ST.

ANDREWS COLLEGE
OF ARTS, SCIENCE AND COMMERCE
BANDRA (W), MUMBAI 400050.
A STUDY ON FDI IN BANKING SECTOR
Submitted for the Course
ECONOMICS OF GLOBAL TRADE AND FINANCE
IN
MASTER OF COMMERCE PROGRAMME PART I
SEMESTER I

OF THE
UNIVERSITY OF MUMBAI
BY
RAJVI DOSHI
ROLL NO: 9060
UNDER THE GUIDANCE OF Dr. Kashmira Mody
2015 2016

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DECLARATION
I hereby declare that this project report entitled A STUDY ON FDI IN
BANKING SECTOR which is being submitted in partial fulfillment of the
requirement of the course on Economics of Global Trade and Finance leading to
the award of the Master of Commerce Degree by the University of Mumbai is
the result of the research carried out by me under the guidance and supervision
of Dr. Kashmira Mody.
I further declared that I have not previously submitted this project report to any
other institution/university for any other degree/ diploma or for any other
person.

Date:
Place: Mumbai

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Signature of Student

CERTIFICATE
It is certified that this project A STUDY ON FDI IN BANKING SECTOR has
been prepared and submitted by Rajvi Doshi (Roll Number 9060) under my
guidance during the academic year 2015-2016.

Date:

Signature
(Dr. Kashmira Mody)
(Associate Professor)

Place: Mumbai

Signature of the
Internal Examiner

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Signature of the
External Examiner

Signature of the
Principal

ACKNOWLEDGEMENT
I would like to express my sincere gratitude towards my teacher and guide Dr. Kashmira
Mody. I would also like to thank our Principal Dr. Marie Fernandes for providing us with the
motivation and facilities to help me in completing this project. I would also like to thank mu
family and peers for their kind co-operation and encouragement which help me in completion
of this project. I would like to express my special gratitude and thanks towards these people.

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EXECUTIVE SUMMARY:
Foreign direct investment (FDI) has played an important role in the process of
globalisation during the past two decades. The rapid expansion in FDI by
multinational enterprises since the mid-eighties may be attributed to significant
changes in technologies, greater liberalisation of trade and investment regimes,
and deregulation and privatisation of markets in developing countries like India.
The present study aims at providing detailed information about FDI inflows in
India during the subsequent years. The analysis is fully based on secondary data
collected through different website and journals.
The project aims at providing information of present FDI policy, year wise FDI
inflows, advantages and disadvantages of FDI, RBI policy, foreign portfolio
investment, impact and importance of FDI in banking sector, etc.
And thus different suggestion and recommendation are given to improve the
present condition of FDI in India.

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SR.
NO.

1.1
1.2
2.1
2.2
2.3
2.4
3.1
3.2
3.3
3.4

3.5
3.6
3.7
3.8
3.9
3.10
3.11
3.12
3.13
4.1
4.2
4.3

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TOPICS

CHAPTER 1 - INTRODUCTION
INTRODUCTION
DEFINITION
CHAPTER 2
STATEMENT OF PROBLEM
OBJECTIVES
RESEARCH METHOLOGY
LITERATURE REVIEW
CHAPTER 3 FDI IN BANKING
TYPES OF FDIS
IMPORTANCE AND BARRIERS
TO FDI
INDIAN FDI SCENARIO
GOVERNMENT APPROVALS
FOR FOREIGN COMPANIES
DOING BUSINESS IN INDIA
IMPACT OF FDI ON INDIAN
BANKING SECTOR
WORLD BANKING SECTOR
THE PRESENT BANKING
SCENARIO IN INDIA
FDI IN INDIAN BANKING
THE IMF STUDY REPORT
FDI IN INDIA A BOON OR A
BAIN
BENEFITS OF FDI
LIMITATION OF FDI
FUTURE SCOPE
CHAPTER 4
FINDINGS AND SUGGESTIONS
CONCLUSION
REFERENCES

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CHAPTER 1
INTRODUCTION:
A foreign direct investment (FDI) is a controlling ownership in a business
enterprise in one country by an entity based in another country.
Foreign direct investment is distinguished from portfolio foreign investment, a
passive investment in the securities of another country such as public stocks and
bonds, by the element of "control. According to the Financial Times, "Standard
definitions of control use the internationally agreed 10 percent threshold of
voting shares, but this is a grey area as often a smaller block of shares will give
control in widely held companies. Moreover, control of technology,
management, even crucial inputs can confer de facto control."
The origin of the investment does not impact the definition as an FDI: the
investment may be made either "inorganically" by buying a company in the
target country or "organically" by expanding operations of an existing business
in that country.

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DEFINITION:
Broadly, foreign direct investment includes "mergers and acquisitions, building
new facilities, reinvesting profits earned from overseas operations and intra
company loans". In a narrow sense, foreign direct investment refers just to
building new facilities. The numerical FDI figures based on varied definitions
are not easily comparable. As a part of the national accounts of a country, and in
regard to the GDP equation Y=C+I+G+(X-M)[Consumption + gross Investment
+ Government spending +(exports - imports)], where I is domestic investment
plus foreign investment, FDI is defined as the net inflows of investment (inflow
minus outflow) to acquire a lasting management interest (10 percent or more of
voting stock) in an enterprise operating in an economy other than that of the
investor. FDI is the sum of equity capital, other long-term capital, and shortterm capital as shown the balance of payments. FDI usually involves
participation in management, joint-venture, transfer of technology and expertise.
Stock of FDI is the net (i.e., inward FDI minus outward FDI) cumulative FDI
for any given period. Direct investment excludes investment through purchase
of shares. FDI is one example of international factor movements A foreign
direct investment (FDI) is a controlling ownership in a BUSINESS enterprise in
one country by an entity based in another country. Foreign direct investment is
distinguished from portfolio foreign investment, a passive investment in the
securities of another country such as public stocks and bonds, by the element of
"control". According to the Financial Times, "Standard definitions of control use
the internationally agreed 10 percent threshold of voting shares, but this is a
grey area as often a smaller block of shares will give control in widely held
companies. Moreover, control of technology, management, even crucial inputs
can confer de facto control.

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CHAPTER 2
STATEMENT OF THE PROBLEM:
In todays economy FDI plays an important role in each sector. Being a
developing country, FDI is a topic of great discussion in India, considering that
foreign income has the will to change the face of the Indian economy. As easy
as it may sound to a layman that incoming cash flow is good for the economy,
FDI comes with a lot of complications. While there are few who support FDI,
there are also many who oppose the idea. The banking industry is a backbone on
which any country can grow. It is through which the entire economy and the
cash flow of the country runs. Therefore it is necessary to understand the change
in the industry which is going to be brought about by the increase in FDI in the
particular industry. The study will also illustrate how FDI changes an industry
and highlights the benefits which will be received by the people.

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OBJECTIVE OF THE STUDY:

To find out the Impact of FDI on Indian banking services.
To analyze the Impact of FDI on Indian banking Technology
To understand the Impact of FDI on Indian banking Infrastructure.
To check out customer satisfaction towards FDI

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RESEARCH METHOLOGY:
Secondary data has been done by using tools such as internet, research papers
and news articles.

AREA OF RESEARCH
Indian banking sector has been considered while researching.

LIMITATIONS OF RESEARCH
Due to certain time and resource barriers, a part of study is focused on
secondary research.

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LITERATURE REVIEW:

Manoj Kumar Sinha, Patterns of foreign direct investment flows and

economic development: a cross country analysis, University of Delhi, 21May-2013
Globalisation can be summarised as opening-up of markets, leading to
transfer of capital, technology and people. However, another important
dimension of globalisation is multilateralism. It would be obvious that the
former cannot be effective without later. One of the major objectives is of
international economic reforms was to encourage multilateralism. The
economic basis of multilateralism lies in allocative efficiency. This implies
that economies are able to import from most efficient sources and are able to
export to the best destinations. In an analogous manner, it can be said about
Foreign Direct Investment (FDI) that multilateralism implies importing
capital from a variety of sources as may be most efficient. Rather than
restricting to a bilateral basis. Similarly, the obverse of this phenomenon
would be to export capital where it can be most efficiently utilised, by
combining capital with other resources optimally. Second, these capital
transfers should work as two way relationship, which implies that the
process of globalisation should have gains for both the home country and the
host country. Therefore, we propose to study FDI flows both from the point
of view of inward FDI where the host country is the recipient country, as
well as, outward FDI where the home country is the source country. If
globalisation is a progression in the international economic relations, it
implies that capital flows are substituting trade flows. The assumption
behind such a progression is that there is a decision to switch from relative
inefficient trade to more efficient alternative of international relocation of
production or FDI.

Palit, Amitendu, Foreign direct investment in India: an economic analysis of

determinants and constraints, Jawaharlal Nehru University, 4-Feb-2014
The research paper highlights FDI in India and takes into consideration the
determinants and limitations. An economic analysis is done by taking
different industry perspectives and internal and external environment.

Yayashree Patil, Performance evaluation of Indian FDI and non FDI banks a
comparative analysis, 16-Sept-2014
The present study Performance Evaluation of Indian FDI and Non-FDI
Banks: A Comparative Analysis, is undertaken to study the performance of
FDI and Non-FDI banks, and the specific areas of economic performance
where FDI has impacted.

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CHAPTER 3
TYPES OF FDIs:
BY DIRECTION
Outward FDI - An outward-bound FDI is backed by the government against all
types of associated risks. This form of FDI is subject to tax incentives as well as
disincentives of various forms. Risk coverage provided to the domestic
industries and subsidies granted to the local firms stand in the way of outward
FDIs, which are also known as 'direct investments abroad.'
Inward FDIs - Different economic factors encourage inward FDIs. These
include interest loans, tax breaks, subsidies, and the removal of restrictions and
limitations. Factors detrimental to the growth of FDIs include necessities of
differential performance and limitations related with ownership patterns.
Horizontal FDIs - Investment in the same industry abroad as a firm operates in
at home.
Vertical FDIs

Backward Vertical FDI: Where an industry abroad provides inputs for a firm's
domestic production process.

Forward Vertical FDI: Where an industry abroad sells the outputs of a firm's
domestic production.
BY TARGET
Greenfield Investment: - Direct investment in new facilities or the expansion of
existing facilities. Greenfield investments are the primary target of a host
nations promotional efforts because they create new production capacity and
jobs, transfer technology and know-how, and can lead to linkages to the global
marketplace. The Organization for International Investment cites the benefits of
Greenfield investment (or in sourcing) for regional and national economies to
include increased employment (often at higher wages than domestic firms);
investments in research and development; and additional capital investments.
Disadvantage of Greenfield investments include the loss of market share for
competing domestic firms.

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Mergers And Acquisitions:- Transfers of existing assets from local firms to

foreign firm takes place; the primary type of FDI. Cross-border mergers occur
when the assets and operation of firms from different countries are combined to
establish a new legal entity. Cross-border acquisitions occur when the control of
assets and operations is transferred from a local to a foreign company, with the
local company becoming an affiliate of the foreign company.
BY MOTIVE
FDI can also be categorized based on the motive behind the investment from the
perspective of the investing firm:
Resource-Seeking
Investments which seek to acquire factors of production those are more efficient
than those obtainable in the home economy of the firm. In some cases, these
resources may not be available in the home economy at all. For example seeking
natural resources in the Middle East and Africa, or cheap labour in Southeast
Asia and Eastern Europe.
Market-Seeking
Investments which aim at either penetrating new markets or maintaining
existing ones. FDI of this kind may also be employed as defensive strategy; it is
argued that businesses are more likely to be pushed towards this type of
investment out of fear of losing a market rather than discovering a new one.
Efficiency-Seeking
Investments which firms hope will increase their efficiency by exploiting the
benefits of economies of scale and scope, and also those of common ownership.

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IMPORTANCE AND BARRIERS TO FDI:

The rapid growth of world population since 1950 has occurred mostly in
developing countries. This growth has been matched by more rapid increases in
gross domestic product, and thus income per capita has increased in most
countries around the world since 1950.
An increase in FDI may be associated with improved economic growth due to
the influx of capital and increased tax revenues for the host country. Host
countries often try to channel FDI investment into new infrastructure and other
projects to boost development. Greater competition from new companies can
lead to productivity gains and greater efficiency in the host country and it has
been suggested that the application of a foreign entitys policies to a domestic
subsidiary may improve corporate governance standards. Furthermore, foreign
investment can result in the transfer of soft skills through training and job
creation, the availability of more advanced technology for the domestic market
and access to research and development resources. The local population may
benefit from the employment opportunities created by new businesses.In many
instances, the investing company is simply transferring its older production
capacity and machines, which might still be appealing to the host country
because of technological lags or under-development, in order to avoid
competition against its own products by the host country/company.

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INDIAN FDI SCENARIO:

To facilitate ease of doing business for foreign investors and their domestic
recipients, the Union Budget 2016-17 has proposed liberalization of foreign
direct investment (FDI) norms in a host of sectors.
These include insurance, pension, Asset Reconstruction Companies (ARC),
stock exchanges, marketing of food products, listed Central Public Sector
Enterprises (CPSE) except banks and areas governed by financial sector
regulators, falling beyond the 18 specified NBFC activities.
This the second time such big bang FDI reforms are being announced by the
government under Prime Minister Narendra Modi. In November last year, just
after the BJP-led National Democratic Alliance (NDA) suffered a huge defeat in
the Bihar Assembly Elections, the Centre had similarly eased norms across 15
sectors, including defence, private sector banking, construction, single brand
retail, broadcasting and civil aviation to boost investment sentiment and attract
more foreign capital into the country. Following these reforms and the Make in
India initiative, FDI during April-December 2015 in FY16 was up 40 per cent
year-on-year to $29.5 billion.
Significantly, in a move that is in line with the union governments policy of
cooperative and competitive federalism as well as to ensure effective
implementation of Bilateral Investment Treaties (BIT) signed by India with
other countries, the government proposed in the FY17 Budget to introduce a
Centre-State Investment Agreement.
States opting to ink these pacts with the Centre will be seen as more attractive
destinations by foreign investors, according to the annexure to the finance
ministers Budget speech.
The finance ministry had in December last year brought out Indias Model BIT
Text that will be used as a basic template during treaty negotiations with other
countries. With several instances of investors suing governments under different
BITs and claiming huge compensation for their losses, these initiatives are
aimed at protecting the governments interests and securing their policy space.
India has BITs with 83 countries of which 72 are operational.
Regarding insurance and the pension sectors, the FY17 Budget has proposed to
allow foreign investment in the automatic route up to 49 per cent, subject to the
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extant guidelines on Indian management and control to be verified by the

sectoral regulators.
In the FY15 Budget, the government had increased the composite cap
(including FDI and foreign institutional investment) in the insurance sector (and
automatically in the pension sector as well) to 49 per cent from the 26 per cent
but with full Indian management and control and through the government
approval (through Foreign Investment Promotion Board or FIPB) route.
Investors had delayed new investments in the sectors citing ambiguity regarding
the rider specifying that management and control should be in Indian hands.
To help banks and financial institutions (FI) address the problem of huge bad
loans, the FY17 Budget has proposed 100 per cent FDI in ARCs through
automatic route. ARCs play a crucial role in resolution of non-performing assets
by acquiring them from banks and FIs. The FY17 Budget also proposed that
foreign portfolio investors will be allowed up to 100 per cent of each tranche in
securities receipts issued by ARCs subject to sectoral caps.
The government has also proposed to allow 100 per cent FDI through FIPB
route in marketing of food products produced and manufactured in India.
While trade bodies including Confederation of All India Traders have opposed
the move saying it amounts to partially opening up foreign investment in multibrand retail trade and allowing multi-nationals in the sector through the
backdoor, Finance Minister Arun Jaitley justified the decision saying: A lot of
fruits and vegetables grown by our farmers either do not fetch the right prices or
fail to reach the markets. Food processing industry and trade should be more
efficient. This move will benefit farmers, give impetus to food processing
industry and create vast employment opportunities.
The FY17 Budget has also proposed to hike the investment limit for foreign
entities in Indian stock exchanges from five per cent to 15 per cent on par with
domestic institutions. This move is aimed at enhancing global competitiveness
of Indian stock exchanges and accelerating adoption of best-in-class technology
and global market practices, the government said.
Also, the existing 24 per cent limit for investment by foreign portfolio investors
(FPI) in CPSEs other than banks, listed in stock exchanges, will be increased to
49 per cent. The move is to obviate the need for prior approval of government
for increasing the FPI investment, the government said.

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GOVERNMENT APPROVALS FOR FOREIGN COMPANIES

DOING BUSINESS IN INDIA:
Government Approvals for Foreign Companies Doing Business in India or
Investment Routes for Investing in India, Entry Strategies for Foreign Investors
India's foreign trade policy has been formulated with a view to invite and
encourage FDI in India. The Reserve Bank of India has prescribed the
administrative and compliance aspects of FDI. A foreign company planning to
set up business operations in India has the following options:
Automatic approval by RBI:
The Reserve Bank of India accords automatic approval within a period of two
weeks (subject to compliance of norms) to all proposals and permits foreign
equity up to 24%; 50%; 51%; 74% and 100% is allowed depending on the
category of industries and the sectoral caps applicable. The lists are
comprehensive and cover most industries of interest to foreign companies.
Investments in high-priority industries or for trading companies primarily
engaged in exporting are given almost automatic approval by the RBI.
The FIPB Route Processing of non-automatic approval cases:
FIPB stands for Foreign Investment Promotion Board which approves all other
cases where the parameters of automatic approval are not met. Normal
processing time is 4 to 6 weeks. Its approach is liberal for all sectors and all
types of proposals, and rejections are few. It is not necessary for foreign
investors to have a local partner, even when the foreign investor wishes to hold
less than the entire equity of the company. The portion of the equity not
proposed to be held by the foreign investor can be offered to the public.

IMPACT OF FDI ON INDIAN BANKING SECTOR:

Today Indian Banks are as technology savvy as their counter parts in developed
countries.
The competitive and reform force have led to the emergence of internet, ebanking, ATM, credit card and mobile banking too, to let banks attract and retain
customers.

In recent times economy is been pushing to increase the role of multi-national

banks in the banking sector.

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WORLD BANKING SECTOR:

A 2010 meta-analysis of the effects of foreign direct investment on local firms
in developing and transition countries suggests that foreign investment robustly
increases local productivity growth. The Commitment to Development Index
ranks the "development-friendliness" of rich country investment policies.
CHINA:
FDI in China, also known as RFDI (renminbi foreign direct investment), has
increased considerably in the last decade, reaching $19.1 billion in the first six
months of 2012, making China the largest recipient of foreign direct investment
and topping the United States which had $17.4 billion of FDI.In 2013 the FDI
flow into China was $24.1 billion, resulting in a 34.7% market share of FDI into
the Asia-Pacific region. By contrast, FDI out of China in 2013 was $8.97
billion, 10.7% of the Asia-Pacific share.
During the global financial crisis FDI fell by over one-third in 2009 but
rebounded in 2010.
INDIA:
Foreign investment was introduced in 1991 under Foreign Exchange
Management Act (FEMA), driven by then finance minister Manmohan Singh.
As Singh subsequently became the prime minister, this has been one of his top
political problems, even in the current times. India disallowed overseas
corporate bodies (OCB) to invest in India. India imposes cap on equity holding
by foreign investors in various sectors, current FDI in aviation and insurance
sectors is limited to a maximum of 49%.
Starting from a baseline of less than $1 billion in 1990, a 2012 UNCTAD survey
projected India as the second most important FDI destination (after China) for
transnational corporations during 20102012. As per the data, the sectors that
attracted higher inflows were services, telecommunication, construction
activities and computer software and hardware. Mauritius, Singapore, US and
UK were among the leading sources of FDI. Based on UNCTAD data FDI flows
were $10.4 billion, a drop of 43% from the first half of the last year.
Nine from 10 largest foreign companies investing in India(from April 2000January 2011) are based in Mauritius . List of the ten largest foreign companies
investing in India (from April 2000- January 2011) are as follows --

1 TMI Mauritius Ltd. ->Rs 7294 crore/$1600 million

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2 Cairn UK Holding -> Rs6663 crores/$1492 million

3 Oracle Global (Mauritius) Ltd. -> Rs 4805 crore/$1083 million
4 Mauritius Debt Management Ltd.-> Rs 3800 crore/$956 million
5 Vodafone Mauritius Ltd. Rs 3268 crore/$801 million
6 Etisalat Mauritius Ltd. Rs 3228 crore
7 CMP Asia Ltd. Rs 2638.25 crore/$653.74 million
8 Oracle Global Mauritius Ltd. Rs 2578.88 crore / $563.94 million
9 Merrill Lynch(Mauritius) Ltd. Rs 2230.02 crore / $483.55 million
10 Name of the company not given (but the Indian company which got the FDI
is Dhabol Power company Ltd.)
In 2015 India emerged as top FDI destination surpassing China and the US. In
first half of the 2015 India attracted FDI of $31 billion compared to $28 billion
and $27 billion of China and the US respectively.
UNITED STATES:
Broadly speaking, the United States has a fundamentally "open economy" and
low barriers to FDI.
U.S. FDI totalled $194 Billion in 2010. 84% of FDI in the United States in 2010
came from or through eight countries: Switzerland, the United Kingdom, Japan,
France, Germany, Luxembourg, the Netherlands, and Canada. [A major source of
investment is the real estate, the foreign investment in this area totalled $92.2
billion in 2013, under various forms of purchase structures (considering the U.S.
taxation and residency laws).
A 2008 study by the Federal Reserve Bank of San Francisco indicated that
foreigners hold greater shares of their investment portfolios in the United States
if their own countries have less developed financial markets, an effect whose
magnitude decreases with income per capita. Countries with fewer capital
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controls and greater trade with the United States also invest more in U.S. equity
and bond markets.
White House data reported in 2011 found that a total of 5.7 million workers
were employed at facilities highly dependent on foreign direct investors. Thus,
about 13% of the American manufacturing workforce depended on such
investments. The average pay of said jobs was found as around $70,000 per
worker, over 30% higher than the average pay across the entire U.S. workforce.
President Barack Obama said in 2012, "In a global economy, the United States
faces increasing competition for the jobs and industries of the future. Taking
steps to ensure that we remain the destination of choice for investors around the
world will help us win that competition and bring prosperity to our people."
In September 2013, the United States House of Representatives voted to pass
the Global Investment in American Jobs Act of 2013 (H.R. 2052; 113th
Congress), a bill which would direct the United States Department of
Commerce to "conduct a review of the global competitiveness of the United
States in attracting foreign direct investment".Supporters of the bill argued that
increased foreign direct investment would help job creation in the United States.
CANADA:
Foreign direct investment by country and by industry are tracked by Statistics
Canada. Foreign direct investment accounted for CAD$634 billion in 2012,
eclipsing the United States in this economic measure. Global FDI inflows and
outflows are tabulated by Statistics Canada.
UNITED KINGDOM:
The UK has a very free market economy and is open to foreign investment.
Prime Minister David Cameron has sought investment from emerging markets
and from the Far East in particular and some of Britain's largest infrastructure
including energy and skyscrapers such as The Shard have been built with
foreign investment.
RUSSIAN FEDERATION:
History of Foreign Investment Law
In 1991, for the first time, Russia regulated the form, range and favorable policy
of FDI in Russia.
In 1994, a consulting council of FDI was an established in Russia, which was
responsible for setting tax rate and policies for exchange rate, improving
investment environment, mediating relationship between central and local
government, researching and improving images of FDI work, and increasing the
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right and responsibility of Ministry of Economic in appealing FDI and enforcing

all kinds of policies.
In 1997, Russia starts to enact policies for appealing FDI on particular
industries, for example, fossil fuel, gas, woods, transportation, food
reprocessing, etc.
In 1999, Russia announced a law named FDI of Russian Federation, which
aimed at providing a basic guarantee for foreign investors on investing, running
business, earnings.
In 2008, Russia banned on FDI on strategic industries, such as military defence
and country safety.
In 2014, president Putin announced that once abroad Russian investment
inflows legally, it would not be checked by tax or law sector. This is a favorable
policy of Putin to appeal Russian investment to come back.
Structure of foreign investment in Russia
1
Direct investment: Investing directly with cash. Basically, investment
more than 10% of the item is called Direct investment.
2
Portfolio investment: Investing indirectly with company loans,
financial loans, stocks, etc. Basically, investment less than 10% of the item is
called Portfolio investment.
3
Other investment: Except for direct and portfolio investment,
including international assistance and loans for original country.

FDI of RF 1994-2012

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Main item of inflow investment in Russian Federation

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THE PRESENT BANKING SCENARIO IN INDIA:

In recent times economy is been pushing to increase the role of multi-national
banks in the banking and insurance sector, despite, the concern expressed by the
left communist parties are opposing the finance minister move to raise overseas
investment limits in the insurance business. The government wants to fulfil a
pledge to allow companies like New York Life Insurance, Met Life Insurance to
raise investment in local companies to 49 per cent from 26 per cent.
But it is opposed on the front that it will lead to state run insurers losing
business and workers their job. Left do not want foreign investors to have
greater voting rights in private banks and oppose the privatization of state run
pension fund.
There are several reasons why such move is fraught with dangers. When
domestic or foreign investors acquire a large shareholding in any bank and
exercise proportionate voting rights, it creates potential problems not only of
excursive concentration in the banking sector but also can expose the economy
to more intensive financial crises at the slightest hint of panic.
Opposition is not considering the need of present situation. FDI in banking
sector can solve various problems of the overall banking sector. Such as
i) Innovative Financial Products
ii) Technical Developments in the Foreign Markets
iii) Problem of Inefficient Management
iv) Non-performing Assets
v) Financial Instability
vi) Poor Capitalization
vii) Changing Financial Market Conditions
If we consider the root cause of these problems, the reason is low-capital base
and all the problems is the outcome of the transactions carried over in a bank
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without a substantial capital base. In a nutshell, we can say that, as the FDI is a
non-debt inflow, which will directly solve the problem of capital base.

FDI IN INDIAN BANKING:

In the private banking sector of India, FDI is allowed up to a maximum limit of
74 % of the paid-up capital of the bank. On the other hand, Foreign Direct
Investment and Portfolio Investment in the public or nationalized banks in India
are subjected to a limit of 20 % in totality. This ceiling is also applicable to the
investments in the State Bank of India and its associate banks. FDI limits in the
banking sector of India were increased with the aim to bring in more FDI
inflows in the country along with the incorporation of advanced Technology and
Management practices. The objective was to make the Indian banking sector
more competitive. The Reserve Bank of India governs the investment matters in
the banking sector.
The global banking industry weathered turbulent times in 2007 and 2008. The
impact of the economic slowdown on the banking and insurance services sector
in India has so far been moderate. The Indian financial system has very little
exposure to foreign assets and their derivative products and it is this feature that
is likely to prove an antidote to the financial sector ills that have plagued many
other emerging economies. Owing to at least a decade of reforms, the banking
sector in India has seen remarkable improvement in financial health and in
providing jobs. Even in the wake of a severe economic downturn, the banking
sector continues to be a very dominant sector of the financial system. The
aggregate foreign investment in a private bank from all sources is allowed to
reach as much as 74% under Indian regulations.
A foreign bank or its wholly owned subsidiary regulated by a financial sector
regulator in the host country can now invest up to 100% in an Indian private
sector bank. This option of 100% FDI will be only available to a regulated
wholly owned subsidiary of a foreign bank and not any investment companies.
Other foreign investors can invest up to 74% in an Indian private sector bank,
through direct or portfolio investment.
The Government has also permitted foreign banks to set up wholly owned
subsidiaries in India. The government, however, has not taken any decision on
raising voting rights beyond the present 10% cap to the extent of shareholding.

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The new FDI norms will not apply to PSU banks, where the FDI ceiling is still
capped at 20%. Foreign investment in private banks with a joint venture or
subsidiary in the insurance sector will be monitored by RBI and the IRDA to
ensure that the 26 per cent equity cap applicable for the insurance sector is not
breached.
All entities making FDI in private sector banks will be mandatorily required to
have credit rating. The increase in foreign investment limit in the banking sector
to 74% includes portfolio investment [ie, foreign institutional investors (FIIs)
and non-resident Indians (NRIs)], IPOs, private placement, ADRs or GDRs and
acquisition of shares from the existing shareholders. This will be the cap for any
increase through an investment subsidiary route as in the case of HSBC-UTI
deal.
In real terms, the sectorial cap has come down from 98% to 74% as the earlier
limit of 49% did not include the 49% stake that FII investors are allowed to
hold. That was allowed through the portfolio route as the sector cap for FII
investment in the banking sector was 49%.
The decision on foreign investment in the banking sector, the most radical since
the one in 1991 to allow new private sector banks, is likely to open the doors to
a host of mergers and acquisitions. The move is expected to also augment the
capital needs of the private banks.

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THE IMF STUDY REPORT:

The IMF's study is in supportive to the above-discussed features of FDI. This
study talks about the optimism over India emanates from a contribution of
following factors.
* India contributed nearly one fifth of Asian domestic demand growth over
2000-05. Looking forward, India slated to be the second largest demand driver
in the region, after China.
* India accounts for almost one quarter of the global portfolio flows to
emerging market economies, nearly $ 12 bn in 2005.
* India is the world's leading recipient of remittances, accounting for about 20%
of the global flows.
Even though above discussed factors are fair enough for the development of
economy. But it is a noted fact that, economy drivers are reluctant towards more
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liberalization for FDI in the banking sector. As the ceiling rates are not
increased, FDI in Financial Sector is not getting a wholesome environment. But
the foreign investment is finding its own way to come in the economy. May be
the way of FII. It is evident from the diagram.
Now a days, foreign commercial and investment banks have quietly begun
picking up public sector bank's bond issues. Bankers said that the funds were
coming into these bonds; some of the foreign banks were also using the banks'
bonds as an arbitrage opportunity in view of the increasing liquidity.
So, therefore from last 2 years FIIs have exceeded the FDI and in portfolio
investment into India since 2003-04 reflects both domestic and global factors.
Compared with FII always FDI has a greater and long-term effect on the Indian
market due to the whimsical nature of FII. (As it is considered as hot money)
The present scenario looks more closely at the paradigm of exponential growth
and laments that India's role as an engine for global growth has been limited by
the still relatively closed nature of its economy.

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FDI IN INDIA A BOON OR A BAIN:

Foreign Direct Investment as seen as an important source of non-debt inflows,
and is increasing being sought as a vehicle for technology flows and as a means
of attaining competitive efficiency by creating a meaningful network of global
interconnections.
FDI plays a vital role in the economy because it does not only provide
opportunities to host countries to enhance their economic development but also
opens new vistas to home countries to optimize their earnings by employing
their ideal resources.
India has sought to increase inflows of FDI with a much liberal policy since
1991 after decade's cautious attitude. The 1990's have witnessed a sustained rise
in annual inflows to India. Basically, opening of the economy after 1991 does
not live much choice but to attract the foreign investment, as an engine of
dynamic growth especially in view of fast paced movement of the world
forward Liberalisation, Privatisation and Globalisation.

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BENEFITS OF FDI:
1. Economic Development Stimulation.
Foreign direct investment can stimulate the target countrys economic
development, creating a more conducive environment for you as the investor
and benefits for the local industry.
2. Easy International Trade.
Commonly, a country has its own import tariff, and this is one of the reasons
why trading with it is quite difficult. Also, there are industries that usually
require their presence in the international markets to ensure their sales and goals
will be completely met. With FDI, all these will be made easier.
3. Employment and Economic Boost.
Foreign direct investment creates new jobs, as investors build new companies in
the target country, create new opportunities. This leads to an increase in income
and more buying power to the people, which in turn leads to an economic boost.
4. Development of Human Capital Resources.
One big advantage brought about by FDI is the development of human capital
resources, which is also often understated as it is not immediately apparent.
Human capital is the competence and knowledge of those able to perform labor,
more known to us as the workforce. The attributes gained by training and
sharing experience would increase the education and overall human capital of a
country. Its resource is not a tangible asset that is owned by companies, but
instead something that is on loan. With this in mind, a country with FDI can
benefit greatly by developing its human resources while maintaining ownership.
5. Tax Incentives.
Parent enterprises would also provide foreign direct investment to get additional
expertise, technology and products. As the foreign investor, you can receive tax
incentives that will be highly useful in your selected field of business.
6. Resource Transfer.
Foreign direct investment will allow resource transfer and other exchanges of
knowledge, where various countries are given access to new technologies and
skills.

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7. Reduced Disparity Between Revenues and Costs.

Foreign direct investment can reduce the disparity between revenues and costs.
With such, countries will be able to make sure that production costs will be the
same and can be sold easily.
8. Increased Productivity.
The facilities and equipment provided by foreign investors can increase a
workforces productivity in the target country.
9. Increment in Income.
Another big advantage of foreign direct investment is the increase of the target
countrys income. With more jobs and higher wages, the national income
normally increases. As a result, economic growth is spurred. Take note that
larger corporations would usually offer higher salary levels than what you
would normally find in the target country, which can lead to increment in
income.
10. Technology Transfer
As due to the globalization local banks are competing in the global market,
where innovative financial products of multinational banks is the key limiting
factor in the development of local bank. They are trying to keep pace with the
technological development in the banks. Nowadays banks have been prominent
and prudent in the rapid expansion of consumer lending in domestic as well as
in foreign markets. It needs appropriate tools to assess (how such credit is
managed) credit management of the banks and authorities in charge of financial
stability.
11. Better Risk Management
As the banks are expanding their area of operation, there is a need to change
their strategies exert competitive pressures and demonstration effect on local
institutions, often including them to reassess business practices, including local
lending practices as the whole banking sector is crying for a strategic policy for
risk management. Through FDI, the host countries will know efficient
management technique. The best example is Basel II. Most of the banks are
opting Basel II for making their financial system safer.
12. Financial Stability and Better Capitalization
Host countries may benefit immediately. From foreign entry, if the foreign bank
re-capitalize a struggling local institution. In the process also provides needed
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balance of payment finance. In general; more efficient allocation of credit in the

financial sector, better capitalization and wider diversification of foreign banks
along with the access of local operations to parent funding, may reduce the
sensitivity of the host country banking system and lead towards financial
stability.

LIMITATION OF FDI:
1. Hindrance to Domestic Investment.
As it focuses its resources elsewhere other than the investors home country,
foreign direct investment can sometimes hinder domestic investment.
2. Risk from Political Changes.
Because political issues in other countries can instantly change, foreign direct
investment is very risky. Plus, most of the risk factors that you are going to
experience are extremely high.
3. Negative Influence on Exchange Rates.
Foreign direct investments can occasionally affect exchange rates to the
advantage of one country and the detriment of another.
4. Higher Costs.
If you invest in some foreign countries, you might notice that it is more
expensive than when you export goods. So, it is very imperative to prepare
sufficient money to set up your operations.
5. Economic Non-Viability.
Considering that foreign direct investments may be capital-intensive from the
point of view of the investor, it can sometimes be very risky or economically
non-viable.
6. Expropriation.
Remember that political changes can also lead to expropriation, which is a
scenario where the government will have control over your property and assets.
7. Negative Impact on the Countrys Investment.
The rules that govern foreign exchange rates and direct investments might
negatively have an impact on the investing country. Investment may be banned
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in some foreign markets, which means that it is impossible to pursue an inviting

opportunity.
8. Modern-Day Economic Colonialism.
Many third-world countries, or at least those with history of colonialism, worry
that foreign direct investment would result in some kind of modern day
economic colonialism, which exposes host countries and leave them vulnerable
to foreign companies exploitations.

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FUTURE SCOPE:
Technology Transfer
As due to the globalization local banks are competing in the global market,
where innovative financial products of multinational banks is the key limiting
factor in the development of local bank. They are trying to keep pace with the
technological development in the banks. Now a days banks have been
prominent and prudent in the rapid expansion of consumer lending in domestic
as well as in foreign markets. It needs appropriate tools to assess (how such
credit is managed) credit management of the banks and authorities in charge of
financial stability. It may need additional information and techniques to monitor
for financial vulnerabilities. FDI's tech transfers, information sharing, training
programs and other forms of technical assistance may help meet this need.
Better Risk Management
As the banks are expanding their area of operation, there is a need to change
their strategies exert competitive pressures and demonstration effect on local
institutions, often including them to reassess business practices, including local
lending practices as the whole banking sector is crying for a strategic policy for
risk management.
Through FDI, the host countries will know efficient management technique. The
best example is Basel II. Most of the banks are opting Basel II for making their
financial system more safer.
Financial Stability and Better Capitalization
Host countries may benefit immediately. From foreign entry, if the foreign bank
re-capitalize a struggling local institution. In the process also provides needed
balance of payment finance. In general; more efficient allocation of credit in the
financial sector, better capitalization and wider diversification of foreign banks
along with the access of local operations to parent funding, may reduce the
sensitivity of the host country banking system and lead towards financial
stability.

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Source : "Economic Review", RBI Annual Report 2005-06.

So due to the aforesaid benefits economy has consistent flow of FDI over the
past few years. In addition to that, the govt. has also taken step to enhance the
FDI (eg. Telecom, civil aviation) FDI up to 100% through the Reserve Bank's
automatic route was permitted for a no. of new sectors in 2005-06 such as
Greenfield airport projects, export trading. All these measures have been
contributing towards increasing direct investment.

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Source : "Economic Review", RBI Annual Report 2005-06.

This overall FDI is evident from the above graph.
FDI & FII have risen sharply during the 1990s reflecting the policies to attract
non-debt creating flows.
Cumulative foreign investment flows have amounted to US & 106 billion since
1990-91 and almost evenly balanced between direct invest flows (US & 49 bn)
and portfolio flows (US & 57 bn). Since 1993-94, FDI flows have exceeded
portfolio flows in the 5 years while portfolio flows have exceeded FDI in the
remaining 8 years. As a proportion to FDI flows to emerging market and
developing countries, FDI flows to India have shown a consistent rise from
1.6% in 1998 to 3.7% in 2005'1.
India's FDI growth of above 30% during past 2 years is encouraging. Although
the FDI inflows into India are small as compared to other emerging markets,
their size is growing on the back of growing interest by many of the world's
leading multinationals. India has improved its rank from fifteenth (in 2002) to
become the second most likely FDI destination after China in 2005.

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CHAPTER 4
FINDINGS AND SUGGESTIONS:
When the Modi government came into power in May 2014, it found itself
inheriting a host of legacy issues resulting from the after-effects of global
recession and UPA IIs financial misadventures. There was a deep
macroeconomic instability brought about by the high fiscal and current account
deficits, raging inflation, tapering of GDP growth rates and the unravelling of
the infrastructure sector. The state electricity discoms were in financial turmoil.
The banking sector was also battling a systemic problem of highly stressed
assets.
Now, as 2016 begins, the macroeconomic indicators have seen a turn for the
better. Inflation, the current account deficit and fiscal deficit have been brought
under control. The fiscal deficit which stood at 5.8% in FY12 was brought down
to a more manageable 4% in FY15. GDP is also growing steadily on the back of
higher infrastructure spending by the government and improving urban
consumption.
While there has been a significant improvement in macroeconomic stability, the
economy is still not out of the woods completely.
The legacy issues are still festering and need to be removed surgically for the
economy to be on a stronger footing. The non-performing assets (NPA) crisis is
only getting worse for banks as time is progressing. According to the Financial
Stability Report issued by RBI in December, the stressed assets of Public Sector
Banks (PSBs) stood at 14.1% for September 2015. This number is extremely
worrying and needs to be looked into immediately. The government estimates
that around Rs. 1,80,000 crore is required over the course of the next three years
to clean up the public banking system. Out of this, the government has set aside
Rs. 70,000 crore as recapitalisation amount through its Indradhanush program
and expects the PSBs to mop up the remaining amount from domestic and
foreign investors by tapping the equity markets.
The recapitalisation of banks is a welcome step but the amount that has been
aside is not enough to root out the problem completely.
Expecting investors to perform the heavy lifting required to bail out the banks is
leaving too much to chance. The government will have to step up its efforts and
allocate more resources to recapitalisation as it is extremely crucial for
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reinvigorating the economy. This allocation has to be frontloaded as soon as

possible to avoid further festering of the NPA crisis. For instance, an extra Rs.
40,000 crore over and above the Indradhanush allocation can be provided in the
upcoming budget for FY 17 itself. In this case, outside investors will be more
than happy to pitch in with the rest of amount as this move would significantly
improve the viability of PSBs. As long as the banks are in distress, it would be
difficult for investors to lend support to banks other than marquee ones like
State Bank of India and Bank of Baroda.
It can be argued that increasing allocation towards recapitalisation will create
further pressure on fiscal deficit targets. But unless the banking sector is
unshackled from the burden of its bad loans, it will not be able to contribute as
much to growth in GDP. The mid-year economic review states that private
investments and exports are lagging behind in driving the economic growth
engine. Not much can be done about exports as it is a function of global demand
but private investments can be kickstarted if banks have an increased capacity to
lend to the corporate sector. An increase in private investments will be able to
more than offset the pressures created on the fiscal side as it will provide a boost
to GDP growth.

Piecemeal approach wont help

A slow and steady approach towards cleaning up the banking mess will prove to
be counter-productive in the long run even on the fiscal front. If private
investments are stalled, the lions share of the responsibility of infrastructure
building will fall on the shoulders of the government. This will entail further
borrowing, which will not help the cause of fiscal consolidation. On the other
hand, if growth in credit off-take restarts, then private investments will share the
burden of investing in infrastructure sectors like power, roads, ports and nonrenewable energy sources. Right now, since the hands of the domestic corporate
sector are tied, the government is relying heavily on FDI to fill the gaps in
infrastructure funding. But a more holistic and sustainable approach would be to
involve private investments to also contribute towards financially viable
infrastructure projects.

The funding tap for these projects has been left dry for too long. Hence it
becomes all the more essential for banks to start with a clean slate. Bailouts are
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never a pleasant outcome. But once it becomes necessary, it needs to be

undertaken quickly and unflinchingly. If the problem is left untreated for too
long it spreads rapidly across the system, like an untreated cancer.
The high NPAs are a grave cause for concern and there is good reason to believe
that even the current level of high NPAs may be understated. The kitchen sink
cleaning efforts by Bank of Baroda in the previous quarter is a case in point. In
such a scenario, banks will be in no mood to lend extensively due to the scarcity
of capital. Only a comprehensive bailout package will enable the banks to
rekindle the lending spirit.
Limited access to capital will definitely stifle these initiatives. Therefore it is
necessary for foreign investment to fill the gaps and there needs to be structural
reforms set in place to ensure no more bailout is necessary for the Indian banks.

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CONCLUSION:
The RBI's decision to allow foreign direct investment in Indian banks, the lifting
of sectorial caps on foreign institutional investors and a series of other policy
measures could ultimately lead to the privatisation of public sector banks. The
series of policy announcements in recent weeks promises to unleash a shakeout
in the Indian banking industry. A major policy change, effected through an
innocuous "clarification" issued by the Reserve Bank of India (RBI) a few
weeks ago, set the stage for the increased presence of foreign entities in the
industry. The RBI's move to allow foreign direct investment (FDI) in Indian
banks has been followed by the announcement in the Union Budget lifting
sectorial caps on foreign institutional investors (FII).
There are also reports that the RBI's forthcoming credit policy may feature more
sops for private and foreign banks. These changes are likely to hasten the
process of consolidation of the banking industry. Although there is some doubt
over whether the moves will have any immediate impact, there is consensus that
the changes are merely a prelude to the wholesale privatisation of the public
sector banks (PSBs). IDBI, the promoter of IDBI Bank, has already announced
its intention to relinquish control of the bank. Foreign banks have also mounted
pressure on the Finance Ministry, seeking the removal of legislative hurdles that
set limits to private and foreign holdings in PSBs. In the short term, the action is
likely to be focused on the Indian private banks. Of the 100 banks in India, 27
are PSBs (including eight in the State Bank of India group). There are 31 private
sector banks, of which eight are of recent vintage (for example, ICICI Bank and
HDFC Bank); and there are 42 foreign banks with branches in India. The RBI's
decision is seen as enabling foreign banks to extend their operations, primarily
by acquiring other banks.

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