currencies with different categories of clientele.
Banks in India, both Indian and foreign, enjoy full and equal access to the
payments and settlement systems and are full members of the clearing
houses and payments system. Before granting any license, RBI may
require to satisfy that the Government or the law of the country in which it
is incorporated does not discriminate in any way against banks from India.
All banks including foreign banks can carry on both retail and
wholesale banking.
Deposit insurance cover is uniformly available to all foreign banks
at a non-discriminatory rate of premium.
The norms for capital adequacy, income recognition and asset
classification are by and large the same. Other prudential norms such
as exposure limits are the same as those applicable to Indian banks.
The branch authorization policy for Indian banks has been made applicable
to foreign banks subject to the following:
Foreign banks are required to bring an assigned capital of US $25
million up front at the time of opening the first branch in India.
Existing foreign banks having only one branch would have to
comply with the above requirement before their request for opening of
second branch is considered.
Foreign banks may submit their branch expansion plan on an
annual basis.
India offered to improve upon some of its commitments provided its major
trading partners were also prepared to make substantial improvements in
their stance on the movement of natural persons. It was felt that India
possessed a fair advantage in the availability of skilled manpower in
several hi-tech areas such as computer software, engineering consultancy,
etc. and it was in India’s interest that free movement of these personnel
was allowed into the developed markets abroad. India’s improved
negotiating brief included a liberalized policy on ATMs (i.e., an ATM will not
be treated as a separate branch) and increasing the number of new
branches to eight.
In the negotiations that took place in June 1995, India’s major trading
partners made the following demands on India:
While the entry of foreign banks brings with it benefits, it also carries
certain risks for the host countries. Benefits are in the form of better
quality banking services that are offered by foreign banks themselves and
also through spurring competition and efficiency in the domestic markets.
The arrival of foreign banks with better accounting and disclosure
standards could lead to an improvement in prudential regulations in
domestic markets. The presence of foreign banks with more sophisticated
products could put pressure on domestic supervisory authorities to
augment their quality and size of domestic supervisory staff.
The entry of foreign banks has also potential risks associated with it.
Another concern relating to foreign entry is that of foreign banks quickly
becoming dominant in the domestic banking system. This fear has led to
Singapore authorities, while announcing a major liberalization programmed
recently, to state explicitly that they wanted local banks to hold at least
half of the market. Also, the Philippines has stipulated that the market
share of foreign-majority owned banks should not exceed 30 per cent of
banking industry. Mexico also restricted foreign ownership to 30 per cent
with a cap of individual foreign bank at 5 per cent when it started selling
state-owned commercial banks in the early 1990s, but later these
restrictions were relaxed and finally removed.
According to the World Bank the U.S. banking sector provided credit equal
to 215 percent of GDP in 2004, more than for most OECD and developing
countries. Globally, banking is one of the more mature industries, with
global banking growth of 6 percent in 2004 (according to a June 2006
USITC report). The United States’ status as a leader in its domestic and
international development of the banking sector, and the expected steady
but slow growth of banking globally, suggests that room for revenue
growth through new branches is only moderate. In the United States,
however, most regional and large U.S. banks have successfully increased
revenue growth through consolidation.
From end of year 1998-2005 foreign banks’ assets in the U.S. market grew
by 77 percent (versus 67 percent for all FDIC insured assets), with foreign
banks currently holding approximately 19 percent of total U.S. banking
assets (U.S. Federal Reserve). Foreign banking investment largely reflects
inflow from large multinational banks with appropriate experience, skills,
capital and a customer-base, which enhances the desirability of expanding
cross-border investments.
The long-term demand for banking services in the U.S. market is likely to
continue to increase at a relatively stable rate. Compared to other
developed economies, the U.S. banking sector remains relatively
fragmented, suggesting that that further consolidation of the industry
through mergers and acquisitions is a real possibility. U.S. banks are
standard-bearers in terms of both profitability and efficiency, and the U.S.
banking market is highly competitive.
China's banking sector has taken concrete steps already to meet the
challenges brought about by the country's accession to the World Trade
Organization (WTO).
Foreign banks usually set up their branches in China - initially from special
economic zones to coastal areas and then to regional capital cities, as well
as major economic cities in domestic areas. This kind of distribution is
consistent with the country's opening-up initiatives.
Currently, there are more than 30 cities that are permitted to establish
operational foreign institutions, among which foreign financial institutions
are concentrated in Beijing, Shanghai, Guangzhou, Dalian, Shenzhen,
Tianjin and Xiamen. The Japanese Bank took the initial step by setting up
the first representative office of foreign financial institutions in China in
1979. Since then, Chinese banks began taking advantage of foreign
investment. In 1982 the Hongkong Nanyang Commercial Bank established
its first foreign branch in Shenzhen. Xiamen International Bank, the first
Sino-foreign joint venture (JV) bank was set up in 1985. With a rapid
increase of foreign investment in China since the 1990s, more and more
foreign financial institutions have entered the Chinese market.
SMEs are becoming valuable clients to both the Chinese and foreign banks.
In comparison with Chinese banks, foreign banks have more experience in
market segmentation, better credit and risk control, good access to the
international market and more simplified procedures for credit approvals,
all of which serve to attract Chinese enterprises as clients.
In 2003, a qualified foreign institutional investors (QFII) scheme was
introduced to allow foreign institutional investors, such as UBS, Deutsche
Bank and Citigroup Global and others to engage in the securities sector on
the Chinese mainland. At present there are 50 approved QFII entities.
At the same time, a total of 17 foreign and Chinese banks have been
approved to invest clients' assets overseas under the qualified domestic
institutional investor (QDII) program. So far, they have launched nine QDII
products, with sales of 2.3 billion Yuan (USD291 million) in RMB-
denominated transactions and USD87 million in US dollar-based
transactions.
Foreign Banks
Standard Chartered
ABN Amro Bank HSBC
Net Worth Return % Net Worth Return % Net Worth Return %
32077.67 21.63 58853.18 31.35 54987.15 17.6
Table 3: Return on Net Worth% of Indian and foreign banks in 2006 and 2007
The above table shows the total assets employed by few Indian and
foreign banks in Indian banking sector and their return on net worth % for
the year 2007. It is cleared from the table that the return on net worth %
earned by the foreign banks is higher than the Indian banks. State Bank of
India showed a return on net worth of 15.41% with the total assets of Rs.
566565.24 crore whereas ABN Amro showed a return on net worth of
21.63% with the total assets of Rs. 32077.67 crore in the Indian banking
sector. In the same way, Standard Chartered and HSBC have also shown
better returns comparative to the Indian banks. The reason for the better
performance of foreign banks can be updated technology used, risk
management tools, better operational efficiency, relaxation in the
regulations of RBI, etc. Although the Indian banks have a high amount of
investment in the Indian banking sector but the foreign banks have a
competitive edge of better use of the capital as compared to foreign banks
which is the main reason for their better efficiency. (Refer Annexure 1 &
2)
Foreign Banks
Citibank HSBC
2006 2007 % change 2006 2007 % change
1577.1 2180.45 38.26 1277.07 1922.39 50.53
Table 4: Operating Profit of Indian and foreign banks in 2006 and 2007
Foreign Banks
Standard Chartered
ABN Amro Bank HSBC
Total Assets ROA % Total Assets ROA % Total Assets ROA %
32077.67 1.37 58853.18 3.06 54987.15 1.82
Table 5: ROA% (Return on Assets) of Indian and foreign banks in 2006 and 2007
The above table shows the ROA (Return on Assets %) of different banks in
Indian banking market. ROA indicates the ability of the entity to generate
percentage return on the value of assets employed in the market. SBI had
shown ROA of 0.84 in the year 2007 whereas Canara Bank and PNB have
shown ROA of 0.98 and 1.03 respectively in the same year. Now if we have
a look at the ROA of foreign banks operating in India, ABN Amro had shown
ROA of 1.37 in the year 2007 whereas Standard Chartered Bank and HSBC
had shown ROA of 3.06 and 1.82 in the same year. It is clear from the
figures that ROA generated by the foreign banks in India is higher than the
Indian banks operating in the same market. But the value of assets
possessed by the Indian banks in the Indian banking system is higher than
the value of assets possessed by the foreign banks. But still, foreign banks
have been able to generate very high profits proportionate to the value of
assets owned by them in the Indian market. This depicts that the foreign
banks have used their assets in a better way as compared to Indian banks.
One of the major reasons for their high efficiency in generating better
returns proportionate to their assets is the regulations or benefits enjoyed
by the foreign banks in the Indian banking segment. (Refer Annexure 5
& 6)
Foreign Banks
Citibank JP Morgan Chase Bank
2006 2007 % change 2006 2007 % change
705.55 900.00 27.56 72.93 106.79 46.43
Table 6: Net Profit of Indian and foreign banks in 2006 and 2007
The table indicates the net profit earned by few Indian and foreign banks
in the years 2006 and 2007 in the Indian banking sector. SBI had reported
the net profit of Rs. 4406.67 crore in the year 2006 which was increased to
Rs. 4541.31 in the year 2007 i.e. an increase of 3.06%. PNB reported the
net profit of Rs. 1439.31 crore and Rs. 1540.08 crore in the years 2006 and
2007 respectively i.e. an increase of 7%. Now if we talk about foreign
banks, Citibank had reported an increase of 27.56% in the net profit from
the year 2006 to 2007 and JP Morgan Chase bank reported an increase of
46.43% in the net profit during the same period. It clearly states that how
fast the foreign banks are increasing their profitability in the Indian market
which is leading to intense competition in the market. Due to increase in
the competition because of the entry of the foreign banks in the Indian
banking system, domestic or Indian banks are providing better service to
the customers in order to retain their market share and to fight and
survive in the competitive environment. This has given opportunity for
Indian banks to achieve the global standards of operations in their working
policies. (Refer Annexure 7 & 8)
Foreign Banks
Citibank Bank of America
%
2006 2007 change 2006 2007 % change
3064.394383.65 43.05347.55 430.11 23.75
Table 7: Interest Income of Indian and foreign banks in 2006 and 2007
The above table indicates the percentage increase in the interest income
earned from the year 2006 to 2007 by few Indian and foreign banks in the
Indian economy. SBI has shown an increase of 9.76%, PNB has shown an
increase of 20.38%, Citibank has shown an increase of 43.05% and Bank of
America has shown an increase of 23.75% in the interest income from the
year 2006 to the year 2007. The interest income earned by foreign banks
is increasing at a higher pace than that of the Indian banks. The reason for
this increase can be attributed to the better credit lending services being
provided by the foreign banks to the nationals. This growth rate in the
income of the foreign banks can create a tough situation for the Indian
banks where Indian banks will be facing higher difficulties for their survival
if they continued their operations in the traditional ways. Therefore, they
need to improve upon their efficiency in providing better services to the
customers. (Refer Annexure 9 & 10)
Foreign Banks
Deutsche Bank ABN Amro
% %
2006 2007 change 2006 2007 change
1158.971625.37 40.241988.593027.26 52.23
Table 8: Total Income of Indian and foreign banks in 2006 and 2007
In the above table, SBI has shown an increase of 4.25% in the total income
from the year 2006 to 2007. Canara bank has shown an increase of
27.81% in the total income in the same year whereas foreign banks like
Deutsche bank and ABN Amro have shown an increase of 40.24% and
52.23% respectively. The data of the banks indicates that foreign banks
are giving tough competition to the Indian banks on the one hand and on
the other hand, they are also compelling them to improve their service
standards to match with the standards adopted by the foreign banks.
Because of the WTO negotiations and liberalization policy of the
government, foreign banks are getting more and more opportunities to
capture large market share in the Indian banking sector along with certain
benefits to improve upon the growth rate of the overall economy. (Refer
Annexure 11 & 12)
(Amount in Rs.
Crore)
Indian Banks
State Bank of India Canara Bank Bank of Baroda
2006 2007 % change2006 2007% change2006 2007% change
24901.84
28940.27 16.22
6291.26
7354.39 16.90
6977.45
7802.04 11.82
Foreign Banks
HSBC Citibank JP Morgan Chase Bank
2006 2007 % change2006 2007% change2006 2007% change
3634.415317.63 46.31
1313.97
2564.16 95.15540.81
1194.12 120.8
Table 9: TIER I Capital of Indian and foreign banks in the year 2006 and 2007
The above table shows the TIER I capital (includes equity capital, and
reserves and surplus) of different banks in the year 2006 and the year
2007. The TIER I capital of SBI in the year 2006 was Rs. 24901.84 crore
which was increased to Rs. 28940.27 crore in the year i.e. an increase of
16.22%. Now if we compare this percentage change in TIER I capital with
Canara bank, there is a marginal difference whereas the change in TIER I
capital of Bank of Baroda from the year 2006 to the year 2007 is 11.82%
which is quite lesser than that of SBI and Canara Bank. In foreign banks, JP
Morgan Chase Bank’s Tier I capital increased from Rs. 540.81 crore to Rs.
1194.12 crore i.e. a change of 120.8% and HSBC’s and Citibank’s Tier I
capital showed an increase of 46.31% and 95.15% respectively in the
same period. The change in TIER I capital indicates an increase in the
equity capital or reserves and surplus in foreign and Indian banks. It can
be clearly identified from the table that the TIER I capital of foreign banks
are increasing at a higher pace as compared to Indian banks indicating
tough competition in the Indian banking market in the future due to more
and more investment in the capital of foreign banks. (Refer Annexure 13
& 14)
(i) Improving profitability: The most direct result of the changes in the
financial sector is increasing competition and narrowing of spreads and its
impact on the profitability of banks. The challenge for banks is how to
manage with fewer margins while at the same time working to improve
productivity which remains low in relation to global standards. This is
particularly important because with dilution in bank’s equity, analysts and
shareholders now closely track their performance. Thus, with falling
spreads, rising provision for NPAs and falling interest rates, greater
attention will need to be paid to reducing transaction costs. This will
require tremendous efforts in the area of technology and for banks to build
capabilities to handle much bigger volumes.
5. SUGGESTIONS AND
RECOMMENDATIONS
There are broadly four major issues that will come up for consideration in
the next round of WTO negotiations. They are:
Should we retain restriction on foreign share of banking assets?
Should we retain the restriction on the number of branch licenses
per year?
What about the investment limit by branches of foreign banks (in
India) in finance companies?
Should we allow trading in banking through modes of supply other
than commercial presence?
6. CONCLUSION
For the past three decades India's banking system has several outstanding
achievements to its credit. The most striking is its extensive reach. It is no
longer confined to only metropolitans or cosmopolitans in India. In fact,
Indian banking system has reached even to the remote corners of the
country. This is one of the main reasons of India's growth process. Another
reason for the great success of Indian banks is that WTO has opened the
gates of expansion for the banks of all the member countries to enjoy the
benefits of liberalization of services and to establish them as stronger
entities to enhance the productivity of the world economy by entering into
the different markets in different economies by way of mergers or by way
of establishing their own branches. This have given an ample opportunities
to the banking sector to grow much faster and to facilitate or to increase
the contribution into GDP by catering to large number of customers
located in different geographical areas in different countries. WTO has
given the chance to the banks to use the foreign capital by way of FDIs or
FIIs which would generate much higher profits than with the domestic
capital because foreign capital brings with it the technological
advancements to provide better products and services at a cheaper cost. It
has also helped the banking sector to perform its functions at a global
level and it has also acted as a supporter in setting the global standards
for the banks which can be used as a benchmark by the Indian banks to
expand their businesses to achieve or earn higher profits which in turn will
help them in growing globally to aid to the development of the whole
economy. With the help of entry of foreign banks in the Indian banking
sector through mergers & acquisitions, the financial sector has become
strong enough to facilitate the payment mechanism in the economy as per
the set global standards.
India has agreed to provide a greater role for foreign banks as a part of the
World Trade Organization (WTO) agreement. As a result the Indian
banking industry is undergoing a rapid dismantling of long-standing
regulations in preparation for the opening of the sector, which will be
completed by 2009. The Government of India (GOI) has loosened many of
the longstanding restrictions in the past two years. Increases in the
presence of foreign banks, private banks, and foreign direct investment
(FDI) have fostered a more competitive banking environment. The 2003
-04 annual budget increased the limit of FDI in private banks from 49
percent to 74 percent. This increase allows foreign owners greater
management control over private banks. The private banks benefit from
the increase in FDI because FDI provides much-needed capital at
competitive prices and a higher Capital Adequacy Ratio (CAR) improves
the overall health of the Indian banking system.
7. ANNEXURE
400000
200000
100000
0
State Bank Canara Punjab ABN Amro Standard HSBC
of India Bank National Chartered
Bank Bank
Banks
35
Return on Net Worth %
30
25
20
Return on Net Worth %
15
10
5
0
State Canara Punjab ABN Standard HSBC
Bank of Bank National Amro Chartered
India Bank Bank
Banks
8000
2006
6000
2007
4000
2000
0
State Bank of Punjab National Citibank HSBC
India Bank
Banks
60
50
% change in operating profit
40
30
10
0
State Bank Punjab Citibank HSBC
-10
of India National
-20 Bank
Banks
400000
200000
100000
0
State Bank Canara Punjab ABN Amro Standard HSBC
of India Bank National Chartered
Bank Bank
Banks
3.5
3
Return on Assets %
2.5
2
ROA %
1.5
1
0.5
0
State Bank Canara Punjab ABN Amro Standard
of India Bank National Chartered
Bank Bank
Banks
Annexure 7: Graph showing Net profit earned by Indian and
foreign banks in the year 2006 and 2007.
5000
4500
Net Profit (in Rs. crore)
4000
3500
3000
2006
2500
2007
2000
1500
1000
500
0
State Bank of Punjab National Citibank JP Morgan Chase
India Bank Bank
Banks
50
45
% change in Net Profit
40
35
30
25 % change in Net Profit
20
15
10
5
0
State Bank of Punjab Citibank JP Morgan
India National Bank Chase Bank
Banks
Annexure 9: Graph showing Interest Income earned by Indian and
foreign banks in the year 2006 and 2007.
45000
Interest Income (in Rs. crore)
40000
35000
30000
25000 2006
20000 2007
15000
10000
5000
0
State Bank of Punjab National Citibank Bank of America
India Bank
Banks
50
% change in Interest Income
45
40
35
30
25 % change in Interest Income
20
15
10
5
0
State Bank Punjab Citibank Bank of
of India National America
Bank
Banks
Annexure 11: Graph showing Total Income earned by Indian and
foreign banks in the year 2006 and 2007.
50000
Total Income (in Rs. crore)
45000
40000
35000
30000
2006
25000
2007
20000
15000
10000
5000
0
State Bank of Canara Bank Deutsche Bank ABN Amro
India
Banks
60
% change in Total Income
50
40
20
10
0
State Bank Canara Bank Deutsche ABN Amro
of India Bank
Banks
Annexure 13: Graph showing TIER I Capital of Indian and foreign
banks in the year 2006 and 2007
35000
TIER I Capital (in Rs. crore)
30000
25000
20000 2006
15000 2007
10000
5000
0
State Bank Canara Bank of HSBC Citibank JP Morgan
of India Bank Baroda Chase
Bank
Banks
140
% change in TIER I Capital
120
100
80
% change in TIER I Capital
60
40
20
0
State Canara Bank of HSBC Citibank JP
Bank of Bank Baroda Morgan
India Chase
Bank
Banks
8. REFERENCES