Last Updated 09 Jul 2021

Role of Foreign Banks

Category Bank, Banking, Investment
Essay type Research
Words 2348 (9 pages)
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Foreign Banks operating in India are banks of other countries having their branches in India. At present there are about sixteen such banks having a total of about 180 branches in most of the big cities of the country. These Foreign Banks have a flourishing business and earn large profits. Indian Banks also have their branches in other countries, and they, too, are doing well.

Some economists are of the view that Foreign Banks should, not be allowed to operate in the country. But permission to such banks to operate in the country is unavoidable on the basis of reciprocity. This is certainly the view of the Reserve Bank of India, and it is justified by the success of Indian Banks operating in foreign countries. Indian Banks have been rapidly expanding their overseas operations. Between 1975 and 1978, the number of offices of Indian Banks in foreign countries had increased by 48, from 77 to 125. This is in contrast with the stagnant number of Foreign Bank Offices in India.As a consequence, the growth of business of Indian Banks has been phenomenal as compared to that of the branches of their foreign counterparts in India.

Deposits and advances of Indian Banks abroad have increased by 14% and 18% respectively, whereas the corresponding figures of Foreign Banks in India are 28% and 30% respectively. In terms of remittances of the present banks also, Indian banks are ahead. In 1976, they remitted Rs. 90 millions to India, where their counterparts remitted Rs. 70 millions only. Indian Banks abroad are involved in many new banking activities. State Bank of India and Bank of Baroda, the two leaders in the sphere, are raising foreign currency funds, for both private and public sector concerns.

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In addition, these banks are funding many joint ventures in South East Asia. For instance, SBI is funding joint ventures in Singapore, Indonesia and Malaysia. The Bank has arranged finances to the tune of $ 750 million dollars. We can see clearly that Indian Banks are indeed generating a lot of business overseas. At present they are operating in as many as 26 countries of which only eight countries have their own bank branches in India.Thus, the question of reciprocity does indeed have relevance, because, if we want to seek profitable opportunities overseas, we must be prepared to open our own gates also. In short, the operation of foreign banks in India is fully justified.

Foreign banks play a relatively minor role in the Indian economy, as reiterated in Global Development Finance 2008, an annual publication from the World Bank that was released last week. This fact is relevant right now for two reasons. First, the Reserve Bank of India is likely to open up the Indian banking market further in April, or around 300 days from now. Two, the global credit crisis has shown how problems in Western banks can reverberate through financial systems in emerging markets. The advantages of greater foreign bank participation are clear: They tend to increase the efficiency of the local banking system, bring in more sophisticated financial services and have the ability to nurse weak banks back to health. That underlies the case for greater freedom for foreign banks.

The credit crisis has brought the dark underside into focus. Global banks that boast of the best practices in the way they allocate capital and manage risks are also prone to make elementary mistakes, partly because of the imperfect nature of regulations and partly because bankers have perverse incentives to be lost with other people’s money. So, which way should policy swing? It is tempting to conclude that India is better off with its current policy of caution about the entry of foreign banks. But that would be a mistake. While we agree that banking markets tend to be prone to crises and, hence, need tighter regulation than markets in goods and services, India needs more foreign bank participation. The main contention—that foreign banks account for just 5% of India’s loan market—is misleading. Local banks have been on a borrowing spree abroad.

They raised more than $12 billion between 2003 and 2006, which is one reason that India could support credit growth of 28. 1% despite the fact that deposits grew at only 18. 5%.A lot of this overseas borrowing must have come from foreign banks operating in global financial centres. The question is: If regulators are comfortable getting resources from foreign banks indirectly through the global credit markets, what is the objection to more direct participation?

Introduction

A large number of foreign banks are now keen on opening shops in India to gain a critical mass by April 2009, when private banking space is expected to open up for foreign players. Foreign Banks in India always brought an explanation about the prompt services to customers. After the set up of foreign banks in India, the banking sector in India also become competitive and accurate.

The share of foreign banks in the business done in the country (deposits and advances) has been hovering between 5 and 7 percent during the past decade. A new rule announced by the Reserve Bank of India for the foreign banks in India in this budget has put up great hopes among foreign banks which allow them to grow unfettered. Now foreign banks in India are permitted to set up local subsidiaries. The policy conveys that foreign banks in India may not acquire Indian ones (except for weak banks identified by the RBI, on its terms) and their Indian subsidiaries will not be able to open branches freely. There are twenty-nine foreign banks are present in India through 273 branches and 871 offsite ATMs. Besides, there are 34 foreign banks operating through representative offices. Four have set up shop in the past year.

They are Banco Bilbao Vizcaya Argentaria, Spain's second-largest bank; Italy's Banca di Roma; the Dublin-based Depfa Bank Plc. ; and National Australia Bank Ltd. Given a chance, all banks would like to convert their representative offices into branches. Standard Chartered Bank, the oldest foreign bank that came to India 150 years ago, now operates the maximum number of branches, 83. It is followed by HSBC, which entered India in 1867, with 47 branches. Citibank has 39 branches and ABN Amro, 28 branches. The only other bank that has a double-digit branch presence is Deutsche, 11.

List of major Foreign Banks in India

  • ABN-AMRO Bank
  • Abu Dhabi Commercial Bank
  • Bank of Ceylon
  • BNP Paribas Bank
  • Citi Bank
  • China Trust Commercial Bank
  • Deutsche Bank
  • HSBC JPMorgan Chase Bank
  • Standard Chartered Bank
  •  Scotia Bank
  • Taib Bank

By the year 2009, the list of foreign banks in India is going to become more quantitative as numbers of foreign banks are still waiting with baggage to start a business in India Upcoming Foreign Banks in India By 2009 few more names is going to be added in the list of foreign banks in India. This is as an aftermath of the sudden interest shown by the Reserve Bank of India paving the roadmap for foreign banks in India greater freedom in India.

The following are the list of foreign banks going to set up business in India

  • Royal Bank of Scotland Switzerland's UBS
  • US-based GE Capital
  • Credit Suisse Group
  • Industrial and Commercial Bank of China

Reasons for foreign banks enter in India

India's GDP is seen growing at a robust pace of around 7% over the next few years, throwing up opportunities for the banking sector to profit from. The credit of banks has risen by over 25% in 2004-05 and the growth momentum is expected to continue over the next four to five years. Participation in the growth curve of the Indian economy in the next four years will provide foreign banks a launchpad for greater business expansion when they get more freedom after April 2009. RBI is following a liberal branch licensing policy for those foreign banks who want to go to the unbanked pockets. They have started sensing enormous business opportunities in financing trade and small and medium sectors in small towns in the world's second fastest-growing economy.

WTO and India about foreign banks operations India had committed to the World Trade Organization (WTO) in 1997 to give 12 new branch licenses to foreign banks every year, including those given to new entrants and the existing players. However, the Indian regulator has all along been allowing foreign banks to open more branches, going beyond its commitment to WTO. In fact, in the last four years till October 2007, it has given its nod to 75 new foreign bank branches and many more ATMs (which do not come under WTO norms). Standard Chartered Bank, the oldest foreign bank that came to India 150 years ago, now operates the maximum number of branches, 83. It is followed by HSBC, which entered India in 1867, with 47 branches. Citibank has 39 branches and ABN Amro, 28 branches. The only other bank that has a double-digit branch presence is Deutsche, 11.

Despite their growing presence, foreign banks still have a very small market share in the Indian banking industry—6. 11% of total deposits and 6. 83% of total loan advances. But their returns from Indian operations are far higher than those of their local counterparts. For instance, the average net profit per branch for foreign banks in India was Rs11. 99 crore last year against Rs33 lakh for the public sector banks that account for close to 70% of the industry. The return on assets for foreign banks last year was 1.

65% and return on equity, 14. 02%. The comparable figures for public sector banks were 0. 82% and 13. 62%. Now you know why foreign banks are ready to walk the extra mile to do business anywhere in India The Reserve Bank of India would like foreign banks to get a flavor of semi-urban India and the rural hinterland. Going by the statistics provided in the RBI's annual report, it appears that foreign banks are being gently nudged away from metros when they apply for permission to open a new branch.

The branches of foreign banks that have been approved between July 2006 and June 2007 are mostly in smaller towns and tier-2 and tier-3 cities. Of the 13 branches for which permission was given, only one branch belonging to Shinhan Bank has been allowed in New Delhi. Smaller cities Hong Kong and Shanghai Banking Corporation (HSBC) received approvals for three branches in Raipur, Jodhpur, and Lucknow. ABN Amro got approvals for branches in Kolhapur, Salem, Udaipur and Ahmedabad. Barclays Bank received approval for branches in Kanchipuram and Bangalore.Most foreign banks follow a strategy of first setting up base in metros – Mumbai, New Delhi, Kolkata, and Chennai. Then, in the next stage, they move to the mini-metros such as Bangalore, Hyderabad, Pune and Ahmedabad.

Over the last few years, some banks have talked about expanding their reach beyond the conventional circuits of these eight places. Foreign banks in India have got approval from the Reserve Bank of India to open 10 branches and seven representative offices during the July 2006- June 2007 period. In the calendar year 2006, the RBI issued approvals for opening 13 branches of foreign banks in India. Under the WTO agreements, India is required to allow the opening of 12 foreign branches every year. More foreign banks rush to India A large number of foreign banks are now keen on opening shop in India to gain a critical mass by April 2009, when private banking space is expected to open up for foreign players. The latest addition to the list of foreign banks wishing to set foot in India is the Royal Bank of Scotland, which has total assets of over $806 billion. The sudden interest in India follows the Reserve Bank of India's roadmap for according foreign banks greater freedom in India.

Switzerland's UBS, ranked the world's best private bank by EuroMoney magazine, has been preparing itself for India launch. Merrill Lynch and Goldman Sachs too are believed to be showing interest. It is not known whether they will go alone or partner with an Indian entity in the new venture. Some of the new players are targeting the derivatives market to grow in India. The huge retail space is also an enticing factor. Merrill Lynch has a joint venture in Indian investment banking space -- DSP Merrill Lynch. Goldman Sachs holds stakes in Kotak Mahindra arms.

US-based GE Capital last week announced its intention to set up a bank last week soon after the banking sector roadmap was unveiled. It already has wide presence in consumer finance through GE Capital India. The RBI roadmap said the removal of limitations on the operations of wholly-owned subsidiaries of foreign banks and treating them on a par with domestic banks to the extent appropriate will be designed and implemented after reviewing the experience till April 2009. A total of 33 foreign banks are present in India and had total assets of Rs 1,36,315 crore (Rs 1363. 15 billion) as at end-March 2004. Roughly they account for about 7 percent of the total banking space. The list of foreign players includes banks like Citibank, Bank of America, Bank of Nova Scotia, ABN-AMRO Bank, Deutsche Bank and JPMorgan Chase Bank, which figure in the top 25 global banks ranked by The Banker magazine.

The other top banks like Credit Suisse Group, Industrial and Commercial Bank of China, are still to start banking business in India. India is expected to find a place in the strategy of these banks given the country's growth prospects. There have been cases of foreign banks closing shops in India too. Dresdner Bank and Commerzbank fall in this category. India's GDP is seen growing at a robust pace of around 7 per cent over the next few years, throwing up opportunities for the banking sector to profit from. The credit of banks in India has risen by over 25 per cent in 2004-05 and the growth momentum is expected to continue over the next few years. Participation in the growth curve of the Indian economy in the next four years will provide foreign banks a launchpad for greater business expansion when they get more freedom after April 2009

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Role of Foreign Banks. (2018, Dec 12). Retrieved from https://phdessay.com/role-of-foreign-banks/

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