A REPORT

ON

“IMPLICATIONS OF WTO ON
INDIAN BANKING”

By:

Ashish Chatrath
PGDM 07-09
FT-07-529
 FINAL DISSERTATION

DECLARATION FORM

I hereby declare that the Project work entitled

IMPLICATIONS OF WTO ON INDIAN BANKING

submitted by me for the partial fulfillment of the Post Graduate Diploma in Business

Management Program to Institute for Integrated Learning in Management, Greater

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.

Place : Greater Noida

Date : 23rd April 2009 Signature of Student

Name of Student : Ashish Chatrath

Address : 1804, Gandhi Lane, Islamabad, Amritsar.
IMPLICATIONS OF WTO ON INDIAN BANKING

Dissertation submitted in partial fulfillment of the requirements of the

two year full-time Post Graduate Diploma in Business Management

Programme.

Submitted by

Ashish Chatrath

Roll No: FT-07-529

Batch: 2007-2009

Institute for Integrated Learning in Management

Graduate School of Management
16, Knowledge Park
Greater Noida– 201 306
Month & Year
 Contents
FINAL DISSERTATION.........................................................................2
DECLARATION FORM..........................................................................2
1. The Project.........................................................7
1.1 Introduction..................................................................................7
1.2 Objectives....................................................................................8
1.3 Limitations...................................................................................8
1.4 Methodology................................................................................8
2. WTO ...............................................................10
2.1 Introduction..............................................................................10
2.2 WTO & Developing Economies...................................................10
2.3 Special& Differential Treatment Under the WTO.......................12
2.4 Functions of WTO.......................................................................13
2.5 GENERAL AGREEMENT ON TARIFFS AND TRADE (GATT)..........13
2.6 WTO & GATT............................................................................14
3. GENERAL AGREEMENT ON TRADE IN SERVICES
(GATS)...................................................................14
3.1 Principles of GATS......................................................................15
3.2 Advantages of GATS...................................................................17
3.3 Disadvantages of GATS..............................................................18
3.4 Modes of GATS.........................................................................19
3.5 Pillars of GATS ..........................................................................21
3.6 GATS Schedule...........................................................................21
3.7 India’s Commitments under GATS.............................................22
4. FINDINGS & OBSERVATIONS.............................23
4. Financial sector & banking service...............................................23
4.2 Major reform initiatives in Indian banking sector ....................25
4.3 Foreign investments in capital of Indian banks .......................27
4.4 Mergers& Acquisitions in banking sector ..................................29
4.5 WTO Requirements & Indian Banking........................................31
4.6 Regulations for foreign banks in India........................................33
4.7 WTO financial services agreement, 1997 – banking commitments
..........................................................................................................35
4.8 Banking Services in United States.............................................37
4.9 Banking services in India & United States..................................38
4.10 Banking services in China........................................................38
4.11 Challenges against Indian banking sector ...............................46
5. SUGGESTIONS AND RECOMMENDATIONS............50
5.1 WTO & future of Indian Banking Sector.....................................50
6. CONCLUSION....................................................53
7. ANNEXURE......................................................55
8. REFERENCES....................................................63

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.

In this project, the major concern was to analyze the implications

of WTO on the Indian banking system. The future projections have been
made by analyzing the change in the foreign capital investments in public
sector banks and private sector banks from the year 2004 to the year 2006
and by analyzing the change in the earnings or profits earned by the
foreign banks in the year 200 and 2007. The project required a detailed
study of the Indian banking sector with respect to the presence of foreign
banks. The main purpose of the project was to find out the impact of the
agreements governing under WTO which has a direct impact on the Indian
banking sector. GATS (General Agreement on Trade in Services) govern
the negotiations regarding services between the member nations. In
different round of negotiations happened under GATS, Government of India
removed many barriers for the foreign banks to enter into the Indian
banking market. This has proved to be one of the major reasons for the
increase in the growth rate of the Indian economy.

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.

According to the Planning Commission, the population of India will be 130

crores by the year 2020, out of which 40 percent will be urban, highly
educated, healthier and prosperous as compared to 28 percent in 2004.
Only 40 per cent of the population will be engaged in agriculture as
against 60 percent now. Share of agriculture in GDP will be a nominal 6 per
cent as against 18.5 percent according to Economic Survey 2006-07. Small
and Medium Enterprises (SMEs) will emerge as a vibrant sector and prime
job provider. Exports will constitute 35 per cent of GDP as against 15 per
cent at present. The economy will be indeed, market driven, productive
and competitive. In this competitive market, banking system will naturally
have a dominant and controlling role to play and the Indian Financial
System should be inherently strong, functionally diverse and flexible.

WTO has opened up a lot of opportunities to the banks in the

world to enter into the new markets in different economies by lowering
down the trade barriers. This has helped the banking sector to grow at a
rapid pace which in turn has helped the world economy to grow faster. The
banking sector of any economy plays a vital role in the circulation of
money by facilitating the different modes of payment. Therefore, it is
crucial for every economy to have a sound and healthy financial sector.
WTO has helped in liberalizing the trade between different countries by
facilitating negotiations between different countries. WTO has also played
an important role in setting the global standards for the banks to improve
their performances with the help of investment in other countries. FDIs
(Foreign Direct Investments) and FIIs (Foreign Institutional Investments) in
banking sector of different economies has facilitated the banks to make
use of the latest technology available in the world and to improve their
profitability by providing better services to the customers. The banking
activities these days are concentrated around major foreign banks, niche
banks, and community-based banks. The quality of assets with the banks
has improved in the past few decades and the Indian banks these days are
also concentrating towards establishing their global presence. Today, the
focus areas of banks for investment and lending are infrastructure,
education, tourism, entertainment, and health services.

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

regarding foreign capital investments in banks was collected with

the help of internet for analyzing the increase in the foreign
investment in both public and private sector banks in India.

 Comparative study of performance of Indian banks and

foreign banks in Indian economy: This report also includes a
comparative study of the banking sector of a developed economy i.e.
U.S. economy with the banking sector of the Indian economy. In this,
the foreign capital employed in various banks was studied to know
the liberalization of services and foreign investment allowed in the
capital of the banks in different economies.
 2. WTO

2.1 Introduction

The WTO is an international organization of 151 member countries that is a

forum for negotiating international trade agreements and the monitoring
and regulating body for enforcing agreements. The WTO was created in
1995, by the passage of the provisions of the "Uruguay Round" of the
General Agreement on Tariffs and Trade (GATT). Prior to the Uruguay
Round, GATT focused on promoting world trade by pressuring countries to
reduce
Tariffs. But with the creation of the WTO, this corporate-inspired agenda
was significantly ratcheted up by targeting so-called "non-tariff barriers to
trade" - essentially any national or local protective legislation that might
be construed as impacting trade.

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.

2.2 WTO & Developing Economies

The gains accruing to the developing countries from liberalization in world

trade under the multilateral trade regime of the WTO has been an issue
largely debated. Realizing that the playing field is not level before opening
up for competition, the provisions for Special and Differential Treatment to
developing countries are inherent in the Uruguay Round (UR) Agreements
of the WTO. The preface to the WTO agreement claims that efforts are
designed to ensure a share in the growth in international trade adequate
with the needs of their economic development. The special treatment is
embedded in all the agreements of WTO like the Agreement on Agriculture
(AOA). Trade Related Intellectual Property Rights (TRIPS), Trade Related
Investment Measures (TRIMS), Anti-dumping measures, Technical Barriers
to Trade, Agreement on Textiles and Clothing and the Trade in Services.
The concessions given to developing countries are seen in terms of lower
reduction commitments of support, flexibility in terms of export subsidies,
longer time period for reducing the support, implementing TRIPS, TRIMS,
special concessions on Sanitary and Phytosanitary measures technical
barriers to trade, etc.

Recognizing the fact that three-fourths of the membership of the WTO is

formed by the developing countries, and their interests cannot be
neglected, the fourth WTO Ministerial meeting held in Doha in November
2001 launched a comprehensive set of multilateral trade negotiations
known as the Doha Development Agenda. The launch of these negotiations
claimed to ensure that the trading system is relevant and responsive to
the needs of the developing countries. The benefits to the developing
countries from the declaration were expected to be largely in terms of
enhanced market access of the developed country products. The
negotiations on the
Doha agenda did not make much headway at the Cancun ministerial in
September 2003 or at Hong Kong in December 2005, despite the fact that
the negotiations are to be completed before the end of year 2005. But
much credibility of WTO now depends on its ability to provide development
opportunities for developing and least developing countries.

As per the definitions under the WTO, there is no unique definition of

“developed” and “developing” economies in the WTO. Members announce
for themselves whether they are developed or developing countries.
However, other members can challenge the decision of a member to make
use of provisions available to developing countries. Developing country
status in the WTO brings certain rights. But a WTO member announcing
itself as a developing country does not automatically mean that it will
benefit from the unilateral preference schemes of some of the developed
country members such as the Generalized System of Preferences (GSP). In
practice, it is the preference giving country which decides the list of
developing countries that will benefit from preferences. However, all
developing countries that are eligible to benefit from technical assistance
provided by the WTO secretariat and WTO members.

2.3 Special& Differential Treatment Under

the WTO

The special provisions in favor of developing countries are incorporated

into the individual agreements and decisions of the Uruguay Round. Within
each section, the special measures have also been grouped under four
headings which reflect their general nature; those recognizing the interests
of least developed/developing countries in a general manner; those easing
the rules or number of obligations to be met; those providing longer time-
frames for the implementation of certain obligations and those providing
for technical assistance.

The committee on trade and development periodically review the special

provisions in favor of developing country members and particularly the
LDCs which are included in the multilateral trade agreements.

Agreement: General Agreement on Trade in Services

Special provisions for Developing countries: Within two years of the

entry into force of the agreement, developed country members and to the
extent possible all other members are to establish enquiry points to help
suppliers from developing countries get information on the commercial
and technical aspects of supplying different kinds of services, the
registration of suppliers, the obtaining of professional qualifications and
the availability of services technology.

WTO members are allowed to enter economic integration agreements that

liberalize trade in services, provided the agreement has substantial
sectoral coverage and provides for the eliminations of substantially all
discrimination in the covered sectors. The multilateral nature of the WTO
agreement is especially attractive to small developing countries that would
otherwise have difficult time negotiating many different bilateral trade
agreements. In addition, there are benefits associated with the dispute
settlement of the WTO which provides a legal backup to deal with inter-
country trade laws which cannot be handled by countries independently.
However, the gains to the developing countries could be accrued only
under the condition that trade is not just sufficiently free but fair,
recognizing the interests of the developing countries.

2.4 Functions of WTO

 Administering and implementing the
multilateral trade agreements.
 Acting as a forum for multilateral negotiations.
 Seeking to resolve trade disputes.
 Overseeing national trade policies.
 Cooperating with other international institutions
involved in global economic presence.

2.5 GENERAL AGREEMENT ON TARIFFS

AND TRADE (GATT)
Uruguay Round (1986-1983) marks a watershed, and for the first time,
multilateral trade negotiations under General Agreement in Tariff and
Trade (GATT) encompass not only the traditional goods sector, but also
extended to three new areas, namely investment, intellectual property
rights and services.

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.

3. GENERAL AGREEMENT ON TRADE IN

SERVICES (GATS)
The General Agreement on Trade in Services (GATS) came into existence
as a result of the Uruguay Round of negotiations and entered into force on
1 January 1995, with the establishment of the WTO. GATS is the first ever
set of multilateral, legally-enforceable rules covering international trade in
services. The multilateral legal instruments resulting from the Uruguay
Round were treated as a single undertaking. India also signed all the WTO
agreements under the single undertaking rule and GATS is a part of this
whole package. 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. Like the agreements on goods, GATS
operates on three levels: the main text containing general principles and
obligations; annexes dealing with rules for specific sectors; and individual
countries’ specific commitments to provide access to their markets.

The obligations under GATS may be categorized into two groups:

General obligations: General obligations apply directly and

automatically to all member countries of the WTO and it includes most
favored nation (MFN) treatment and transparency.

Conditional obligations: Conditional obligations apply to sectors where

the member country has assumed market access and national treatment
obligations. Under conditional obligations, GATS follows a positive list
approach under which each member is expected to undertake specific
liberalization commitments through a process called "scheduling". Any
commitment can be added or improved at any time autonomously by the
member concerned but it becomes a binding commitment only if it is
scheduled. The Request-Offer approach is the main method of
negotiations, with the starting point for negotiations being the current
schedules of commitment.

3.1 Principles of GATS

The GATS create certain obligations on all members which they must
follow in the implementation of their obligations under the agreement. The
members are free to state in their schedules the services they intend to
bring under the purview of GATS and the terms and conditions of their
commitments. They may also amend them later after appropriate
negotiations with other members. But once they have made their
commitments they are required to adhere to the following principles.

 National Treatment: Under the article XVII this means that a

member shall treat the persons belonging to all other members the way
 it treat its own nationals. This means it cannot discriminate between
foreigners and its own nationals in a manner. This could also mean that:
• Foreign companies cannot be subjected to additional performance
requirements like meeting environment safeguards.
• They cannot be compelled to hire or train local staff or build
domestic capacity.
• There can be no compulsion regarding technology transfer.
• Foreign person must be extended the same tax exemption or
subsidies that are given to domestic companies.
• Foreigner can be placed on foreign companies regarding
acquisition of land and other assets.
• Members must provide the “equal competitive privileges” to both
domestic and foreign companies.

 Most-Favored Nation Treatment (MFNT): Under Article II,

MFNT means that every member shall treat all others the way it treats
its best friend among them. That is, member shall extend the best of
the trade terms it offers to a member to all others on an equal footing.
While, “national treatment” obligates a member not to make any
discrimination between its own nationals and foreign nationals, MFNT
requires a member not to discriminate between other member-states
and that it should offer them uniform treatment. This is also referred to
as Generalized System of Trade Preferences (GSP). Sometimes MFNT is
offered on the condition of reciprocity, that is State would extend to
another State MFNT only if the latter also commits itself to extend the
same. But under GATS the MFNT has to be unconditional.

 Minimum Treatment: Under Article XVI, a

member has to extend to all other members a treatment not less
favorable than what it has committed itself under its schedule. But if it
were to offer to any member a better deal than what it has committed
itself under its schedule, then it has to extend to all other members the
same treatment under MFNT clause. If a member modifies its schedule
and either enhances its commitment, then it has to extend the same to
all other members. This may be in terms of number of service suppliers
in the form of quotas, total value or number of operations, or number of
persons, or specific types of legal entities, etc.

 Schedule of Specific Commitments: Under Article XX, each member

is required to set out in a schedule the specific commitments it proposes to
undertake vis-à-vis other members. With respect to each sector the
schedule shall specify:

• Terms, limitations and conditions on market access;

• Conditions and qualifications on national treatment;
• Undertakings relating to additional commitments; and
• The date of entry into force of such commitments.

A member may, however, modify or withdraw its commitments in its

schedule after three years have elapsed and by giving a notice to the
Council for Trade in Services (to be established under Article XXIV) within
three months before the intended modification or withdrawal. The
modifying member is required to enter into negotiations with any affected
member for reaching compensatory adjustment, etc. There are provisions
for dispute settlement through arbitration, etc. However, GATS creates an
obligation on a member State to progressively enhance its commitments
over a period of time.

3.2 Advantages of GATS

 Economic Performance: An efficient services infrastructure is
must for economic success. Services such as telecommunications,
banking, insurance and transport supply strategically important inputs
for all sectors, goods and services.

 Spur of competition would encourage excellence, quality of

output and reduction in prices. This is evident from the recent Indian
experience in cell phone sector.

 Access to world-class services would revolutionize the domestic

production.

 The benefit of quality services would penetrate down to the

ultimate consumer.

 Liberalization of services sector is bound to generate process and

product innovation.
  Protectionism has led to inefficiency. Liberalization would lead to
greater transparency and stability.

 It will lead to greater technology transfer as it would be in the

interest of the investor to utilize local manpower by giving the requisite
training.

 In short, GATS would bring in (a) FDI; (b) industrialization;

(c)employment; (d) transfer of technology; and (e) generation of wealth.

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.

3.3 Disadvantages of GATS

The GATS has attracted considerable opposition from many developed

countries and various commentators for being a device for wholesale
auction of vital service sectors to MNCs of developed countries. The
following are some of the criticisms that are made against GATS.

 Though GATS supporters claim that it is a “bottom up” treaty in

the sense that a member can progressively enhance its commitments
and that there is no compulsion on any State to accept obligations it is
unwilling to, in reality it is said that the GATS never gave any
opportunity for any democratic debate at the local communities, or
regional and national parliaments. Being an imposed one, it is “top-
down” agreement.

 The whole gamut of obligations under the GATS entrenches into

the culture national resources and vital service sectors of developing
countries.
  The past experience of privatization of resources like water in
Bolivia, Argentina and Puerto Rico has proved to be disastrous, Prices of
water had gone up and the poor suffered.

 Indian experience with Enron in privatizing power production in

Maharashtra has not been a happy one.

 In sectors like health and education, entry of foreign MNCs is

likely to make healthcare and education beyond the reach of the
common man. The quality of services that they boast of would be the
privilege of the rich and the elite.

 Agriculture is another sector where poorer countries might suffer

irreparably.

 There is no evidence that liberalization would lead to increased

FDI and enhanced competition might snuff out local competition.

 What are known as “commons” i.e., forests, watersheds, culture,

arts, etc, would come under the onslaught of profit-oriented
corporations that have little regard for this common heritage of
mankind. This will result in prioritization of markets and profits over
public interest and well-being.

3.4 Modes of GATS

The GATS sets out four models of supplying services, namely:

Mode I: Cross-border trade

Mode II: Consumption abroad
Mode III: Commercial presence
Mode IV: Presence of natural persons.

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

Consumption abroad refers to situations where a service consumer

moves into another member’s territory to obtain a service (for example, or
nationals of India moved abroad as tourists, students, or patients to
consume the respective services).

MODE III

Commercial presence is the supply of a service through commercial

presence of the foreign supplier in the territory of another WTO member.
In this case, a service supplier of one member establishes a territorial
presence in another member’s territory to provide a service. (For example,
the services provided within India by a locally-established affiliate,
subsidiary, or representative office of a foreign-owned and controlled
company such as bank, hotel group, construction company, etc.).

MODE IV

Presence of natural persons involves the admission of foreign nationals

to another country to provide services there. An annex to the GATS makes
it clear, however, that the agreement has nothing to do with individuals
looking for employment in another country, or with citizenship, residence
or employment requirements. The members still have a right to regulate
the entry and stay of the persons concerned, for instance, by requiring
visas. (For example, a foreign national provides a service within India as an
independent supplier such as consultant, health worker or employee of a
service supplier which can be a consultancy firm, hospital, or a
construction company).
 3.5 Pillars of GATS
GATS have three main pillars to rest –

 The first pillar is the framework agreement, which contains basic

obligations applicable to all member countries.

 The second pillar is that of national treatment and national

schedules of commitment on market access.

 The third pillar constitutes a number of Annexes and attachments

on special situations of individual service sector.

3.6 GATS Schedule

The commitments by the member countries can be scheduled in one of the
following ways:

1. Full commitment: “None” or “No limitations”, which implies that the

member does not seek in any way to limit market access or national
treatment through measures inconsistent with Articles XVI or XVII of GATS.

2. Commitment with limitations: The member details the measures

maintained which are inconsistent with market access or national
treatment, and implicitly commits itself to take no other inconsistent
measures.

3. No commitment: “Unbound”, indicates that the member remains free

to maintain or introduce measures inconsistent with market access or
national treatment.
4. No commitment technically feasible: “Unbound”, indicates that in
the sector in question, a particular mode of supply cannot be used.

In banking, no commitment is allowed in Modes 1, 2 and 4. In Mode 3,

grant of branch licenses to foreign banks is subject to a cap of 12 licenses
per year both for new and existing banks. Licenses for new foreign banks
may be denied if the share of the assets of foreign banks in the total
banking assets (on and off balance sheet) in India exceeds 15 per cent. In
both insurance and banking, requests received from other countries in
WTO commitments include allowing full market access and national
treatment commitments as well as removal of limitations on foreign equity
participation.

3.7 India’s Commitments under GATS

India is a founder member of WTO and ratified the agreement establishing

the WTO on 30.12.1994. As in the case of other multilateral agreements,
India’s commitments to GATS are guided by the following general
principles in varying degrees:

 Gradual Approach: India believes in gradual and step by step

approach and not a Big Bang or short therapy approach.

 Human Face: All the reform programs have strong emphasis on

human face and least sacrifice made by the people.

 Sovereignty constraint: Indian government tries to minimize

the loss of power for national policy formulation that could result from
international cooperation.

 Political Constraint: India is a sovereign democratic republic

with independent judiciary, and all external relations are based on
general political consensus.

 Agency constraint: Policies are influenced by the ideology of

the political in power. But once adopted, policies are irreversible.
  Preference for decentralization: India prefers national level
policies that take into account external factors, rather than polled
mechanisms at the international level.

 Priority Reforms: Basic purpose of commitment is to strengthen

our economic position and global competitiveness, but not at the cost of
national security, public health and safety, and environmental
protection.

4. FINDINGS & OBSERVATIONS

4. Financial sector & banking service

The term ‘financial services’ is broadly used for a set of services provided
to ensure efficient mobilization and allocation of funds towards the overall
growth of an economy. By directing investment funds to their most
productive use, an efficient financial services sector can significantly
promote growth and income. As a result, the effective provision of these
services is a basic prerequisite for a dynamic and modern economy. Across
most developing countries, including India, financial services constitute a
part of the regulatory system that manages inflow and outflow of foreign
capital, reduces exchange rate volatility and provides credit to socially
desired sectors. Countries such as the United States, Japan, as well as
some members of European Union have, over the years, been vocal
demanders of liberalization of different financial services, arguing that
barriers to entry hinder economic progress and financial stability. They
also have well-developed financial service industries that stand to benefit
from access to international markets. However, the rapid flow of money
out of developing countries in the aftermath of the Latin American crisis in
1980s and the East Asian crisis in 1997, demonstrated that liberalizing
financial markets sans proper planning and management of investment is
not a recipe of success. In fact, given their immense importance in overall
stability of an economy, there is a broad disagreement among various
countries about further liberalization of financial services. These
disagreements range from both liberalization in additional financial
services sector as well deeper liberalization in a particular sector.

The Indian banking industry is passing through a phase of customers

market. The customers have more choices in choosing their banks. A
competition has been established within the banks operating in India. With
stiff competition and advancement of technology, the services provided by
banks have become more easy and convenient.

Financial sector reforms were initiated as part of overall economic reforms

in the country and wide ranging reforms covering industry, trade, taxation,
external sector, banking and financial markets have been carried out since
mid 1991. A decade of economic and financial sector reforms has
strengthened the fundamentals of the Indian economy and transformed
the operating environment for banks and financial institutions in the
country. The most significant achievement of the financial sector reforms
has been the marked improvement in the financial health of commercial
banks in terms of capital adequacy, profitability and asset quality as also
greater attention to risk management. Further, deregulation has opened
up new opportunities for banks to increase revenues by diversifying into
investment banking, insurance, credit cards, depository services,
mortgage financing, securitization, etc. At the same time, liberalization has
brought greater competition among banks, both domestic and foreign, as
well as competition from mutual funds, NBFCs, post office, etc. and the
competition will only get stronger, as large global players emerge on the
scene. Increasing competition is squeezing profitability for the banks and
forcing them to work efficiently on shrinking areas. Increase of competition
means greater choice available to consumers, and the increased level of
sophistication and technology in banks. As banks benchmark themselves
against global standards, there has been a marked increase in disclosures
and transparency in bank balance sheets and greater focus on corporate
governance.

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.

Second phase (commencing in April 2009): The RBI may permit

merger or acquisition of any private sector bank in India by a foreign bank.

4.2 Major reform initiatives in Indian

banking sector
Some of the major reform initiatives in the last decade that have changed
the face of the Indian banking and financial sector are:

1. Interest rate deregulation: Interest rates on deposits and lending

have been deregulated with banks enjoying greater freedom to determine
their rates.

2. Adoption of prudential norms in terms of capital adequacy, asset

classification, income recognition, provisioning, exposure limits,
investment fluctuation reserve, etc.
3. Reduction in pre-emption – lowering of reserve requirements (SLR and
CRR), thus releasing more resources to lend which banks can deploy
profitably.

4. Government equity in banks has been reduced and strong banks have
been allowed to access the capital market for raising additional capital.

5. Banks now enjoy greater operational freedom in terms of opening and

swapping of branches, and banks with a good track record of profitability
have greater flexibility in recruitment.

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.

8. Several new institutions have been set up including the National

Securities Depositories Ltd., Central Depositories Services Ltd., Clearing
Corporation of India Ltd., Credit Information Bureau India Ltd.

9. Limits for investment in overseas markets by banks, mutual fund

companies i.e. Asset Management Companies (AMCs) and corporates have
been liberalized. The overseas investment limit for corporates has been
raised to 100% of net worth and the ceiling of $100 million on prepayment
of external commercial borrowings has been removed. AMCs and
corporates can now undertake FRAs (Forward Rate Agreements) with
banks. Indians are allowed to maintain resident foreign currency
(domestic) accounts and full convertibility for deposit schemes of NRIs has
been introduced.

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.

11. Technology infrastructure for the payments and settlement system in

the country has been strengthened with electronic funds transfer,
Centralized Funds Management System, Structured Financial Messaging
Solution, Negotiated Dealing System and move towards Real Time Gross
Settlement.

12. Adoption of global standards: Prudential norms for capital

adequacy, asset classification, income recognition and provisioning are
now close to global standards. RBI has introduced Risk Based Supervision
of banks (against the traditional transaction based approach). Best
international practices in accounting systems, corporate governance,
payment and settlement systems, etc. are being adopted.

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%.

4.3 Foreign investments in capital of

Indian banks

 PUBLIC SECTOR BANKS

Na Name of the Bank No. of % to Paid N No. of % T o Paid

Shares (a up C apitalShares (a Osup Ca
as on 31.03. on capital
.2 04) 31.03.2006)
Andhra Bank 2,15,77,223 5.39 8,40,30,646 17.32
Bank of Baroda 4,75,40,615 16.14 73,33,56,892 20.13
Bank of India 2,37,64,900 4.86 6,44,68,034 13.19
Canara Bank 4,36,00,569 10.63 7,49,35,787 18.27
Corporation Bank 1,10,83,135 7.72 1,44,47,387 10.07
Indian Overseas Bank 11,31,795 0.20 9,49,49,445 17.42
Oriental Bank of 2,53,75,968 13.17 4,97,68,926 19.86
Commerce
Punjab National Bank 2,96,25,795 11.16 6,32,47,778 20.00
State Bank of India 6,01,97,755 11.43 6,25,03,693 11.87
Syndicate Bank 36,83,407 0.78 6,37,89,100 13.51
UCO Bank 6,25,000 0.07 1,45,71,873 1.82
Union Bank 5,39,07,074 11.71 10,06,13,918 19.91
Vijaya Bank 2,19,71,273 5.06 6,94,62,629 16.02

Table 1: Foreign investment in public sector banks in the year 2004 and 2006.

 PRIVATE SECTOR BANKS

 Name of the Bank No. of % to Paid No. of % to Paid
Shares (as onup Capital Shares (as onup Capital
31.03.2004) 31.03.2006)
Centurian Bank 76,73,437 5.37 27,75,78,001 21.67
Federal Bank 10,65,637 4.80 1,83,15,281 27.53
HDFC Bank 7,67,38,812 27.02 10,22,08,872 32.71
ICICI Bank 28,33,78,082 38.63 41,48,16,138 46.63
Indusind Bank 1,36,76,792 4.70 3,75,20,769 12.90
ING Vysya Bank 46,45,021 20.53 1,55,02,328 17.03
Jammu & Kashmir 77,12,696 15.90 1,45,49,707 29.99
Bank
Karnataka Bank 18,98,653 4.68 2,29,13,805 18.88
Karur Vysya Bank 9.19,613 5.10 29,43,356 16.35
Kotak Mahindra Bank 94,35,947 7.92 6,45,43,383 20.93
UTI Bank 3,31,63,474 14.27 9,69,84,197 34.87

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.

4.4 Mergers& Acquisitions in banking

sector
Whether it is an Industrial Sector or Services Sector, mergers &
acquisitions have become way forward in today’s world. In a free market
economy, companies have to keep evolving to remain competitive.
Adaptability to changes in the market becomes a crucial factor for survival.
Banking system is the bloodline of any economy and banks are trustees of
public money. The depositors therefore, have more stakes in the welfare of
banks than the share holders. Failure of a bank has more systemic
implications than say, the failure of a manufacturing company. Laws
governing regulation and supervision of banks in all countries therefore
focus on protecting the interests of depositors.

Mergers and Acquisitions are not an unknown phenomenon in Indian

Banking. The predecessor of State Bank of India, the Imperial Bank of India
was born out of consolidation of three Presidency Banks way back in 1920.
Merger of Times Bank with HDFC Bank was the first of such consolidations
after financial sector reforms ushered in 1991. Merger of Bank of Madura
with ICICI Bank, reverse merger of ICICI with ICICI bank, coming together of
Centurion Bank and Bank of Punjab to form Centurion Bank of Punjab and
the merger of Lord Krishna Bank and Federal Bank are voluntary efforts by
banks to consolidate and grow.

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 Malaysia, the Central Bank implemented a well crafted financial master

plan aimed at strengthening the domestic banks by creating a level
playing field for foreign banks and open banking sector to global
competition.

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.

Thailand has implemented a Financial Sector Master Plan aimed at

removing obstructions to Mergers & Acquisitions and also allows FDI flow
to strengthen the banking system.

Consolidation or merger can be done with two basic motives:

1. Maximize value for shareholders or stakeholders: All the

activities of any bank will be to earn huge profits to maximize
stakeholders’ value and the value maximization can only be achieved
through a reduction in ‘cost’ or an increase in ‘revenue’.

1.1 Achieving cost reduction

a) Cost reduction through economy of Scale:

Consolidation helps in scaling in up operations, there by reducing per unit
cost.
b) Cost reduction through economy of Scope: This
is achieved through synergy involved in the ability to offer multiple
products using the same infrastructure. Example: Banks can offer
insurance and investment products using their branch network and
thereby achieve economy of scope.
c) Cost reduction through rationalization of man
power: The merged entity will be able to identify the right persons to
manage critical functions from a larger pool of human resources.
d) Reduction in risk: The merged entity will be able
to reduce credit risk through spreading it across wider geographies or
product range.
e) Cost reduction through possible reduction in tax
obligations.
f) Cheaper sourcing of inputs with increased
bargaining power with vendors and suppliers.
g) Ability to enter new business areas with reduced
initial cost as compared to a new set up.

1.2 Increasing Revenue

A bigger entity will be able to serve a large customer base. By offering
more services and taking bigger share in the business of the customer,
the bank will be able to increase the
.

2. Non-value maximizing motives: Non-value maximizing motives

could very often be ego factors of personal ambitions of managers. It could
even be to ward of take over by another company.

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.

4.5 WTO Requirements & Indian Banking

Since 1941 several nations of the world have attempted to evolve a
system under which multilateral trade among nations is carried out
smoothly without any hindrance. Since the first round in 1941 at Geneva
with 23 participant nations, several rounds have been conducted again at
Geneva between 1986 and 1993 with 117 member nations. At the end of
these meetings, GATT (General Agreement on Tariffs and Trade) gave way
to the establishment of a permanent organization to guide multilateral
trade, namely World Trade Organization. Given the wide variance among
member nations in the state of their economies, member nations were
classified into three categories, namely, developed, developing and least
developed nations. At the end of the Uruguay Round, all members
including India agreed on the following:

• To offer the Most Favored Nation (MFN) treatment to all member

countries;
• To offer reduced tariffs;
• To remove all subsidies to domestic industries and agriculture;
• To remove all quantitative restrictions on imports and exports;
• To ensure intellectual property rights of member nations; and
• To ensure that exports satisfy phytosanitary measures agree on.

Basically, the agreement signed during June 1995 in Geneva gives

opportunity for banks in 140 member countries to offer their banking
services to Indian consumers using all or any of the four modes of GATS.
By the same token, Indian banks now have the freedom and opportunity to
enter other member countries of WTO, to provide their services to the
nationals of these countries using any of the four modes. Following this
agreement, Government of India has liberalized shareholding of foreign
banks in Indian banks. Foreign banks are now allowed to pick-up as much
as 74%, of the equity shares of an Indian bank, against only 20% permitted
earlier. As foreign Institutional Investors (FIIs) can hold upto 49%. Till
recently, the RBI has been restricting branch expansion of foreign banks.

All the above actions of Government of India, under the veil of

economic reforms in the financial sector, will have far-reaching
implications to Indian banks. The first implication is that Indian banks will
be expected to take on international banks, some of whose sheer size is
frightening.

To succeed under WTO requirements, Indian banks need much higher

levels of operational efficiency, increase operating income by providing a
variety of new services, ensure efficient cost control, take speedy
commercial decisions and possess knowledge and ability to face
uncertainties and emerging new challenges. After making these
adjustments to retain and further gain in the domestic market, Indian
banks need to aggressively enter other member countries and provide
their services to enable marketing of Indian goods and professional
services to these countries. The banking system in India, which helped
transform the poor Indian economy of the 1950s to become one of the
largest economies in the world, in terms of Purchasing Power Parity (PPP),
will rise to the occasion and continue to contribute to India’s growth
through its dynamism and expanded activities, not only within India, but in
other member countries of the World Trade Organization.

4.6 Regulations for foreign banks in India

At present, there are 29 foreign banks operating in India with a network of
273 branches and 871 off-site ATMs. The major foreign banks in India are
the Standard Chartered Bank, Citibank, Hong Kong & Shanghai Banking
Corporation, ABN Amro Bank and the Deutsche Bank. The primary activity
of most foreign banks in India had been corporate banking. However, since
mid-1990s, foreign banks added consumer financing to their portfolio and
today the foreign banks offer a wide-range of products such as automobile,
home and household consumer loans as well as credit cards.

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.

Unlike the restrictive practices of certain foreign countries, India is liberal

in respect of the licensing and operation of the foreign bank branches as
illustrated by the following:

 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.

In terms of India’s commitment to WTO, as a part of market access, India

is committed to permit opening of 12 branches of foreign banks every
year. As against these commitments, Reserve Bank of India has permitted
upto 17- 18 branches in the past. The Bank follows a liberal policy where
the branches are sought to be opened in unbanked/under-banked areas.
Off-site ATMs are not counted in the above limit. Including off-site ATMs,
foreign banks are having (as on October 15, 2007) place of business at 933
locations (273 branches + 660 off site ATMs).

The procedure regarding approval of proposals for opening branches of

foreign banks in India has been simplified and streamlined for the sake of
expeditious disposal. A license under the provisions of B.R. Act, 1949
enables the foreign banks to carry out any activity which is permissible to
a bank in India. This is in contrast with practices adopted in many
countries, where foreign banks can carry out only a limited menu of
activities.

As against the requirements of achieving 40 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 achieve the minimum target of
32% of net bank credit for priority sector lending. Within the target of 32%,
two sub targets in respect of advances (a) to small scale sector (minimum
of 10%), and (b) exports (minimum of 12%) have been fixed. The foreign
banks are not mandated for targeted credit in respect of agricultural
advances. There is no regulatory prescription in respect of foreign banks to
open branches in rural and semi-urban centers.

4.7 WTO financial services agreement, 1997

– banking commitments
India ratified the agreement establishing the WTO in December 1994. Its
original schedule in the Financial Services Agreement committed foreign
bank presence only through branches at the rate of five licenses per year.
It denied the entry of foreign banks if the market share of assets of foreign
banks exceeds 15 per cent of the total assets of the banking system. It
treated an ATM outside branch premises as a separate branch. India also
invoked a MFN exemption in all areas of financial services meaning that its
offers are based on reciprocity.

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:

 India should lift its MFN exemptions if other members do the

same.
 India should increase the number of licenses and provide a
gradual increase in the market share on assets of the foreign banks.
 Market share itself should be defined properly in terms of the
fund-based assets or total assets on and off the balance sheet.
 Subsidiaries and joint ventures should be allowed in banking.
 Discrimination against foreign banks in terms of higher rate of
taxation, and in placement of surplus funds by public sector units (i.e.
national treatment) should be removed.

Against these considerations, during the final round of negotiations that

was held in December 1997, India made the following commitments:

 It deleted MFN exemption in all areas of financial services.

 India increased the limit on the number of bank licenses granted
per year from eight to 12 but kept the market share unchanged at 15
per cent for foreign banks. But this share of assets is computed as a
total of on- and off-balance sheet basis. Licenses issued for ATMs
installed by foreign banks were not included in the ceiling of 12
licenses.
 Foreign banks already operating in India can invest no more than
10 per cent of owned funds in other financial service companies or 30
per cent of the invested company’s capital, whichever is lower.

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.

4.8 Banking Services in United States

The United States was an original signatory to the GATT and a leading
proponent of the GATT’s free-market principles. It continues to be among
the countries urging further discussions on opening markets to trade.
Although decisions in the WTO are by consensus, the United States has a
highly influential role in the WTO, because it is the largest trader in the
world. The U.S. banking sector is deep, competitive, and supported by a
strong economy and prudent supervision. The banking industry serves a
diverse market, providing wholesale and retail financial services to
corporations, small and medium-sized enterprises (SMEs), and individuals.
The banking sector includes deposit-taking commercial banks and thrifts.
The U.S. banking sector has mirrored consolidation trends in other major
economies but is still relatively unique in its significant number of regional
and community banks.

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.

4.9 Banking services in India & United

States
While 19 U.S. based banks had Indian branches approved between 2003
and October 2007, no Indian banks had received U.S. approval in the
period. Indian banks had applied to set up three branches, two subsidiaries
and nine representative offices in U.S. territory, with some requests
pending for more than five years. The regulatory regime in India provided
a level playing field for foreign and domestic banks. Prudential rules were
the same as for local banks, and foreign banks even enjoyed a lower
priority-sector lending requirement of 32 percent of adjusted bank credit
against 40 percent for Indian banks. Foreign banks had 6.1 percent of
deposits and 6.8 percent of advances in the commercial banking system
as at the end of June, 2007. Foreign banks dominated the off-balance
sheet business with a market share of as high as 72.7 percent, and they
had 52 percent of total foreign exchange turnover in the first half of 2007-
08 (April-March) from 41 percent in 2005-06. Foreign banks also recorded
a higher rate of return than local banks from local operations. Net profit
per branch for foreign banks in 2005-06 was 119.9 million rupees ($30.3
million) compared to 3.3 million rupees for local banks.

4.10 Banking services in China

As an important component to the country's overall economic system, the
China’s banking industry has seen rapid growth in line with the economic
development of the People’s Republic of China (PRC). Banks have
historically been, and continue to be, a significant source of capital for the
economy and the primary choice for domestic savings. The Chinese
banking sector comprises broad categories of banking institutions, namely
joint stock commercial banks, urban commercial banks, urban credit
cooperatives, rural credit cooperatives, foreign-invested commercial banks
and other financial institutions.
As of the year 2006 end, the total assets of the China’s banking
sector amounted to Yuan 43.95 Trillion (US$ 5.812 Trillion), an increase of
Yuan 16.31 Trillion (US$ 2.16 Trillion) from 2003. During the same period,
the total liabilities of the banking sector reached Yuan 41.71 Trillion (US$
5.516 Trillion), an increase of Yuan 15.14 Trillion (US$ 2.0 Trillion).

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).

The Shanghai Bank welcomed three international shareholders in the year

2002, including the global banking giant Hong Kong and Shanghai Banking
Corporation (HSBC) and the International Finance Corporation (IFC) under
the World Bank, which hold 8 percent and 7 percent respectively of the
Shanghai Bank's shares.

According to China's WTO accession agreement in 2001, Beijing agreed to

open its banking sector to full foreign competition from December 11,
2006. But Chinese authorities are formulating new regulations that could
hamper the efforts of overseas banks to attract retail customers. The
banking analysts speculated that Beijing has drafted the new rules in a bid
to contain the influence of foreign banks in China, according to the
International Herald Tribune.

Chinese financial regulators planned to impose tighter restrictions on

foreign banks trying to get a slice of the country's huge pile of local
currency deposits, worth an estimated US$2 trillion. For the more than 70
foreign banks that operate about 230 branches in the country, the new
regulations could limit future expansion plans into smaller second- and
third-tier cities.
Foreign banks are eyeing entering the potentially lucrative consumer
banking market where they could seek Yuan-denominated deposits, issue
credit cards, and offer home loans. The proposed rules would call for
foreign banks to incorporate in China with a minimum of RMB1 billion, or
US$123.3 million, in capital before they could compete with domestic
banks for retail customers.

Foreigners are facing growing regulatory hurdles across the financial

sector. In September 2006, international firms were denied the opportunity
to acquire domestic brokerages. The China Securities Regulatory
Commission announced it would stop issuing licenses to foreigners to open
new branches in an effort to give domestic players more time to improve
profitability.

The ban appears to alter plans by Beijing to draw on foreign investors'

capital and management expertise to help clean up a sector plagued for
years by poor management and heavy losses. Under its WTO
commitments, China must allow foreign investors to hold stakes of as
much as 49 percent in local brokerages by December 2006. The current
ceiling is 33 percent.

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.

BANKS’ PERFORMANCE IN INDIAN ECONOMY

(Amount in Rs. Crore)
Indian Banks
State Bank of India Canara Bank Punjab National Bank
Net Worth Return % Net Worth Return % Net Worth Return %
566565.24 15.41 165961.04 18.78 162422.5 16.03

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)

(Amount in Rs. Crore)

Indian Banks
 State Bank of India Punjab National Bank
2006 2007 % change 2006 2007 % change
11299.23 9999.94 -11.5 2917.11 3230.65 10.75

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

As shown in Table 2, State Bank of India showed a decline in its operating

profit from Rs. 11299.23 crore in the year 2006 to Rs. 9999.94 crore in the
year 2007 i.e. a decrease of 11.5% whereas Punjab National Bank showed
an increase its operating profit from Rs. 2917.11 crore in the year 2006 to
Rs. 3230.65 crore in the year 2007 i.e. an increase of 10.75%. These
figures depict that the operational efficiency of PNB has increased in the
year 2007 whereas the operational efficiency of SBI has decreased. Now if
we compare the change in operating profit of Indian banks with foreign
banks, it can be clearly identified that the foreign banks enjoy better
operational efficiency as compared to Indian banks. Citibank showed an
increase in its operating profit from Rs. 1577.1 crore in the year 2006 to
Rs. 2180.45 crore in the year 2007 i.e. an increase of 38.26% and HSBC
showed an increase in its operating profit from Rs. 1277.07 crore in the
year 2006 to Rs. 1922.39 crore in the year 2007 i.e. an increase of
50.53%. Therefore, it is cleared from the above data that Indian banks are
falling behind the foreign banks in its operational efficiency. Foreign banks’
operational efficiency is higher than the Indian banks which is the reason
for a higher increase in the operating profits of foreign banks when
compared with Indian banks.
(Refer Annexure 3 & 4)

(Amount in Rs. Crore)

Indian Banks
Punjab National
State Bank of India Canara Bank Bank
Total Assets ROA % Total Assets ROA % Total Assets ROA %
566565.24 0.84 165961.04 0.98 162422.5 1.03

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)

(Amount in Rs. Crore)

Indian Banks
State Bank of India Punjab National Bank
2006 2007 % change 2006 2007 % change
4406.67 4541.31 3.06 1439.31 1540.08 7.00

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)

(Amount in Rs. Crore)

Indian Banks
State Bank of India Punjab National Bank
%
2006 2007 change 2006 2007 % change
35979.57
39491.03 9.76
9584.15
11537.48 20.38

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)

(Amount in Rs. Crore)

Indian Banks
State Bank of India Canara Bank
% %
2006 2007 change 2006 2007 change
43414.77
45260.27 4.25
10027.08
12815.51 27.81

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)

4.11 Challenges against Indian banking

sector

(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.

(ii) Reinforcing technology: Technology has thus become a strategic

and integral part of banking, driving banks to acquire and implement world
class systems that enable them to provide products and services in large
volumes at a competitive cost with better risk management practices. The
pressure to undertake extensive computerization is very real as banks that
adopt the latest in technology have an edge over others. Customers have
become very demanding and banks have to deliver customized products
through multiple channels, allowing customers access to the bank round
the clock.

(iii) Risk management: The deregulated environment brings in its wake

risks along with profitable opportunities, and technology plays a crucial
role in managing these risks. In addition to being exposed to credit risk,
market risk and operational risk, the business of banks would be
susceptible to country risk, which will be heightened as controls on the
movement of capital are eased. In this context, banks are upgrading their
credit assessment and risk management skills and retraining staff,
developing a cadre of specialists and introducing technology driven
management information systems.

(iv) Sharpening skills: The far-reaching changes in the banking and

financial sector entail a fundamental shift in the set of skills required in
banking. To meet increased competition and manage risks, the demand for
specialized banking functions, using IT as a competitive tool is set to go
up. Special skills in retail banking, treasury, risk management, foreign
exchange, development banking, etc., will need to be carefully nurtured
and built. Thus, the twin pillars of the banking sector i.e. human resources
and IT will have to be strengthened.

(v) Greater customer orientation: In today’s competitive environment,

banks will have to strive to attract and retain customers by introducing
innovative products, enhancing the quality of customer service and
marketing a variety of products through diverse channels targeted at
specific customer groups.
(vi) Corporate governance: Besides using their strengths and strategic
initiatives for creating shareholder value, banks have to be conscious of
their responsibilities towards corporate governance. Following financial
liberalization, as the ownership of banks gets broad based, the importance
of institutional and individual shareholders will increase. In such a
scenario, banks will need to put in place a code for corporate governance
for benefiting all stakeholders of a corporate entity.

(vii) International standards: Introducing internationally followed best

practices and observing universally acceptable standards and codes is
necessary for strengthening the domestic financial architecture. This
includes best practices in the area of corporate governance along with full
transparency in disclosures. In today’s globalize world, focusing on the
observance of standards will help smooth integration with world financial
markets.

The face of banking is changing rapidly. Competition is going to be tough

and with financial liberalization under the WTO, banks in India will have to
benchmark themselves against the best in the world. For a strong and
flexible banking and financial system, therefore, banks need to tackle
significant issues like improvements in profitability, efficiency and
technology, while achieving economies of scale through
consolidation/mergers and exploring available cost-effective solutions.
These are some of the issues that need to be addressed if banks want to
succeed and not just to survive in the dynamic environment.

In India, Banking sector is emerging as a part of the new economic order

arising out of globalization expansion of rural credit, poverty eradication,
infrastructure and development of agriculture product has assumed high
priority in the nation’s development agenda. Keeping in view this phase,
an efficient financial service sector like banks can significantly promote
growth and income.

Liberalization of international trade in financial services is one of

the important aspects of negotiations on trade in banking services as a
part of the General Agreement on Trade in Services (GATS). Liberalization
of financial services provides greater opportunities for mobilization and
allocation of funds. WTO norms have opened up lot of opportunities for
Indian banking system. With the help of WTO norms, FDI i.e. foreign direct
investment is also permitted in the banking sector which has helped a lot
for the Indian banks to grow at a pacer rate by utilizing the foreign capital
to the best of its use. The financial sector liberalization spearheaded by
WTO under the garb of opening of financial services included privatization
and disinvestment of government holdings. The WTO also imposes a whole
lot of conditions like withdrawal of subsidies (soft-interest loans etc.) and
even manpower limitations.

WTO has facilitated a number of global banks taking large stake

and control over banking entities in India. This had brought capital,
technology and management skills. The globalization of financial sector
has also gained importance with the technological advancements which
has effectively reduced the barriers of trade in financial services.

Today, the Indian financial system is rapidly changing. Some of the

features of this change are:
• Increasing sophistication of capital markets.
• Emergence of global investments.
• Industry consolidation.
• Heightened focus on customer relations.
• Proliferation of new players entering the market.

The growth of trade in banking services is expected to lead to the following

benefits:-

 Economic performance: Presence of an efficient services

infrastructure is required for the success of any economy. Banking
Services supply vital inputs for all sectors in the form of borrowings and
capital requirements.

 Employment Opportunities: Growth in trade in banking

services promotes employment within the country.

 Consumer Choice: Liberalization leads to lower prices, better

quality and provides a wider choice for the consumers. Presence of
banking services at a global level, the banks can provide better services
to its customers at a cheaper rate.

 Technology Transfer: Liberalization of financial services also

encourages FDI which brings new IT and technologies which helps in the
development of the financial sector of the economy.

 Development: Access to the world economies help the banks in

catering to the larger market segment and increasing the customer
 base which in turn help in the development of the overall economy by
capitalizing on their competitive strength.

5. SUGGESTIONS AND
RECOMMENDATIONS

5.1 WTO & future of Indian Banking

Sector
Increasing globalization of trade under the WTO has provided India with a
new opportunity as well as a necessity to strengthen her efforts at
reforming her domestic financial sector. The real issue before India is how
to obtain the best deal for herself in the current round of negotiations
while seeking to reform her financial sector. In this paper the authors have
identified six major issues that will come up for consideration in this round
of WTO negotiations and made recommendations for India’s response
strategy by appropriately drawing lessons from the global experience in
the opening up of the banking sector.

It is observed that there is a divergence difference of interests and

motivations of different countries participating in the financial services
negotiations. Most of the developed countries look for market access and
export gains for their large and technologically advanced financial firms.
Developing countries, which normally do not enjoy international
competitive advantage for their financial services, seek external capital
flows for their capital-scarce economies on the one hand, and competitive
efficiency for their domestic financial markets, on the other hand. India, no
doubt, possesses superior management talent and is at the forefront of
new technology. Still, our financial firms are far from competitive to be
able to exploit opportunities abroad. Following area few considerations
which should guide the negotiators in determining India’s stance at the
future rounds of financial services negotiations.

An important consideration is that India stands to gain by joining

the global financial markets as benefits far outweigh risks. Primarily, India
needs large inflows of foreign capital for achieving and sustaining over 8
percent per annum of real GDP growth. Globalization also has a
disciplinary role for future macroeconomic, structural and prudential
policies. Foreign competition in insurance sector, which has started in a
limited way and reforms in provident and pension funds, will enhance the
savings rate and availability of long term funds for infrastructure
development. It is now well recognized that India does have opportunities
in foreign markets, unlike many other developing countries, through
movement of natural persons abroad of skilled labor (software engineers,
consultants, etc) and through export of services like financial data
processing, back office work, customer services, etc.

However, opening of Indian financial markets has to be done cautiously to

avoid an East Asian type of crisis. In these countries, financial and
structural weaknesses caused the crisis. The major lesson from the crisis is
that deregulation and internationalization could trigger a crisis if
undertaken without adequate safeguards. India, therefore, needs to
strengthen the financial sector through reforms, particularly by
institutional capacity-building. Reform of the financial sector, besides being
in our own interest, is an important part of India’s response strategy to
WTO negotiations.

It must be remembered that the process of transition to a competitive

environment cannot be achieved rapidly. Therefore, we need to negotiate
for a longer transition period.

There should be an element of reciprocity in our stance. That is, India

should give in to foreign demands only to the extent that the country
receives concessions. Areas can be identified in which India should seek
benefits from the developed countries. There continues to be a variety of
restrictions to the physical movement of India’s natural persons to
developed countries. These barriers relate primarily to granting of visas
and work permits such as wage parity requirements, requirements to pay
social and security taxes and problems with recognition of qualifications
and work experience. India should seek better market access for its
enhancing skilled and semi-skilled labor and knowledge workers and
thereby enhance the scope of export of services.
Foreign banks in India have outperformed other categories of banking
firms (with exceptions in some years), in terms of both operating as well as
net profit levels as a proportion of total assets. This is also reflected in the
higher ‘spread’ enjoyed by the foreign banks in India than any other
category of banks. In the next round of negotiations, developing countries
like India, China should made demands to the developed economies like
U.S. for the approvals of the pending requests. They should also pressurize
the U.S. government to remove certain restrictions for the entry of the
foreign players in the U.S. banking sector with a view to liberalize the trade
in banking services so that the banks of the developing economies can
improve their profitability by exploring the overseas market. India should
think carefully before increasing the limit of granting branch licenses to
U.S. so as to demand U.S. government to grant the approval of the
pending requests made by India. Indian government should limit the
liberalization of services to the present level because if the foreign banks
are allowed to work freely as domestic banks with 100% FDI, foreign banks
will dominate over domestic banks. The profits thus generated by the
foreign banks would be repatriated to their home countries. Foreign banks
also make use of upgraded technology which they bring in from the
developed economies which will result into tougher competition for
domestic banks. Domestic banks will incur more losses and it will
adversely affect the financial sector of the Indian economy and GDP
contribution by banking services. Entry of foreign banks is a good prospect
of development for the developing economies but restriction free trade in
banking by the foreign players may force Indian economy to depend on
the foreign banks rather than domestic banks for the efficient working of
the financial system.

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.

Foreign banks currently possess only a marginal portion of the banking

market in India, Foreign presence in the banking sector is sure to increase
in future because of both the expanding demand for banking services and
the compliance with international standards set forth by WTO and Basel II
agreements. The foreign banks in India operate quite differently from the
domestic banks. The return on assets for foreign banks is double than that
of the domestic banks. Foreign banks are more competitive than the
domestic banks due to greater technology use and better risk
management. Therefore, the foreign banks have a better scope of earning
profits in Indian economy as compared to the domestic banks and this
benefit of investment will attract a large number of foreign banks to invest
more and more money in Indian banking sector.

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

Annexure 1: Graph showing Net Worth of Indian and foreign banks

in the year 2007
 600000
Net Worth (in Rs. crore)
500000

400000

300000 Net Worth

200000

100000

0
State Bank Canara Punjab ABN Amro Standard HSBC
of India Bank National Chartered
Bank Bank
Banks

Annexure 2: Graph showing Return on Net Worth % of Indian and

foreign banks in the year 2007.

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

Annexure 3: Graph showing Operating Profit earned by Indian and

foreign banks in the year 2006 and 2007.
 12000
Operating Profit (in Rs. crore)
10000

8000
2006
6000
2007
4000

2000

0
State Bank of Punjab National Citibank HSBC
India Bank
Banks

Annexure 4: Graph showing % change in operating profit of Indian

and foreign banks from the year 2006 to 2007.

60

50
% change in operating profit

40

30

20 % change in operating profit

10

0
State Bank Punjab Citibank HSBC
-10
of India National
-20 Bank
Banks

Annexure 5: Graph showing total assets of Indian and foreign

banks in the year 2007.
 600000
Total Assets (in Rs. crore)
500000

400000

300000 Total Assets

200000

100000

0
State Bank Canara Punjab ABN Amro Standard HSBC
of India Bank National Chartered
Bank Bank
Banks

Annexure 6: Graph showing Return on Assets % of Indian and

foreign banks in the year 2007.

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

Annexure 8: Graph showing % change in net profit of Indian and

foreign banks from the year 2006 to 2007.

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

Annexure 10: Graph showing % change in interest income of

Indian and foreign banks from the year 2006 to 2007.

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

Annexure 12: Graph showing % change in total income of Indian

and foreign banks from the year 2006 to 2007.

60
% change in Total Income

50

40

30 % change in Total Income

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

Annexure 14: Graph showing % change in tier I capital of Indian

and foreign banks from the year 2006 to 2007.

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

1. Official website of WTO (www.wto.org)

2. Online publication of “The Hindu Business Line”
3. Online publication of “The Tribune”
4. Online publication of “The Financial Express”
5. Online publication of “Focus WTO – A news & views magazine”
6. “World Trade Organization” by P K Vasudeva
7. India Finance and Investment Guide on www.indiamart.com
8. News information available on the website www.rediff.com
9. www.theeconomictimes.com
10. www.hindustantimes.com
12. www.businessworld.in
13. www.business-standard.com
14. Indian Economic Survey 2005-06 & 2006-07
15. India and the WTO, The Development Agenda edited by Deepika M G