1273520,Avneet singh sandhu,F1,Q13- Foreign banks on Indian Land? Your views?

      DEFINITION OF FOREIGN 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.

For example, suppose the Bank of America opens a foreign branch bank in Canada. The branch would be legally obligated to follow both Canadian and American banking regulations.

      FOREIGN BANKS BRANCHES IN INDIA AS ON SEPTEMBER 30, 2013

 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 46 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  SEPTEMBER 30, 2013

 

THE URBAN-CENTRIC FOREIGN BANKS

Till date, most of branches of foreign banks are located in metropolitan areas and major Indian cities where bulk of premium banking business is concentrated. As on March 2012, out of total 322 branches of foreign banks, 246 branches (76%) were located in metros, 61 (19%) in urban areas and the rest 15 (5%) in semi-urban and rural areas. It is distressing to note that foreign banks such as Standard Chartered Bank and BNP Paribas have not yet opened a single branch in the rural areas despite operating in India for more than 150 years.

Further, foreign banks are reluctant to serve the poor and low-income people residing in metropolitan and urban areas. There is no regulatory ban in India on foreign banks to serve the urban poor and low-income people.

       DISADVANTAGES OF FOREIGN BANKS

1.     FEAR OF FOREIGN DENOMINATION-A stated fear in the mind of central banker is that unrestricted entry of foreign banks may result in assuming dominant position in domestic market by driving out less efficient and less resourceful domestic banks. They believe that local depositors have more faith in big international banks than in smaller national banks

2.     LACK OF LOCAL COMMITMENT- The argument here is in two parts; first, under the time of local distress, foreign banks will be the first to leave the ship the reason is that for large international banks with solid financial strength it is relatively pain less to suffer the losses of shut down while it is not the case of smaller domestic banks. Secondly in the time of distress in home country the foreign banks may shut down there foreign operations in order to bring stabilization in their earnings at home.

3.     CREAM SKIMMING BEHAVIOUR- Another concern of policy makers and domestic bankers has been that foreign banks have been carve out a niche for themselves in the upper/richer end of the market and rarely extend their service outside. Consequently they cream skim the market taking a dis propionate share of best of local business away from domestic banks.

4.     CAPITAL FLIGHT- Foreign banks are often clamed for encouraging the increase in capital flight from less developed countries to high developed countries there by adds pressure to exchange rate.

5.     UNHEALTHY COMPETITION

      ADVANTAGES OF FOREIGN BANKS

1.     A BOOST TO BANKING SECTOR- In the past this has been the major controversial benefit. Countries expect the foreign banks to enter and galvanise the domestic banking sector by providing the healthy competition. Domestic banks expect to react to the foreign banks presence and compete fiercely to retain their market share there by lifting the standards of domestic banking sector.

2.     GREATER ACCESS TO INTERNATIONAL MARKET- Countries on opening their doors to foreign banks expect them to aid the development of trade and FDI. First there domestic operations will benefit local producers in particular import/export companies and MNC These companies can take the advantage of the superior performance and expertise of foreign banks. Secondly foreign banks also help in increasing the inflow of foreign currencies.

     REASONS FOREIGN BANKS LOOK TO DO BUSINESS IN INDIA:

1.     DEMAND FOR INVESTMENT BANKING SERVICES - As Indian entities have grown in size and scope, they have felt the need to tap into newer and cheaper sources of funds from overseas markets. Consequently, they have turned to foreign banks with experience and expertise in such activities. This trend is likely to continue as Indian corporations look to cost- effectively raise funds to reduce leverage and restructure their balance sheets. Foreign banks such as Citibank, which helped Indian clients raise US$18 billion from equity and debt markets and advised on M&A deals worth  US$10.4 billion during 2012-13,4 are well entrenched.

2.     GROWTH IN INTERNATIONAL TRADE - Since the opening up of the Indian economy in the early 1990s, India’s share in global exports and imports has shown considerable improvement. From a share of 0.5% and 0.7% in global exports and imports in 1990, it has more than tripled – to 1.6% and 2.6% in 2012.

  

     OBSTACLES FACING FOREIGN BANKS:

1.     NO DIFFERENTIAL LICENSING - The RBI does not encourage banks whose business model does not take into account the RBI’s objective of financial inclusion. Thus, foreign banks that are looking to offer very specialized banking services in India must apply for a universal banking license that mandates the roll-out of full-fledged banking services in the country. Consequently, giving precedence to financial inclusion may not be viable for all foreign banks entering the banking sector.

2.     FINANCIAL INCLUSION - Complying with the RBI’s guidelines on financial inclusion requires offering banking products and services to unbanked and under banked areas and customers. This involves costs that foreign banks with few branches and fewer sources of raising low- cost funds may find difficult to implement. As of 31 March 2013, out of the 331 branches of foreign banks in India, only 17 were located in the rural and semi-urban areas. Out of the total 1,261 ATMs set up by foreign banks, only 51 were in rural and semi-urban areas.

3.     SETTING UP A WHOLLY OWNED BANKING SUB- SIDIARY (WOS) - Currently, foreign banks in India operate as branches of the parent bank located overseas. However RBI has recently released guidelines for setting up wholly owned subsidiaries (WOS) by foreign banks in India. A WOS would have to be in the form of a locally incorporated entity

4.     LONGER GESTATION PERIOD - Traditionally, the RBI has been tight-fisted about issuing banking licenses. Banking licenses in the private sector were last issued in 2003; new licenses will likely be issued in 2014.