RESEARCH PAPER

ON THE ROLE OF FDI

IN INDIAN BANKING
SECTOR

ABSTRACT OF THE PAPER:

This paper discuss about the history of banking system, necessity of FDI in
banking system, guidelines for FDI and also shows the statistics of FDI in
Indian banking sector. FDI inflows are essentially long-term in nature and are
primarily driven by growth prospects of the Indian economy and confidence of
international investors in India as an attractive long-term. 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.

RESEARCH METHODOLOGY:
Research and experimental development is formal work undertaken
systematically to increase the stock of knowledge. The present study is of
descriptive nature. Therefore the use is made of secondary data collected
primarily from journals, articles, online database of Indian Economy, RBI
bulletin, websites or newspaper etc.

OBJECTIVE OF THE STUDY

To study about the growth of banking sector.
To study role of government in banking sector in India.
To study guidelines for investment in banking sector.
To understand the problems faced by Indian banking
sector.
To see how FDI benefits banking sector in India.
To see investment percentage of FDI in banking sector.

WAYS IN WHICH FDI IS POSSIBLE

IN BANKING SECTOR:
Indian operations by foreign banks can be executed by any
one of the following three channels:
Branches in India
Wholly owned subsidies In case of wholly owned
subsidies (WOS), the guidelines for FDI in the banking
sector specified that the WOS must involve a capital of
minimum 300 crores and should ensure proper corporate
governance.
Other subsidies 74% in private banks

Guidelines For Investment In Banking Sector

The limits of FDI in the banking sector has been increased to 74% of the paid up capital of bank.
FDI in the banking sector is allowed under the automatic route in India. (49% currently)
FDI and portfolio investment in the public or nationalised banks in India are subject to limit of
20% in totality.
This ceiling is also applicable to the investors in SBI and its associated banks.
FDI limits in 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 RBI of India governs the investment matters in the banking sector.

Problems faced by the Indian

banking sector
Inefficiency in management
Instability in financial matters
Innovativeness in financial products or schemes
Technical developments happening across various
foreign markets
Non-performing areas or properties
Changing financial market conditions

BENEFITS OF FDI IN INDIAN

BANKING SYSTEM
Transfer of technology from overseas countries to the domestic markets :

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.
Ensure better and improved risk management in the banking sector :As the banks are expanding their area
of operation, there is a need to change their strategies exerts 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.

Assure better capitalization .

Host countries may benefit immediately. From foreign entry, if the foreign bank recapitalize 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.
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
(e.g. Telecom, civil aviation) FDI up to 100 percent 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.
This also offers financial stability in the banking sector .
Foreign Direct Investment is a non-debt inflow, which will directly solve the
problem of capital base of the Indian Banks.

Investment percentage of fdi in

the banking sector in india

SECTOR-WISE FDI EQUITY

INFLOW:

SUGGESTIONS
FDI and portfolio investment in the public or
nationalised banks in India are subject to limit of 20% in
totality, this limit must be increased.
All foreign investments must take place under the
automatic route, the government route must be
decreased.
FDI should not override the regulations of RBI, but
should result in growth of Indian economy.
Capital raising capacity of India is low, hence FDI is
required in the Indian banking industry.

CONCLUSION
Since the capital raising capacity in India is very less to
take the Indian banking sector to worldwide we require
investment from abroad. RBI should make such policies
that FDI should not override the regulations of RBI and
should result in the growth of Indian economy.