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1-4-2014

Impact of foreign banks on the Indian economy

Gaurav Sharda

Namratha Swamy

Charan Singh

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Sharda, Gaurav; Swamy, Namratha; and Singh, Charan, "Impact of foreign banks on the Indian economy"
(2014). Working Papers. 430.
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 WORKING PAPER NO: 451

Impact of Foreign Banks on the Indian Economy

Gaurav Sharda
PGP Student
Indian Institute of Management Bangalore
Bannerghatta Road, Bangalore – 560076
shardagaurav1@[Link]

Namratha Swamy
PGP Student
Indian Institute of Management Bangalore
Bannerghatta Road, Bangalore – 560076
[Link]@[Link]

Charan Singh
RBI Chair Professor
Economics & Social Science
Indian Institute of Management Bangalore
Bannerghatta Road, Bangalore – 5600 76
Ph: 080-26993818
charansingh@[Link]

Year of Publication –February 2014

 Impact of Foreign Banks on the Indian Economy 1

Abstract

This paper examines the impact of foreign banks on Indian economy. Further, it discusses the
various opinions towards the foreign bank operations in the host country, with India as the example.
The paper looks at the regulatory framework in India to understand the attitude of RBI towards
foreign banks. It also discusses what several foreign banks feel about the Indian regulatory setup and
how these banks have adapted themselves to deal with the changes. To look at the impact of foreign
banks the paper analyses various parameters like the rural presence, contribution towards priority
sector, technological development and financial ratios like return on asset and equity. Two case
studies have been discussed – one, about The Hong Kong and Shanghai Banking Corporation’s
(HSBC) journey in India and the other, about BCCI in India. The paper ends by discussing various
challenges which are faced by foreign banks when they set-up their shop in the country.

Keywords: Foreign Banks, priority sector lending, HSBC, BCCI.

1
The authors wish to thank GBS Wadhwa, Rajani Ramakrishnan, Vinay Gupta, Sharada Shimpi, Puneet Gupta
and A Janardhana, as well as other participants of the internal seminar at IIMB for their comments and
suggestions. The WP originated as a term project for the first two authors, PGP students at IIMB.

IMPACT OF FOREIGN BANKS ON INDIAN ECONOMY Page 1

Introduction

Banking sector in India dates back to 18th century with the establishment of Bank of Hindustan in
1770 followed by the General Bank of India in 1786. There were a number of Public sector banks like
Bank of Bengal, Bank of Bombay which came into existence between 1800 and 1850(including State
Bank of India. These banks were founded as per the charters from British East India Company. With
the trade relations developing between India and various other countries there was a keen interest
from banks in other countries to invest in India and grow their customer base here. The banks were
following the customers in some cases while in some other banks led new customers to enter new
geographies and make investments.

After 1850’s the British initiated the process of setting up foreign banks in India and it was followed
by banks from countries viz. France, Germany, Japan, Holland and US. Some of the oldest foreign
banks that entered India were
a) HSBC (then called the Mercantile Bank of India which started in 1853)
b) Standard Chartered Bank (then called the Chartered Bank of India, Australia and China which
started in 1858).

At present the Standard Chartered Bank is the largest foreign bank in terms of numbers, with 99
branches in 42 cities. As per the RBI discussion paper on presence of foreign banks in India (2011),
there were 34 foreign banks operating in India as branches. Their balance sheet assets, accounted
for around 7.65 percent of the total assets of the scheduled commercial banks as on March 31, 2010.
If the credit equivalent of off balance sheet assets were 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.

Further sections analyse the regulatory framework that govern the foreign banks and the changes
that have gone through in this regard.

This paper examines the impact that foreign banks have had on the Indian economy. The Section I
begin with an introduction followed by review of literature about articles on bank regulations,
establishment of foreign banks. The Section III brings out the performance of foreign banks with
regard to a number of parameters like rural presence, priority sector lending. Section IV introduces
the stories of two foreign banks HSBC and BCCI bank through case studies. The Section V highlights
the challenges faced by foreign banks and then Section VI is a conclusion based on the analysis.

IMPACT OF FOREIGN BANKS ON INDIAN ECONOMY Page 2

 Section 2: Review of Literature

Academic Literature

Marco, Carment and Francisco [2006] analyse the performance measures of the banks
(domestic/foreign) as against the performance of the country and track the changes during the
financial crisis and how there was a difference between the domestic and foreign banks in this
regard.

Cárdenas, Graf and Dogherty [2008] explain the implication of a foreign banks’ entry to the financial
system of the host country, the financial viability of a local subsidiary and the possible effects on the
market dynamics.

Claessens and Horen [2012] provides a detailed database of bank ownership for several countries
over 1995-2009 and reviewed their performance during this period. Schnitzer and Lehner [2006]
analyse the impact of foreign bank entry on host countries particularly emphasizing on the transition
period in the context of emerging markets by studying impact of foreign banks. Cull and Peria [2010]
provide insight on foreign banks participation in emerging economies. According to author, the
participation of foreign banks has increased, but process has not been uniform. Eastern Europe &
Latin America were quick to adopt this model but Middle-east and Asia were late comers.
Elimination of barriers, reduced information cost of operating in foreign markets has been the
reasons for foreign banks to participate in a host country.

Hope, Laurenceson and Qin [2008] analyse the impact of foreign bank participation on Chinese
banking sector by studying several Chinese commercial banks. They also discuss how the presence of
foreign banks did enhance the competitive environment in China’s banking sector. The results
suggest that Chinese banks which have received foreign investment have not been significantly more
efficient than those who have not.

Sathye [2002] studies if the presence of foreign banks in India has resulted in reduced concentration
and thus increase in competition. They find that there has not been much impact on concentration
of banks in the country.

Ghosh [2012] discusses how foreign banks have an impact on domestic profitability. The paper
concludes that foreign banks presence improves profitability and asset quality.

Sanyal and Shankar [2008] talk about the productivity differences that existed pre and post 1991
reforms and results shows that the productivity gap between Indian private banks, public and
foreign banks has dramatically increased due to faster productivity growth by Indian private banks.

According to Charvaka [1993], phenomenal profits by foreign banks is not due to highly efficient
banking operations, but on account of treasury operations, portfolio management and lending in
the money market, non-deposit resources mobilized essentially from other banks, financial
institutions and public sector undertakings. Policy has favored foreign banks, in terms of limited
social obligation and in contrast, Indian banks have a disadvantageous position in several aspects
including social responsibilities, rural banking, priority sector lending, etc. They also face losses from
small and big borrowers.

IMPACT OF FOREIGN BANKS ON INDIAN ECONOMY Page 3

According to research emerging from the RBI, two aspects are highlighted. First, there are opinions
in favor of foreign banks by extending support and concerns were expressed over the presence of
the same in the country. An observed trend is that with the growth of foreign banks, smaller banks
will find it difficult to compete and contribute [Leeladhar 2007]. Many of the foreign banks in India
work mainly in high end sectors and have paid less attention to the “Priority sectors”. Annex Tables
1-4 show that setting up of ATMs, branches in rural area by foreign banks have been less as
compared to Indian Banks. However, others find that foreign banks bring in operational efficiencies
in the field of technology, risk management, customer service, investment banking, etc. [Dinesh U,
Rebello J 2012].

Regarding the attitude of RBI towards foreign banks there have been a number of views expressed.
Despite the promotion of foreign banks in India, there have been concerns in RBI regarding the
increasing footprint of foreign banks in the country [Mohan 2009]. Most of the foreign banks in India
have confined their work to the areas of Investment Banking and foreign exchange Market [Mohan
2006] and have not paid much attention to the other “priority sector” in the country. This results in a
small presence in the country which could result in the top management of the bank paying little
attention to the operations. Hence any transgression committed by these banks which can have
significant impact on the financial market of the host country but have a little effect on the overall
global operations of the bank. Sometimes, even strong regulatory action taken by regulators against
such global banks has had negligible market impact on them and hence there is loss of regulatory
effectiveness as a result of the presence of big financial conglomerates.

Proponents who have been against the increasing footprints of foreign banks have pointed the fact
that the direct effect of the global financial crisis on the Indian financial system was almost
negligible owing mainly to the limited exposure to riskier assets and derivatives. The impact on
domestic economy was also very less due to the relatively low presence of foreign banks[Thorat
2009].Foreign banks do come with certain good aspects like better operational efficiencies,
superior customer service and technology, expertise in areas like Investment banking
[Chakrabarty 2012].

Reports

In order to allay the concerns as well as take fullest advantage of foreign banks, RBI has set-up a
regulatory framework based on recommendation given by several committees mentioned
below. 4 main milestones can be identified with regard to regulatory policy changes as applicable to
foreign banks. This is explained in detail below:

Narasimham Committee report of 1991 recommended a structural reorganization of the Banking

system in India to improve the efficiency of operations of banks here. There was a clear push for the
foreign banks as they indicated an improvement in efficiency. Foreign banks were allowed to open
branches in India as fully owned or as subsidiaries. They were also permitted to enter into joint
ventures with private banks for merchant banking or investment banking. Also according to the
committee report of 1998 the foreign banks seeking to set up business in India need to have a
minimum start-up capital of $25 million as against the existing requirement of $10 million. The
committee also provided for subsidiaries and Joint Ventures (JVs) to be treated at the same level as
private banks [Narasimham Committee 1998]

IMPACT OF FOREIGN BANKS ON INDIAN ECONOMY Page 4

In 2005 RBI proposed the twin track approach for stabilizing and making the banking sector more
efficient. Under this there were 2 models of entry available which were the branch presence model
and the other WOS (Wholly owned subsidiary) model. The details regarding each of these forms of
presence is explained in Table 5 of Annex. The roadmap was implemented in 2 phases: The first
phase (March 2005 – March 2009) - there was more focus on consolidation of domestic banking
system. During this phase foreign banks were allowed to enter India through establishment of
branches or WOS or converting their existing branches into WOS, the clear trend was establishing
branches. The second phase began after reviewing the first phase (April 2009 onwards) and after the
review there was keen interest on WOS model going ahead. Another roadmap for implementation
was released in 2011 which again did not make WOS mandatory because of the WTO commitment.
RBI expected that banks would switch to the WOS model once their assets exceeded the threshold
of 0.25 percent of all holdings.

The proposed framework specified conditions as to when a foreign bank is allowed to only setup a
WOS model and also suggests that it is mandatory to convert into a WOS model from branch form as
and when any of these conditions come true. Some of the conditions that were mentioned in the
report included adequate level of disclosures, the required level of supervision and others. A
comparison of the policies regarding branches in other countries like USA, Canada and Australia is
shown in Table 6 of Annex.

The discussion paper released by the RBI in 2011 also covered points such as: The recent global
financial crisis highlighted that (i) complex structures (ii) too big to fail (TBTF) and (iii) too connected
to fail (TCTF) exacerbated the crisis. And that the post-crisis lessons support domestic incorporation
of foreign banks i.e. subsidiarisation. Setting up subsidiaries supports in ring fencing capital within
the country. The local incorporation requirement for foreign banks is imposed by several
jurisdictions, primarily in order to protect retail depositors and to limit operations of the systemically
important banks. Branches are generally not allowed to take retail deposits or enjoy deposit
insurance: On this aspect, the paper indicated the position in some countries (Please refer to Annex).
The discussion paper weighed the benefits and drawbacks of the branch form of presence in
comparison with the subsidiary form of foreign banks and indicated that the positives in the WOS
form prevail over the weaknesses.

Following the RBI discussion paper being made open to comments in 2011, there were many
comments/responses from many financial institutions across the world regarding the new
framework. Though a few banking experts were of the opinion that the RBI’s policy has been very
liberal [Parekh and Venkatesh, 2011] in terms of the timelines allowed for changing into WOS or
propagating the WOS form of presence there is another faction led by some of the biggest foreign
banks of the country which are of an opposing viewpoint. According to Standard Chartered Asia CEO
there are not enough incentives for the banks to go for the WOS form of presence. The tax structure,
absence of national treatment all act as hindrance to the adherent to policy of RBI. According to
audit experts the tax structure [Dinesh U, Rebello J 2012] is not clearly defined on conversion from
branch to WOS form i.e. when they are looking for local incorporation. The BBA (British Bankers’
association) discussion paper is an elaborate response to the roadmap of RBI and looks at each of
the important step taken by RBI [Ashvin 2010].

IMPACT OF FOREIGN BANKS ON INDIAN ECONOMY Page 5

The next leg of recommendations came through the Nair committee setup in 2011 to re-examine
the classification that existed in priority lending sector and suggest revised guidelines with respect to
these issues. The recommendations made were applicable to both domestic and foreign banks. The
major changes that were done with regard to Foreign banks regulations was that the priority sector
target was increased to 40 percent of ANBC (Adjusted Net Bank credit) or CEOBE (Credit equivalent
of off Balance sheet exposure) whichever is greater. There was also a sub-target of 15 percent for
exports and 15 percent for MSE sector. The committee also brought up the idea of non-tradable
priority sector lending certificates (PSLCs) with foreign banks as well. According to the
recommendations all foreign banks which have more than 20 branches will come under this
condition and be required to satisfy a minimum priority sector lending of 40 percent as compared to
32 percent for other foreign banks. This served both as an incentive and a disincentive. Looking at it
from RBI perspective this is more of involvement of foreign banks in true growth story of India. For
banks with a large number of branches like Standard Chartered (99 branches) this regulation will not
have much of an impact. But for banks with branches slightly above 20 this might be a big
disadvantage. HSBC with 51 branches was one of them who faced this problem. Foreign banks are of
the opinion that getting into the higher priority sector lending requirement bracket makes sense if
they are given the license and required permissions to expand up to a large number like 100. Else it
only ends up putting extra requirement on the banks without giving them the benefits of economies
of scale.

RBI’s Annual Policy Statement for 2010-11 brought out a realization that as international agreement
on cross-border resolution mechanism for internationally active banks was not likely to be reached
in the near future, there was considerable merit in subsidiarisation of significant cross-border
presence. And that this would not only ease the resolution process, but would also give a greater
regulatory control and comfort to the host jurisdictions.

According to the latest norms released by the RBI, those foreign banks which have become
“systematically important” (whose assets account for at least 0.25 percent of the total assets of all
commercial banks) will have to convert to wholly owned subsidiaries of their parent. Those foreign
banks which set up wholly owned subsidiaries (WOS) in India will be given “near national bank”
treatment in India. This will allow them to open up new branches which will give them a level playing
field vis-à-vis their Indian counterpart. This will also allow them to expand their branch network
without seeking prior approval of the RBI (except in sensitive locations from the perspective of
national security). As per the release of the framework for setting up of WOS by foreign banks in
India, by the RBI, the policy is guided by two cardinal principles of (i) reciprocity and (ii) single mode
of presence (the proposed framework in the discussion paper of 2011 had indicated that these
principles should guide the framework of the future policy regarding presence of foreign banks in
India). The policy incentivizes the existing foreign bank branches which operate within the
framework of India’s commitment to the WTO to convert into WOS due to the attractiveness of near
national treatment. Such a conversion is also desirable from the financial stability point of view [RBI,
2013].

According to the scheme for setting up of WOS by foreign banks in India, WOSs may also be
permitted, to enter into mergers and acquisition transactions with any private sector bank in India
subject to the overall foreign investment limit of 74 per cent. This would be considered after a

IMPACT OF FOREIGN BANKS ON INDIAN ECONOMY Page 6

review regarding the extent of penetration of foreign investment in Indian banks and functioning of
the foreign banks (branch mode and WOS). The WOSs of the foreign banks may, at their option
dilute their stake to 74 per cent or less in accordance with the extant FDI policy on foreign
investment in banking sector and list on stock exchanges in India. Key features of the framework
(Press release, RBI 2013):

• Banks which would be mandated entry into India only in the WOS mode: Banks with complex
structures, banks which are not widely held, banks which do not provide adequate disclosure
in their home jurisdiction, banks from jurisdictions having legislation giving a preferential claim
to depositors of home country in winding up proceedings, etc.
• In the case of foreign banks for which the above conditions are not applicable, can opt for a
branch or WOS form of presence
• A foreign bank opting for branch form of presence shall convert into a WOS as and when the
above conditions become applicable to it or it becomes systemically important on account of
its balance sheet size in India
• Foreign banks which commenced banking business in India before August 2010 shall have the
option to continue their banking business through the branch mode. However, such banks will
be incentivized to convert into WOS due to the attractiveness factor of near national
treatment given to WOS
• When the capital and reserves of the WOSs and foreign bank branches in India exceed 20 per
cent of the capital and reserves of the banking system, in order to avoid domination by foreign
banks, restrictions would be placed on further entry of new WOSs of foreign banks/ capital
infusion
• For new entrants, the initial minimum paid-up voting equity capital for a WOS shall be Rs. 5
billion. The existing branches of foreign banks desiring to convert into WOS shall have a
minimum net worth of Rs. 5 billion
• A letter of comfort would need to be issued by the parent of the WOS to the RBI for meeting
the liabilities of the WOS
• Corporate Governance: (i) Not less than two-third of the directors should be non-executive
directors; (ii) A minimum of one-third of the directors should be independent of the
management of the subsidiary in India, its parent or associates; (iii) Not less than fifty per cent
of the directors should be Indian nationals/NRIs/PIOs subject to the condition that not less
than 1/3rd of the directors are Indian nationals resident in India
• Branch expansion guidelines as applicable to domestic scheduled commercial banks would
generally be applicable to the WOSs of foreign banks except that they will require prior
approval of RBI for opening branches at certain locations that are sensitive from the
perspective of national security
• Priority Sector lending requirement would be 40 per cent for WOS like domestic scheduled
commercial banks with adequate transition period for existing foreign bank branches
converting into WOS.
• On arm’s length basis, WOS would be permitted to use parental guarantee/ credit rating only
for the purpose of providing custodial services and for their international operations.
However, WOS should not provide counter guarantee to its parent for such support.
• WOSs may, at their option, dilute their stake to 74 per cent or less in accordance with the
existing FDI policy. In the event of dilution, they will have to list themselves.

IMPACT OF FOREIGN BANKS ON INDIAN ECONOMY Page 7

 Foreign banks have been hesitant of conversion to WOS. Hence in order to promote foreign banks
to convert their branches to wholly-owned subsidiary, according to a recent directive, I RBI has
decided to exempt stamp duty and capital gains on conversion [Dinesh U 2013]. This exemption is
valid from 1st April 2013.

Section 3: Performance of foreign banks

In order to compare the performance of foreign banks with respect to Indian counterpart several
performance indicators have been considered. To prove the point that Foreign banks are focusing
only on urban areas proxy indicators like number of ATM branches opened in urban and rural are
discussed. To understand the impact of foreign banks towards agriculture, their net advances
towards agriculture is compared with Indian banks. In order to understand how foreign banks are
managing their assets a comparison of return of assets is performed. A discussion on non-
performing assets of various banks in India is done by analyzing Capital to Risk-Weighted Assets
ratio.

Focus on urban areas

One of the clear trends that emerge from the growth of foreign banks is the kind of population that
they cater to. The table in the appendix indicates the percentage of branches in rural areas for
foreign banks (around 2 to 3 percent of total branches) and this number is negligible compared to
the same percentage for other scheduled commercial banks (here rural and semi-urban branches
account for 58 percent of the total branches). The key inferences that can be drawn from this are:

1) Foreign banks clearly are focusing on expansion activities in urban areas. This makes sense
because the initial amount of deposit required is also high and would not be feasible for
people in rural areas.
2) Over the last 20 years the number of rural branches in foreign banks have only increased to
about 15 branches (in 1995 there were 3 branches) in comparison to the private sector
banks which have more than doubled their rural branches in the same time period.

The charts shown below represent the variation in number of branches of Foreign banks opened,
closed and in operation during a particular year in different geographies i.e. the rural and urban
areas.

However, licenses issued by the RBI are few in number; hence it is difficult to open branches in rural
areas. This situation could be corrected if banks opt for wholly owned subsidiary structure, in which
case banks will be forced to open at least 25% branches in rural area. However they will also be
entitled to open as many branches as they like in bigger cities. Therefore the loss, if any arising from
operating rural branches can be absorbed by bigger branches in cities.

IMPACT OF FOREIGN BANKS ON INDIAN ECONOMY Page 8

Graph 1

Source: a) Report on Trends and Progress of Banking in India, RBI

b) Statistical Tables Relating to Banks in India,

IMPACT OF FOREIGN BANKS ON INDIAN ECONOMY Page 9

Priority Sector Lending

Priority Sector lending refers to those sectors which may not be as attractive to lenders as other
sectors can be, but is important to the economy for various reasons, including providing source of
livelihood to many. Major areas which are covered under priority sector lending are Agriculture,
Small and micro enterprises, education, housing, export credit, etc.

According to government regulation the following are the requirement to be satisfied by each bank:

Table 1: Priority Sector Lending (% of adjusted net bank credit)

Domestic Bank / Foreign Banks Foreign Banks With Less

Category
(With More than 20 Branches) than 20 Branches
Total Priority Sector Lending 40 32
Contribution to Agriculture 18 No Specific Requirement
Contribution to Weaker Section 10 No Specific Requirement

Source: a) Report on Trends and Progress of Banking in India, RBI publication

b) Statistical Tables Relating to Banks in India, RBI publication

Looking at the above table, foreign banks with less than 20 branches have no mandatory
requirement to contribute towards agriculture. Considering the large number of NPA, it is neither an
attractive proposition for them. Taking advantage of this, most of the foreign banks cover their
priority sector requirement by contributing towards the export sector. A look at the trend in
contributing towards agriculture/export is shown below:

Table 2: Priority Sector Advances to Agriculture (% of adjusted Net banking Credit)

Bank Type 1999-00 2005-06 2011-12

Public Sector bank 15.8 15.2 15.8
Private Sector banks 9.1 13.5 14.3
Foreign Banks 1.8 5.6 0.1

Source: Same as Table 1.

And Contribution towards Other sectors (including exports) is shown below:

Table 3: Advance to "Other" Sector (% of adjusted Net Banking Credit)

Bank Type 1999-00 2005-06 2011-12

Public Sector bank 11.0 8.1 9.5
Private Sector banks 13.9 4.2 5.4
Foreign Banks 22.5 19.4 29.8

Source: Same as Table 1.

IMPACT OF FOREIGN BANKS ON INDIAN ECONOMY Page 10

The Return on Asset is an Indicator of how efficiently the bank is managing its resources. Foreign
banks are better in managing their resources as compared to public sector banks and private banks.
With the entry of foreign banks it has been observed that the ROA of domestic banks have also
increased significantly this may be due to the “spillover effect” which foreign banks’ operations in
India have over the other banks. Their operations might have encouraged domestic banks to adopt
better practices of operations in order to compete with foreign banks. A trend of ROA for the Last
decade can be seen below:

Return on Asset is the indicator of the efficiency in which the bank employs its resources, while
return on equity is the indicator of the efficiency in which the bank uses its capital. As it can be seen
from Tables 4 and 5, foreign banks are the most productive in using their resources while Public
sector banks have used their funds more judiciously.

Table 4: Return on Assets

Bank Type 1999-00 2005-06 2011-12

Public Sector bank 0.6 0.8 0.9
Old Private Sector Bank 1.2 0.5 1.2
New Private Sector Bank 1.1 0.9 1.6
Foreign Banks 0.3 1.6 1.8

Source: Same as Table 1.

Table 5: Return on Asset and Return on Equity for the year 2012-2013

Bank Type Return on Asset Return on Equity

Public Sector bank 0.8 13.2
Old Private Sector Bank 1.3 16.2
New Private Sector Bank 1.7 16.5
Foreign Banks 1.9 11.5

Source: Same as Table 1.

As seen from the Table - 6, NPA’s for foreign banks were relatively low in the past decade. This
probably shows their superior risk management capabilities or more generally, exclusivity, of giving
loans to a select group.

Table 6: Net NPAs (% of Net Advances) for various categories of banks

1999-00 2005-06 2011-12 2012-13

Public Sector Banks 7.4 1.3 1.7 2.0
Old Private Sector Banks 7.3 1.6 0.6 0.8
New Private Sector Banks 2.9 0.8 0.5 0.4
Foreign Banks 2.4 0.8 0.6 1.0

Source: Same as Table 1.

IMPACT OF FOREIGN BANKS ON INDIAN ECONOMY Page 11

 Table – 7 points to the fact that the cost of Deposits, borrowing and cost of funds are the least for
foreign banks but their return on investment is the highest. This indicated the superiority in
operational efficiencies which foreign banks have achieved. Capital to Risk-weighted asset ratio is
the amount of money (as a percentage of shareholder’s capital) which the bank is supposed to have.
Internationally, this has been agreed to be at 8 percent. Of all types of banks, Foreign Banks in India
have the highest capital to risk-weighted asset ratio (Table 8).According to Tale 9, long term deposits
with foreign banks are very few, least among the rest of the banks. Most Loans and Advances given
by foreign banks are still very mature (mostly less than 1 year). Borrowings, with less than 1 year are
highest for foreign banks as compared to other banks and with itself.

Table 7: Cost of Funds and Returns on Funds for the year 2012-2013

Cost of Cost of Cost Return on Return on Return Spread

Deposits Borrowings of Advances Investments on
Funds Funds
Public Sector 6.6 2.5 6.3 10.1 7.60 9.4 3.1
Old Private Sector 7.5 4.3 7.1 12.2 7.5 10.6 3.4
New private Sec 6.5 3.2 5.8 11.3 7.2 9.9 4.1
Foreign 4.7 2.8 4.1 9.6 8.1 8.9 4.8

Source: Same as Table 1.

Table 8: Capital to Risk-Weighted Assets Ratio under Basel I and II for the year 2013

Basel 1 Basel 2
Public Sector Banks 11.31 12.38
Old Private Sector banks 12.33 13.73
New private sector banks 15.71 17.52
Foreign Banks 18.76 17.87
Source: Same as Table 1.

Table 9: Maturity Profile of Select Liabilities/Assets

Public Sector Old Private Sector New Private Foreign

Deposits
Bank Bank Sector Bank Banks
Less than 1 year 49.6 48.1 48.9 61.8
Between 1 and 3 years 25.3 39.2 26.6 29.8
Between 3 and 5 years 8.5 6.9 5.2 8.3
Over 5 years 16.6 5.8 19.3 0.1
Borrowing
Less than 1 year 45.4 63.7 49.2 84.5
Between 1 and 3 years 12.2 13.4 11.7 9.2
Between 3 and 5 years 15.2 7.8 12.9 2.7
Over 5 years 27.2 15.1 26.2 3.5
Loan and Advances
Less than 1 year 34.3 44 32.4 67.4

IMPACT OF FOREIGN BANKS ON INDIAN ECONOMY Page 12

Between 1 and 3 years 37.4 36.1 37.4 15.5
Between 3 and 5 years 11 9.1 12 4.5
Over 5 years 17.3 10.8 18.2 12.5
Investments
Less than 1 year 20.1 30.3 45.7 76.6
Between 1 and 3 years 12.6 12.2 18.6 12.9
Between 3 and 5 years 14.2 13 8.2 5.2
Over 5 years 53.1 44.4 27 5.3

Source: Same as Table 1.

Section 4: Case study of two foreign banks

Key findings about 2 foreign banks have been discussed in this section. The growth story of HSBC
spanning over 150 years and the challenges and the situations of BCCI bank in India are presented
below.

A. The Hong Kong and Shanghai Banking Corporation

HSBC began its operations in India as Mercantile Bank in October 1853. The Mercantile bank of
India, London and China was founded in Mumbai with branches in 3 countries: India, China and
London. The bank was mainly established for facilitating trade between the 3 countries then. This
bank had offices in 9 cities by 1855 and the next 100 years were profitable for the bank. The
Mercantile bank was acquired by the Hong Kong and Shanghai Banking Corporation Ltd in 1959
laying the foundation for today’s HSBC group. The bank has grown tremendously over the last 150
years following a strategy of ‘Managing for Value’, and the managing for value has undergone
several changes throughout its existence in India. HSBC gave India its first ATM in 1987 and has been
a major contributor in terms of the technology evolution of banks in India.

The HSBC group in India provides 24 hour banking services through the 140 ATMs throughout the
country and is known for its high end technology based banking services like phone banking, internet
banking, trade banking and treasury dealing services. HSBC in India offers a very wide range of
services which include:

1) Retail Banking and Wealth Management: The Bank has around 1.4 million customers
worldwide and offers a wide range of services to these resident and non-resident Indian
segments in India, USA, UK, Canada, Australia, Middle East and South East Asia.
2) Commercial Banking
3) Private Bank
4) Global Markets
5) Asset Management
6) Audit Services
7) Investment Banking and Institutional Equities Broking

IMPACT OF FOREIGN BANKS ON INDIAN ECONOMY Page 13

This wide array of services is what differentiates HSBC from the rest of the banks. The technology
inclination of HSBC coupled with the unique offerings has helped it achieve the differential
advantage compared to the other banks.

Sector focus: HSBC in India is focused equally on all sectors except a few industries like defense,
aviation which HSBC cannot serve. Though there are not many rural area branches of HSBC the social
concern is addressed by HSBC through the various projects launched like Mann Deshi, Micro
financing, education of children etc.

Corporate Sustainability: Here there are 3 main areas in which HSBC works

a) Financial Inclusion- Providing education to children in rural areas and also underprivileged kids,
teaching live skills that will be essential for building a career and make them independent
throughout. The focus is also on women empowerment and financial support to women to help
them start businesses on their own or provide them education to make them capable to
compete and survive in the industry. HSBC scholarship program, Future first investment in
children program and Micro finance fund are all initial steps of HSBC towards this direction.
b) Environment sustainability initiatives - Focused on climate change, ecosystem conservation,
direct impact reduction, business development and risk management. They have supported
projects in climate change which work on impact of climate change on business and work with
supported organizations in collaboration to tackle the challenge on a global level. Ecosystem
conservation and direct impact reduction measurement of any environmental sustainability
measures are some of the other areas of focus for HSBC.
c) Volunteering programs: HSBC is keen on allowing its employees to be a part of the change that
they drive by encouraging them to be a part of the various social and environmental initiatives
that they come up with.

The key factors that make HSBC unique amongst the other foreign banks are:

1) Heritage and Long association: HSBC has been in India for 150 years and has been an integral
part of the India growth story over the years. The long association has made it a trusted
name across the country which is a key factor in establishing a connect with customers.
2) India is a part of the progress story: The growth rates in India have been high compared to
the other developed countries which have almost stagnated. There is mutual benefit
obtained both for HSBC and for India.
3) Environment sustainability: The work HSBC has carried out in this sector is encouraging and
has made the other banks progress in this direction as well.

Attitude towards RBI’s regulatory policies: HSBC India Ms. Naina Lal Kidwai in her interview [Press
trust of India, 2013] tells that the attitude of RBI has been a positive one and the regulations that
have been brought out will be adhered to by HSBC. Even to the recent news that RBI might want
foreign banks to only run as subsidiaries, Ms. Naina remarked that HSBC would be willing to go the
way described.

The number of branches of HSBC has increased from 28 in 2001 to 48 by the end of 2012 which is
one of the highest in India as compared to other foreign banks. The Return on asset has increased
from a mere 0.96% in the year 2000 to more than double to 1.98% in 2012 which is above the

IMPACT OF FOREIGN BANKS ON INDIAN ECONOMY Page 14

average value of all the foreign banks combined. The net non-performing assets (as a percentage of
Net Advances) have come down from 1.04% in the year 2000 to a mere 0.62% in the year 2012. This
is again lower than the average of 1% of all foreign banks combined. The return on equity has
increased from 11.83% in 2011 to 13.88% in the year 2012, while the average for all foreign banks is
a mere 6.33%.

The entire analysis above indicates that if a foreign Bank stays engaged with a developing country
like India, the rules allow it to maintain a healthy profit without compromising on its social
obligations.

B. BCCI Bank (Bank of Commerce and Credit International)

BCCI bank started in 1972 as a Pakistani bank in Luxembourg. By 1988 there was a number of money
laundering charges against BCCI across nations [The Guardian, 2005]. There were a number of
investigations against the bank to verify the authenticity of the charges levied. Owing to all the
regulatory pressures BCCI pled guilty and ceased operations worldwide from 5th July 1991. At that
point, it had only one office in India, in Mumbai. The closure of the bank impacted its clients
adversely including those in India. Most of the depositors with BCCI were NRIs who were lured by
the high rate of interest being offered by BCCI. It was felt by RBI that in order to protect the interests
of its clients having business with the Bombay branch of BCCI, who were either resident Indians,
Indian firms with running businesses or NRIs, the assets and liabilities of its Mumbai Branch could be
taken over by an Indian bank which could either absorb the Bank or open a new bank as its
subsidiary. The faith in the Indian banking system of NRIs was at stake when the closure of BCCI in
India was about to take place and hence it became essential to not liquidate the bank but try and
keep it afloat. Hence the SBI was asked by RBI to acquire the operations of the Mumbai Branch of
BCCI from the liquidators. On account of its assets having a significantly high percentage of toxic
assets, as well as several other reasons, SBI was granted a license to start the operations of the
erstwhile BCCI in its new avatar of SBICI as a wholly owned subsidiary of SBI. A key reason that could
be identified for risky loans forming a bigger chunk of portfolio is the absence of asset classification
guidelines. These guidelines came into effect only after 1992-93 which was a year after BCCI shut
down its operations. SBICI commenced operations on 17th January 1993. As SBICI had not been set
up under an Act of Parliament in the manner that SBI and the nationalized banks had earlier been
but was set up under the Companies Act, 1956, RBI categorized it as a Private Sector Bank and not a
Public Sector Bank despite being a fully owned subsidiary of SBI.

SBICI functioned as a single branch bank till 1999 when it opened its second branch in the city of
Mumbai itself. SBICI in its initial few years tried to stabilize the bank and reduce the toxic assets so as
to have sufficient capital to lend. The takeover conditions put in my liquidators when BCCI
operations were taken over included some minimum wage stipulations and this resulted in very low
capital available for expansion of the bank. In 2002 bank was faced with a major issue of its net
worth being less than paid-up capital. This is when RBI began insisting that SBI merge SBICI with
itself and there would be no further expansion in its branch network. SBICI remained a bank with a
single city, two branch footprint confined to a metropolis till its acquisition by SBI in July 2011. The
low capital present with the bank also led to limit on the corporate lending that the bank could do.
The retail lending got limited by the number of branches and the cities in which they were present.
The lower paid up capital meant lending to small corporates which was again of lower quality and

IMPACT OF FOREIGN BANKS ON INDIAN ECONOMY Page 15

hence higher risk associated. However, the period between 2004 till its acquisition, the Bank cleaned
up its Balance Sheet, became a profitable entity, and for the last six years of its existence, had a Nil
Net NPA position. Internally a number of systems and mechanisms were cleared up to ensure better
operating efficiency and utilization of assets improving. Considering that it were the NPAs which had
choked its operations, the turnaround resulting in consistent profits, decent financial ratios and NIL
Net NPAs was regarded as commendable.

However, there were no tangible takeaways from the foreign bank, BCCI, either on the
technological side or in terms of any specialized skills, practices or management inputs. Though a
foreign bank, BCCI was already being spoken of in a negative light well before it went bust. SBI felt it
necessary to rely on its own executives to provide managerial support and to deliver. The executives
brought with them the typically conservative and financially prudent business practices of SBI to
SBICI. Moreover, the local top management of erstwhile BCCI and many others at various levels left
during the process of takeover or immediately thereafter.

Merger of SBICI with SBI

When State Bank of India Commercial and International Bank Ltd (SBICI) was set up in 1994 after
taking over the Indian operations of the erstwhile Bank of Credit & Commerce International Ltd
(BCCI), its net worth stood at Rs.128.74 crores on the capital base of Rs.100 crores[PTI,2011]. It had
total business (deposits and advances) of less than Rs.700 crores, with a ROA of 0.49 per cent.

According to RBI guidelines, for ownership in private sector bank, the minimum cap needed for
capital was increased to Rs.300 crores. Considering the existing business model of SBICI (and the
returns generated by it) did not justify the capital infusion required. Hence the government
approved merger of SBICI with its parent bank SBI [Press trust of India, 2011].

IMPACT OF FOREIGN BANKS ON INDIAN ECONOMY Page 16

Section 5: Challenges faced by Foreign Banks

This section looks at foreign banks and some of the major problems they face in India.

Foreign banks play an important role in financing foreign trade. The 2011 discussion paper mentions
that most of the foreign banks have opened branches to cater to trade-finance. With their know-
how in handling foreign trade, the foreign banks have contributed significantly in rapid rise of cross
border trade.

RBI’s report on currency and finance (2006-08) brought out the aspect of being liberal: While India
had committed 12 branches of foreign banks in a year, during the period 2003 to October 2007;
India gave approval for 75 new foreign bank branches. The report stated that the regulatory regime
followed by RBI in respect of foreign banks was non-discriminatory and very liberal by global
standards. To support this, the following was pointed out:

• India issues a single class of banking license to foreign banks and does not require them to
graduate from a lower to a higher category of banking license over a number of years
• The single class of license places them virtually on the same footing as an Indian bank and
does not place any restrictions on the scope of their operations
• No restrictions exist on establishment of non-banking financial subsidiary in India for the
specified 18 activities under automatic route by the foreign banks and their group companies
• Deposit insurance cover is uniformly available to all foreign banks at a non-discriminatory
rate of premium
• Prudential norms applicable to the foreign banks for capital adequacy, income recognition
and asset classification, etc., are, by and large, the same as for the Indian banks

With the backdrop of the significance of foreign banks in financing foreign trade and the RBI’s stance
towards foreign banks, following are some of the major challenges faced by the foreign banks as
discussed in the PWC Report, 2013:

• Regulatory concerns
• Overall political environment and particularly, uncertainties owing to the forthcoming
national election in 2014.
• Some issues and general discussions which appear to have surfaced following the RBI
framework for setting up of WOSs by Foreign Banks in India:
o Requirement of specifications and further clarity: Such as, the amount of stamp duty;
Accounting norms; Specifications regarding the letter of comfort; specific meaning of
terms such as “complex structures”, “adequate disclosure requirements”
o Perhaps only the foreign banks with a high level of trade between India and their home
country, would be interested in subsidiarisation
o Requirement of branch expansion in rural centers: Hitches regarding hiring, local
problems such as electricity
o Issues pertaining to stamp duty, taxation rules (uncertainty that has crept in due to the
recent issues with regard to retrospective taxes etc.)

IMPACT OF FOREIGN BANKS ON INDIAN ECONOMY Page 17

Our interview with an industry expert who has worked in the evolution of a foreign bank in India
from the ground level revealed some insights that are listed below:

1) Shortage of quality people: Human resource is a major problem that new organizations face
and getting the right set of people is essential for the success of any organization.
2) Underestimating the value of capital needed: Though the minimum cap required by RBI is
very low (25Mn Dollars) the need to expand is a core problem that they face. Being
profitable requires operation on a large scale to get benefits from scale economies and also
be able to generate the right amounts of investments as and when needed. The issue with
lower capital is the inability to serve large clients which would mean serving lower quality
clients that makes the entire operations more risky and hence be more difficult to sustain on
a larger scale.
3) Limited branch networks: RBI regulations allow the number of branches increase only at a
certain prescribed limit. The cap on this number prevents banks from being able to grow in
all regions and obtain pan-India presence. Most of the foreign banks are dependent on the
Headquarters for the funds and this may have an unnecessary delay in the growth stage.
4) Technology: The mismatch between the technology present at the Headquarter level and
also India is a major cause of concern. The technology that needs to be implemented in the
foreign country and the interface with the headquarters’ system needs to be clearly
identified.

Though there are a few issues that the new banks face there are also a number of positives that
India has offered which has made India an emerging market for most foreign banks:

a) Fast paced economy: India being a developing economy offers a number of business
opportunities to banks which are present here and also for the ones who would like to enter
the Indian market. The other markets in the world have already saturated.
b) Indian banks: In India the banks need to go to other banks or markets in order to raise the
required money. Raising capital is a difficult problem and most foreign banks go back to
headquarters for getting money required.
c) Priority sector: Foreign banks have a smaller priority lending requirement of 32 percent as
against 40 percent for government sector banks. Also the sectors which are a part of the
lending sectors allowed are also different for foreign banks. Foreign banks can fulfil this
through exports, imports and do not have to lend to agricultural sector like the other banks.
d) IT systems are useful to speed up processes: The It development in India at a faster pace
than the other countries gives India an advantage and makes it more sought

IMPACT OF FOREIGN BANKS ON INDIAN ECONOMY Page 18

 Section 6: Conclusion

The report talks about the various opinions towards the foreign banks operations in the country. It
begins by looking at the regulatory framework that existed in order to understand the central bank’s
attitude towards foreign banks entry into India. While the regulations have been successful in setting
up a guideline that needs to be followed by banks there is still not a push for one particular form of
presence. The 2005 RBI policy on the roadmap for presence of foreign banks laid out the 2 forms of
presence with an aim to push for Wholly-owned subsidiary (WOS) model. But from the view of
foreign banks there is no incentive for moving to the WOS model. The contention regarding the form
of presence has remained over the years. Looking at the impact of foreign banks over the years, the
following characteristics have been observed:

1) Rural presence: Foreign banks have a very small presence in rural and semi-rural areas. Only
1 or 2 percent of the total branches of foreign banks are in rural / semi-rural areas. This is in
contrast with the scheduled commercial banks which have grown enormously in the rural
sector (currently rural branches account for 58 percent of their total number of branches).
2) Technological development: Foreign banks have helped in bettering the technology used in
the banking sector. The first ATM in India was brought up by HSBC and from then on foreign
banks have contributed to the latest banking practices helping them become more efficient
3) Priority sector lending: The priority sector requirement itself is different for foreign banks
and also the percentage rates are lower for them. For banks with less than 20 branches the
requirement is at 32 percent as against 40 percent for the other nationalized banks. Also the
requirement is mostly satisfied by banks by lending in the export-import sector and not
lending in sectors like agriculture which are the actual constituents of the priority sector.
4) Return on Assets: This has clearly shown a positive trend bringing into forefront the
improvements brought across by the operational improvements through better practices of
foreign banks.

Our case study on HSBC has also revealed insights similar to that explained above. There are
positives and negatives from presence of foreign banks in India. They have aided in technological
improvements but not really entered the growth sectors like the agriculture sector in India. The
common perception of foreign banks in India is that they are focused on profitability and not on the
development issues of the country.

IMPACT OF FOREIGN BANKS ON INDIAN ECONOMY Page 19

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IMPACT OF FOREIGN BANKS ON INDIAN ECONOMY Page 21

 Annexure
Table 1: Comparison of various foreign banks regard to number of branches and ATMs
No of Branches
Bank 2001 2006 2012
Rural Urban total Rural Urban total Rural Urban total
AB Bank 0 9 9 0 0 0 0 1 1
Abu Dhabi Commercial Bank 0 2 2 0 2 2 0 2 2
American Express Banking Corp. 0 4 4 0 8 8 0 1 1
Antwerp Diamond Bank 0 0 0 0 1 1 0 1 1
Bank Internasional Indonesia 0 1 1 0 1 1 0 1 1
Bank of America 0 4 4 0 4 4 0 5 5
Bank of Bahrain & Kuwait 0 2 2 0 2 2 0 2 2
Bank of Ceylon 0 1 1 0 1 1 0 1 1
Bank of Nova Scotia 0 5 5 0 5 5 0 5 5
Bank of Tokyo-Mitsubishi UFJ 0 1 1 0 3 3 0 3 3
Barclays Bank 0 2 2 0 1 1 1 8 9
BNP Paribas 0 1 1 0 9 9 0 9 9
Chinatrust Commercial Bank 0 1 1 0 1 1 0 1 1
Citibank 0 15 15 1 38 39 2 41 43
Commonwealth Bank of Australia 0 1 1 0 1 1 0 1 1
Credit Agricole Bank 0 2 2 0 1 1 0 6 6
Credit Suisse AG 0 0 0 0 0 0 1 1
DBS Bank 0 0 0 0 2 2 0 6 6
Deutsche Bank 0 6 6 0 8 8 0 14 14
FirstRand Bank 0 1 1 0 0 0 1 1
Hongkong & Shanghai Banking Corp 0 28 28 7 43 50 0 48 48
JP Morgan Chase Bank 0 15 15 0 1 1 0 1 1
JSC VTB Bank 0 1 1 0 0 0 1 1
Krung Thai Bank 0 1 1 0 0 0 1 1
Mashreq Bank 0 2 2 0 2 2 0 2 2
Mizuho Corporate Bank 0 0 0 0 1 1 0 2 2
Oman International Bank 0 2 2 0 2 2 0 2 2
Royal Bank of Scotland 0 0 0 0 0 2 29 31
Sberbank 0 28 28 0 3 3 0 1 1
Shinhan Bank 0 2 2 0 0 0 1 2 3
Societe Generale 0 1 1 0 2 2 0 2 2
Sonali Bank 0 1 1 0 1 1 0 2 2
Standard Chartered Bank 2 61 63 0 85 85 0 94 94
State Bank of Mauritius 0 2 2 0 3 3 0 3 3
UBS AG 0 0 0 0 0 0 0 1 1
United Overseas Bank 0 0 0 0 0 0 0 1 1

2 202 204 8 231 239 6 302 308

Source: a) Statistical Tables relating to Banking in India, RBI

b) Report and trends and progress in Banking in India, RBI

IMPACT OF FOREIGN BANKS ON INDIAN ECONOMY Page 22

 Table 2: Table showing comparison of Foreign banks with respect to ATMs and employees

No. of
No. of ATMS employees
Bank
2006 2012 2006 2012

AB Bank 0 0 0 31
Abu Dhabi Commercial Bank 3 0 38 48
American Express Banking Corp. 10 0 1773 622
Antwerp Diamond Bank 0 0 19 24
Bank International Indonesia 0 0 15 1
Bank of America 0 0 282 279
Bank of Bahrain & Kuwait 6 0 68 98
Bank of Ceylon 0 0 33 27
Bank of Nova Scotia 0 0 0 193
Bank of Tokyo-Mitsubishi UFJ 0 0 0 273
Barclays Bank 0 36 46 978
BNP Paribas 0 0 303 342
China trust Commercial Bank 0 0 21 36
Citibank 388 703 3250 5176
Commonwealth Bank of Australia 6 0 0 27
Credit Agricole Bank 0 0 0 106
Credit Suisse AG 0 0 131 32
DBS Bank 0 39 678 786
Deutsche Bank 22 64 0 1453
FirstRand Bank 0 0 4985 74
Hong Kong & Shanghai Banking Corp. Ltd. 165 143 82 5191
JP Morgan Chase Bank 0 0 0 256
JSC VTB Bank 0 0 0 18
Krung Thai Bank 0 0 11 10
Mashreq Bank 0 0 10 14
Mizuho Corporate Bank 0 0 50 176
Oman International Bank 0 0 40 72
Royal Bank of Scotland 0 122 0 1951
Sberbank 0 0 0 16
Shinhan Bank 0 0 0 76
Societe Generale 0 0 113 94
Sonali Bank 0 0 45 38
Standard Chartered Bank 182 307 5390 7527
State Bank of Mauritius 0 0 29 47
UBS AG 0 0 0 57
United Overseas Bank 0 0 0 9
782 1414 17412 26158

Source: Same as Annex Table 1.

IMPACT OF FOREIGN BANKS ON INDIAN ECONOMY Page 23

 Table 3: Total percentage of branches in rural areas for commercial banks, Public sector banks

Branches ATMs
Name of the Bank 2000 2006 2012 2006 2012
Rural Urban Total Rural Urban Total Rural Urban Total On-siteOff-sitTotal On-site Off-siteTotal

Scheduled
Commercial Banks 44282 15889 60171 46244 34996 81240 47545 48141 95686
Nationalised Banks 20686 11735 32421 29365 18478 47843 27760 20876 48636 6587 6021 12608 18277 12773 31050
Private Sector Banks 2816 2167 4983 2802 3714 6516 6268 7184 13452 3309 4350 7659 13249 22830 36079

Source: Same as Annex Table 1.

Table 4: Number of branches of foreign banks in various years and in various geographies

Branches opened Branches closed No of branches present

Year
Rural Urban total Rural Urban Total Rural Urban Total
2012 0 5 5 0 0 0 15 309 324
2011 4 5 9 0 0 0 15 304 319
2010 3 12 15 0 0 0 11 299 310
2009 6 10 16 6 10 16 8 287 295
2008 0 16 16 0 0 0 2 278 280
2007 1 12 13 0 0 0 2 270 272
2006 1 18 19 0 2 2 1 260 261
2005 0 31 31 0 10 10 0 245 245
2004 0 17 17 0 5 5 0 224 224
2003 0 21 21 2 59 61 0 212 212
2002 0 6 6 0 5 5 2 204 206
2001 0 11 11 0 0 0 2 203 205
2000 1 10 11 1 10 11 2 191 193
1999 1 11 12 1 16 17 3 189 192
1998 1 10 11 0 0 0 3 193 196
1997 0 14 15 0 2 2 3 183 186
1996 0 7 7 0 0 0 3 170 173
1995 0 10 10 0 0 0 3 162 165
1994 0 4 4 0 1 1 3 152 155

Source: Same as Annex Table 1.

IMPACT OF FOREIGN BANKS ON INDIAN ECONOMY Page 24

 Table 5: Comparison of the various forms of presence – Branch Form and Subsidiary form

Branch Form
Pros Cons
(i) Greater operational flexibility. (i) In the event of failure of the bank, it is
difficult to determine assets available for
local creditors.
(ii) Increased lending capacity (loan size limits (ii) Management of a branch does not
based on the parent bank’s capital). have a fiduciary responsibility to the
branch’s local clients.
(iii) Reduced Corporate Governance (iii) Assets attributable to a branch can be
requirements. transferred by it to the foreign head
office. In times of distress, this would be
a negative from the branch country
perspective.
(iv) Strong support from parent in situations of (iv) Insolvency procedures may differ in
local adversity different countries with some following
separate entity doctrine while others
follow one-entity doctrine.
Subsidiary form
Pros Cons
(i) Clear delineation between the assets and (i) Parent support may not be there
liabilities of the domestic bank and those of its in all weathers
foreign parent.
(ii) Ring-fenced capital within the host country. (ii) Where the liquidity is managed
centrally by the parent and the local
subsidiary is funded on a short-term
basis, the failure of the parent may result
in the failure of the subsidiary too.
(iii) Own set of directors who are required to act (iii) Possible downside risk to financial
in the best interest of the bank. stability if the subsidiaries dominate the
domestic financial system.
(iv) The host country authorities are able
to exercise greater control in times of distress.

IMPACT OF FOREIGN BANKS ON INDIAN ECONOMY Page 25

Table 6: Some features about branches:

USA Canada Australia

In order to accept or maintain To undertake the business of Foreign banks satisfying
domestic retail deposits of less banking in Canada, a foreign prudential requirements and
than $ 100,000 a foreign bank bank must: that are able to demonstrate
must establish an insured (i) Incorporate a bank their potential contribution to
banking subsidiary. This subsidiary under the competition in Australia may
requirement does not apply to Bank Act; or conduct banking in Australia.
a foreign bank branch that was (ii) Establish a bank branch Foreign banks may under take
engaged in insured deposit- under the Bank Act. banking operations in Australia
taking activities on December through locally incorporated
19, 1991. Full service bank branches subsidiaries and/or an
and lending branches cannot authorised branch. However, a
be member institutions of the branch may not accept “retail”
Canada Deposit Insurance deposits. A foreign bank wishing
Corporation. to deposits must seek
authorisation as a locally
In order to establish a bank incorporated subsidiary for that
branch, a foreign bank must purpose. Foreign bank branches
be authorised under the Bank many accept deposits (and other
Act and must be incorporated funds) in any amount from
by or under the laws of incorporated entities, non-
another jurisdiction outside residents and their own
Canada (i.e., an authorised employees. Deposits (and other
foreign bank). funds) may only be accepted
from other sources where the
No one person (Canadian or initial deposit (or other funds)
foreign) may own more than are greater than $A250,
10 per cent of any class of [Link]-taking outside of
shares of a Schedule I bank this is considered to be “retail”
banking business.

Source: RBI

IMPACT OF FOREIGN BANKS ON INDIAN ECONOMY Page 26