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Essay on the Foreign Banks in India
Essay Contents:
- Essay on the Introduction to Foreign Banks
- Essay on the Importance of Foreign Banks
- Essay on the Foreign Banks in India
- Essay on the Foreign Banks with Maximum Branches in India
Essay # 1. Introduction to Foreign Banks:
The Indian government securities markets have been broadly insulated from the global financial crisis. There has been no incidence of settlement failure or default. The muted impact of the global crisis on the Indian government securities markets can be attributed, inter alia, to the calibrated opening of the markets to foreign players. Following the intensification of the global financial crisis in September 2008, the Reserve Bank implemented both conventional and unconventional policy measures in order to proactively mitigate the adverse impact of the global financial crisis on the Indian economy.
The Reserve Bank was able to restore normalcy in the financial markets over a short period of time through its liquidity operations in both domestic and foreign currency. The Reserve Bank’s exchange rate policy has been guided by the broad principles of careful monitoring and management of exchange rates with flexibility, without a fixed target or a preannounced target or band, while allowing the underlying demand and supply conditions to determine exchange rate movements over time in an orderly way.
In 2005, the Reserve Bank released the “Road map for presence of foreign banks in India” laying out a two track and gradualist approach aimed at increasing the efficiency and stability of the banking sector in India. There are currently 34 foreign banks operating in India as branches. Their balance sheet assets, accounted for about 7.65 percent of the total assets of the scheduled commercial banks as on March 31, 2010 as against 9.03 per cent as on March 31, 2009.
In case, the credit equivalent of off balance sheet assets are included, the share of foreign banks was 10.52 per cent of the total assets of the scheduled commercial banks as on March 31,2010, out of this, the share of top five foreign banks alone was 7.12 per cent.
The policy on presence of foreign banks in India has followed two cardinal principles of:
(i) Reciprocity and
(ii) Single Mode of Presence.
These principles are independent of the form of presence of foreign banks. Foreign banks applying to the RBI for setting up their WOS/branches in India must satisfy RBI that they are subject to adequate prudential supervision in their home country.
Foreign bank is obligated to follow the regulations of both the home and host countries. Because the foreign branch banks’ loan limits are based on the parent bank’s capital, foreign banks can provide more loans than subsidiary banks. Banks often open a foreign branch in order to provide more services to their multinational corporation customers. However, operating a foreign branch bank may be considerably complicated because of the dual banking regulations that the foreign branch needs to follow.
Essay # 2. Importance of Foreign Banks:
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 vast Indian market, the significant unbanked and under banked populace, and the corresponding business opportunities are some of the more obvious reasons why foreign banks are looking to expand in India. There is a demand for specialised banking services, which 85 banks, other than the four mentioned above, have set up and maintained as a limited presence in India – either in the form of a branch or a rep office.
These banks see opportunities in areas such as investment banking; private banking and wealth management; trade finance; cash management; and specialised lending services, for example, which do not require a large branch/ATM network and customer base.
Foreign banks’ participation can enhance efficiency of local banking by introducing more competition, innovation and by bringing global expertise and technology transfer into local banking practices. Evidence suggests foreign banks in India tend to lend more, have higher returns, lower costs and better credit quality.
Essay # 3. Foreign Banks in India:
The story of foreign banks in India goes back to the 19th century when the colonial economy brought with it the need for modern banking services, uniform currency and remittances by British army personnel and civil servants. The earliest banking institutions, joint stock banks, agency houses and the presidency banks, established by the merchants during the East India Company regime largely catered to this growing need.
Milestone events for banking in India such as the passing of the Reserve Bank of India (RBI) Act, 1934, the creation of the central bank in 1935, bank nationalisation in 1969 and 1980 did not impact foreign banks much. The first phase of banking reforms, triggered by recommendations of the Narasimhan Committee in 1991 and the licensing of the new private sector banks through the next two decades inaugurated an era of change.
As of March 2013, there are 43 foreign banks from 26 countries operating as branches and 46 banks from 22 countries operating as representative offices. Foreign banks have less than one percent of the total branch network but about seven percent of the total banking sector assets and a sizeable 11 percent of profits.
Foreign banks have operated in India since the 1860s, when Comptoir d’Escompte de Paris set up a branch in Calcutta. Of the current crop of foreign banks operating in India, HSBC is the oldest one – having established a branch as early as 1853. Standard Chartered Bank has operated in India since 1858, while Citibank began operations in the country in 1902. The fact that these banks have functioned and flourished in India for so long is testimony to the fact that they have successfully met the challenges posed by the Indian banking environment.
There are a total of 43 foreign banks operating in India through 331 branches. Another 46 banks have a presence in the form of a representative office. Out of the 43 banks, Standard Chartered Bank, HSBC, Citibank and The Royal Bank of Scotland lead in terms of number of branches, with 101, 50, 42 and 31 branches respectively as of 31 March, 2013.
Even while the issue of granting bank licences to a few private banks is gaining traction, the Reserve Bank of India has released important guidelines for foreign banks to participate in the Indian financial sector in a bigger way than what has been possible so far. The two developments have one common objective — they are meant to deepen the financial sector. The framework for foreign banks has one major theme — the formation of wholly- owned subsidiaries (WOS) for furthering their business in India. The RBI guidelines make it clear that the WOS model is what the regulator would prefer the foreign banks to have.
Suitable incentives are being given to new as well as existing players operating through their branches in India to adopt the subsidiary route and incorporate locally. The origin of the new policy is to be traced to the year 2004 when the government relaxed the foreign direct investment limits to 74 per cent in private sector banks.
Simultaneously, foreign banks were permitted to set up a 100 per cent wholly-owned subsidiary in India subject to certain conditions. A detailed roadmap for operationalising the FDI guidelines, in two stages, was issued subsequently. Then, as now, the objective was to encourage foreign banks to take the WOS route. But in the absence of any incentives, no bank came forward to set up or convert their branches into WOS.
One of the key projects undertaken by Indian central bank governor Raghuram Rajan appears to be on shaky ground. Soon after taking over at the helm of the Reserve Bank of India in early September, Mr. Rajan had hit the fast-forward button on a long-pending RBI plan, and allowed foreign banks to set up Indian subsidiaries. In speeches in the fall, Mr. Rajan encouraged foreign banks to set up local units, saying RBI would give them “near national treatment”, including the ability to set up numerous branches in the country and potentially buy Indian banks.
In return, RBI would get more control over these banks’ operations in India. Unless a foreign bank wants to focus on expanding aggressively to serve individuals in India, they may not find it worth the additional regulatory hassle involved in setting up a local unit. More than 40 multinational banks have a presence in India as branches of a foreign parent. But they face restrictions in the number of branches they can open in India, something foreign banks have long complained about. RBI’s new policy and the freedom to set up more branches were supposed to entice those RBI Govt’s Foreign Bank Plan Stumbles.
Foreign banks such as Standard Chartered, Citibank and HSBC have an opportunity to play a much larger role in India and possibly even acquire small private banks with the Reserve Bank of India releasing a new framework for setting up of wholly owned subsidiaries by overseas players in the country.
RBI has said that it may force some of the foreign banks to incorporate locally if it feels that rules in its home country requires the bank to favour depositors back home over depositors abroad. Foreign banks which account for 0.25 percent of banking assets in India may also be forced to convert into a local entity.
Domestic incorporation may also be made mandatory for banks that do not have adequate disclosure requirement in their home jurisdiction, or those that have a complex structure or are very closely held. “Wholly owned subsidiaries may be permitted, subject to regulatory approvals, to enter into mergers and acquisition transactions with any private sector bank in India subject to the overall foreign investment limit of 74 percent,” RBI said.
RBI has said that it will cap the entry of new wholly owned subsidiaries of foreign banks when the capital and reserves of the foreign banks (i.e wholly owned subsidiaries and foreign bank branches) in India exceed 20 percent of the capital and reserves of the banking system. But even with this ceiling, there is large headroom for foreign banks to grow considering that at present they account for around five percent of banking business in the country.
Foreign banks are exiting the wealth management business in India as they find the market too small and unprofitable in the long run given the stiff regulations. Swiss banks like EFG Group, UBS and Sarasin and US-based Morgan Stanley have exited their wealth management business in India. Sarasin had assets under management (AUMs) of around $100 million compared with larger peers like Standard Chartered and Bank of America that have estimated AUMs of anywhere between $3 and $4 billion.
While India remains an attractive market, UBS has concluded that, in view of its recently announced strategy for investment banking, it will not be feasible to implement its business plan for the bank branch in Mumbai in the form originally planned.
Many foreign banks remain unclear on how the wholly-owned subsidiary (WOS) route offered by the Reserve Bank of India to them will play out as priority sector lending as well as setting up and operating rural branches pose challenges, says a survey by PwC India.
According to the recently released WOS guidelines, foreign banks that choose to adopt the WOS model may enter into mergers and acquisitions with domestic private banks. However, this will be subject to regulatory approvals necessary for the transaction, as well as assessment of the foreign lender’s participation and success in the banking space.
Acquisition targets in India that are primarily promoter-driven and command high valuation, may also pose challenges for foreign banks. The lack of alignment of voting rights with shareholding was a concern expressed by many participants. The new guidelines also allow foreign banks to open new branches, scale up their business in India and list on exchanges, subject to the overall investment limit of 74 per cent.
Further, the RBI has also mandated foreign banks with more than 20 branches to meet the 40 per cent priority sector norm, which is a challenge for them. Foreign banks account for less than 1 per cent (334 branches of 43 banks) of India’s total branch network, about 7 per cent of the total banking sector assets and a sizeable 11 per cent of profits.
Essay # 4. Foreign Banks with Maximum Branches in India:
According to Reserve Bank of India 2012 data number of foreign banks in India sums up at 41 foreign banks, 26 state-run lenders and 20 private-sector banks in the country. Despite many restrictions foreign banks continue to visit the country and open branches almost in each and every state.
Leading foreign banks in India are:
1. Standard Chartered Bank:
Initially commenced in Africa, The Standard Bank merged with Chartered Bank of India in the year 1969. It has approximately 96 branches across the country and is among one of the big foreign bank operators in banking and financial services in India. Presently headquartered in London, United Kingdom, Standard Chartered Bank operates in consumer, corporate and institutional banking, and treasury services.
2. HSBC:
‘HSBC Holdings pic is a British multinational banking and financial services company headquartered in London, United Kingdom. It is one of the world’s largest banks. It was founded in London in 1991 by the Hong-Kong and Shanghai Banking Corporation to act as a new group holding company. HSBC has around 7,200 offices in 85 countries and territories across Africa, Asia, Europe, North America and South America, and around 89 million customers.
HSBC is organised within four business groups:
i. Commercial banking;
ii. Global banks and Markets (investment banking);
iii. Retail Banking and Wealth Management; and
iv. Global Private Banking.
The Hong Kong and Shanghai Banking Corporation was founded by Scotsman Sir Thomas Sutherland in the then British colony of Hong Kong on 3 March 1865.
HSBC has a significant presence in each of the world’s major financial markets, with the Americas, Asia Pacific and Europe each representing around one third of its business. The Mercantile Bank of India which laid the foundation for HSBC to come to India. HSBC is credited with the tag of giving India its first ATM in 1987. It has approximately 50 branches across the country.
3. Citibank:
Citibank India is an Indian private sector bank headquartered in Mumbai, Maharashtra. It is a subsidiary of Citigroup, a multinational services corporation headquartered in New York City, United States. Established in 1902 in Calcutta (Kolkata), Citibank has a long history in India. Currently, Citigroup, the owner of Citibank India, is the largest foreign direct investor in financial services in India.
It is the leading foreign direct investor in financial services in India with approximately $4 billion capital commitment in its onshore and banking and other financial services. It has almost 42 branches across 40 cities of India along with more than 700 ATMs.
4. The Royal Bank of Scotland:
The Royal Bank of Scotland pic is one of the retail banking subsidiaries of the Royal Bank of Scotland Group pic, and together with NatWest and Ulster Bank, provides banking facilities throughout the UK and Ireland. The bank traces its origin to the Society of the Subscribed Equivalent Debt, which was set up by investors in the failed Company of Scotland to protect the compensation they received as part of the arrangements of the 1707 Acts of Union. The bank’s history in India goes back to 1921 and at present have around 31 branches across the country and over 700 branches across the globe.
5. Deutsche Bank:
Deutsche Bank AG is a German global banking and financial services company with its headquarters in the Deutsche Bank Twin Towers in Frankfurt. The bank offers financial products and services for corporate and institutional clients along with private and business clients. Deutsche Bank was founded in Berlin in 1870 as a specialist bank for foreign trade. The history of Deutsche Bank in India goes back to the year 1980. Presently the bank has about 16 branches operating in 15 states across the country.
6. DBS Bank:
DBS is a leading financial services group in Asia, with over 250 branches across 17 markets. The bank’s strong capital position, as well as “AA-” and “Aal” credit ratings that are among the highest in the Asia-Pacific region, earned it Global Finance’s “Safest Bank in Asia” accolade for five consecutive years, from 2009 to 2013. The bank was set up by Government of Singapore in June 1968 to take over the industrial financing activities from the Economic Development Board.
The bank has around 12 branches in India within cities comprising Chennai, Kolkata, Bangalore, Mumbai, Kolhapur, Nashik, Cuddalore, Moradabad, Pune, Salem, Surat and Delhi. It also owns 37.5 percent stakes in DBS CHolamandalam, a financial institution.
7. Barclays Bank:
Barclays is a British multinational banking and financial services company headquartered in London. It is a universal bank with operations in retail, wholesale and investment banking, as well as wealth management, mortgage lending and credit cards. It has operations in over 50 countries and territories and has around 48 million customers. Barclays traces its origins to a goldsmith banking business established in the City of London in 1690.
James Barclay became a partner in the business in 1736. Barclays has a primary listing on the London Stock Exchange and is a constituent of the FTSE 100 Index. The Barclays Bank India includes over 9 lakh clients who consists of multinational companies, public sector companies and a large number of small and medium enterprises as well as individuals.
8. BNP Paribus:
BNP Paribas is a French bank and financial services company with headquarters in Paris, and a global headquarters in London. It was formed through the merger of Banque Nationale de Paris (BNP) and Paribas in 2000 and is one of the largest banks in the world. Basically the bank provides services in three sectors, i.e. retail banking, corporate and investment banking and investment solutions. BNP Paribas has around 8 branches in India.
9. Credit Agricole Corporate and Investment Bank:
Credit Agricole CIB came to India in the year 1981 and presently has branches in Bangalore, Chennai, Delhi, Mumbai and Pune. Credit Agricole CIB is an investment banking institutions operating across 58 countries including India. Clients are primarily corporates, governments, and banks, with a small footprint in the investor segment. Its activities are arranged into two major divisions, Capital Markets & Investment Banking Division and Financing Division.
10. Bank of America:
The Bank of America Corporation is an American multinational banking and financial corporation headquartered in Charlotte, North Carolina. It is the second largest bank holding company in the United States by assets. The history of Bank of America dates back to 1904, when Amadeo Giannini founded the Bank of Italy in San Francisco.
The Bank of Italy served the needs of many immigrants settling in the United States at that time, a service denied to them by the existing American banks that were typically discriminatory and often denied service to all but the wealthiest. Bank of America started functioning in India through its Mumbai branch in 1964. The India headquarter of the bank is in Mumbai.
11. Abu Dhabi Commercial Bunk:
Abu Dhabi Commercial Bank is a bank in the United Arab Emirates. Abu Dhabi Commercial Bank was formed in 1985 as a public shareholding company with limited liability, upon merger of Emirates Commercial Bank and Federal Commercial Bank with Khaleej Commercial Bank, which was established in 1975.
12. Antwerp Diamond Bank:
It is a small, 75-year-old bank that specialises exclusively in serving the diamond and the diamond jewelry sector. It is the second largest diamond bank in the world, after ABN AMRO’s International Diamond and Jewelry Group. In addition to its headquarters in Antwerp, it has offices covering all the major traditional as well as emerging diamond centers such as Antwerp, Dubai, Geneva, Hong Kong, Mumbai and New York.
Conclusion:
As summary it can say that, foreign bank are obligated to follow the regulations of both the home and host countries. Because the foreign branch banks’ loan limits are based on the parent bank’s capital, foreign banks can provide more loans than subsidiary banks. Banks often open a foreign branch in order to provide more services to their multinational corporation customers.
Foreign banks are banks that do their operations and services at a foreign country that is rather not in close proximity to an individual. The Cayman Islands are a major international financial center and are a favourite choice of a foreign bank for its outsiders. The foreign banks in India are slowly but steadily creating a niche for themselves.
With the globalisation hitting the world, the concept of banking has changed substantially over the last couple of years. Some of the foreign banks have successfully introduced latest technologies in the banking practices in India. This has made the banking business in the country more smooth and interesting for the customers.