Foreign banks in India

INTRODUCTION

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. While the agency houses and joint stock banks largely failed and disappeared, the three presidency banks would later merge to form the State Bank of India, India’s largest lender. British owned and controlled, these early banks may be considered India’s first ‘foreign banks’. It was decades after their establishment that the first bank owned and controlled by Indians, the Allahabad Bank, would be established.

The opening of the Suez Canal in 1869, shift in the balance of global eastwest trade flows through Indian ports, introduction of the railroad and telegraph and other infrastructure improvements, all contributed to growing interconnectivity of the Orient with the Occident, as the colonial powers of Europe spread across Asia and Africa. This was followed by a phase of numerous Indian or foreign banks coming up to service different segments of the economy; a landscape described by Lord Curzon as “some old fashioned sailing ship, divided by solid wooden bulkheads into separate and cumbersome compartments.”

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. They adapted well to the changing economy and retained their niche as service providers and employers of the elite; bringing capital, innovation and best practices from their home countries.

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. Meanwhile, the opening-up of the economy to increased participation by foreign players created greater opportunities for foreign banks to work with their multinational clients in India. In the more recent past, foreign banks have followed Indian corporate entities in their outbound expansions.

The survival of the banking system in India through the financial crisis has demonstrated its strengths and most foreign banks present in India believe that India is a market with undeniable potential. However, like their predecessors, they continue to look for the best possible role they can play amidst the challenging political economy, heightened competition and changing financial services regulations. 

Foreign banks in preindependence India

Foreign banks in India today, such as Standard Chartered Bank and HSBC, found their roots in financing the growing trade between Asia and the rest of the world. Traditional trade items at the time were cotton from Mumbai, indigo and tea from Kolkata, rice from Burma, sugar from Java, tobacco from Sumatra, hemp from Manila and silk from Yokohama, all flowing to the west through Indian ports, making India an important destination for these banks.

Standard Chartered Bank’s antecedent, the Chartered Bank of India opened an office in Calcutta in 1858, after receiving a Royal Charter from Queen Victoria. The Hongkong and Shanghai Banking Corporation (HSBC), present in pre-independence India through branches, took a major inorganic step in 1959 when it acquired the erstwhile Mercantile Bank in India. The Comptoir d’Escompte de Paris, which would later become one of the entities to form BNP Paribas, started operations in Calcutta in 1860, and represented the French as the second nationality to have a major banking presence in the country after the British.

Major American banking companies were at the time restricted by law from operating outside the US. The relaxation of these laws paved the way for the global expansion of American banks in the early 20th century. Citibank, or as it was known then, The National City Bank of New York, entered India in 1902, and JP Morgan, which had ambitions of entering India as early as 1902, did so in 1922 via an ownership stake in the Calcutta merchant banking firm Andrew Yule and Co. Ltd. 

Background

Bank in general sense could be understood as an entity, which deposits individual saving and make investment of those deposit to different sectors. Banks are regarded as a financial intermediaries which mobilize individual deposit to different sector by providing loan at certain rate of interest. Bank runs through the profit which is earned by the interest that is received from credit provided to other people. Interest rate on credit provided by bank is generally higher than the interest provided on amount deposited by customer. 

Lord Denning has defined term bank as “An establishment for the custody of money received from, or on behalf of, its customers. Its essential duty is to pay their drafts on it: its profits arise from the use of money left unemployed by them.” This definition of Lord Denning has included cheque issuing facility with in the definition of bank as it provides it is duty of bank to pay back such deposited amount whenever depositor issues cheque or draft. With the change in time, working scope of banks has been also increased. Previously, banks simply used to involve in the business of taking deposit and providing loan to general people. However, in present context banks are involved in various activities such as remittance, foreign -exchange, financial leasing, assets management etc. 

Banking Regulation Act, 1949 is the main legislation relating to the bank and it’s functioning in India. BRA, 1949 has not given definition of bank, however Act has defined term banking in the border context. It defines banking as “the accepting, for lending of investment, of deposits of money from the public, repayable on demand or otherwise, and withdrawable by cheque, draft, and order or otherwise” . Similarly in the context of Nepal, Bank and Financial Institution Act, 2017 has defined the term bank as a corporate body incorporated to carry on financial transaction.

In India, banking sector is regulated by Reserve Bank of India Act, 1934 and Banking Regulation Act, 1949. Similarly, Foreign Exchange Management Act, 1999 regulates cross border exchange transactions by Indian entities including banks. RBI has been entrusted with statutory power to issue policy, guideline and notification to regulate banking sector. RBI by using its supervisory power manages and regulates the Indian financial system. RBI has been provided wide discretionary power and also authorized to inspect and investigate the affairs of banks and to impose the penalties upon non-compliance of the instructions issued by the RBI.

Bank being financial intermediary plays crucial role in trade and business as it deals with money. Due to the increase in scope of work, bank has played special role in trade and business. With the establishment of WTO and accepting free trade policy by many countries, international trade has substantially increased. Increase in international trade has made necessary for banks to provide their service in countries other than its country of incorporation. 

In the present context of globalization, international trade has increased substantially, this has made increasement in the establishment of foreign banks. Foreign banks have relation with two countries so, it is required to be regulated under the complex mechanism. Though establishment of foreign banks may have various implications, foreign banks are essential financial intermediary in globalized world. 

In the article Foreign Banks Operating in India with Specific Business Practices Models & their Scenario Post RBI Map 2005 by Ashok Edurkar & Dr. Atik Asgar Shaikh it has been mentioned that primary objectives for establishment of foreign banks in India were to develop economic relations with home country of foreign banks and to provide foreign banks opportunity in international trade. Along with this foreign banks are established in India for the generation of more profit with less risk, they utilizes less restrictive regulatory practices and high interest rate in comparison to their home country as a reason foreign banks has been increased in India.

In 1991 Narasimham Committee has made recommendation for establishment and entry of foreign banks and to promote the transformations of banks into international banks. Later on Road map for the presence of foreign bank in India, 2005 was formulated by the RBI with an intent to enhance foreign banks and fulfill WTO commitment. This road map has prescribed two phase, where first phase was for 2005 March - 2009 March, which mainly focused on entry of the foreign bank and upgrading the Indian banks to prepare themselves for the global competition and conversion of existing foreign bank into wholly owned subsidiary. Similarly, second phase started from 2009 March which is mainly focusing to enhancement of foreign bank and facilitating foreign bank to conduct the business in India.

Later on in India, with an experience of global financial crisis of 2008, Scheme for Setting up of Wholly Owned Subsidiaries (WOS) by Foreign Bank in India was developed by RBI, which mainly focused on the local incorporations of foreign banks. This Scheme has provided two modes for the presence of foreign bank in India, as a branch mode or as a wholly owned subsidiary mode. However banks has to choose one mode and governed by principles of single mode of presence. Scheme has also provided that upon the fulfillment of conditions prescribed by law foreign bank that entered under branch mode can convert themselves in to wholly own subsidiary mode. This scheme has provided that national treatment principle would be applied for the foreign banks, however it has also made provision to limit national treatment principle for the maintaining financial stability and protecting the national banks.

Similarly, in the article Challenges for Foreign Banks entering in India Open New Opportunity for Consulting Firms published by cognizant has mentioned that with the acceptance of economic liberalization policy by India in 1990’s and increase in the foreign direct investment in different sector, number of foreign bank has been increased in India. However, regulatory framework designed by RBI, social issues like trust on foreign banks in rural area, low infrastructural development are the major challenges for the establishment of foreign banks. 

In 1974, BASEL committee was formed with an intent for international coordination and harmonization of banking sector. This committee has prescribed series of principles for the supervision of international banking, as a response to global economic crisis, occurred on different time. Committee in 1975 drafted BASEL Concordat which stated basic rules for supervisory power among host and home country. In 1983, Concardat was resived and principle of consolidation supervision and dual key supervision was included. Later in 1992 committee drafted Minimum Standard for the Supervision of International Banking Groups and their Cross- Border Establishment which has also adopted the principle of consolidated supervision.

Later in 1997, Core Principle for the Effective Banking Supervision was formulated by the BASEL committee, which contains 25 core principles for the supervision of banks which also included foreign banks. Principle 23,24 and 25 of core principle deals with the supervision of foreign banks. This core principle has also emphasized on the consolidated supervision of foreign banks. Principle has provided that home country supervisor of foreign bank should establish relation and exchange information of bank to the supervisor of host country. Lastly, host country supervisor is also require to supervise foreign bank with the same standard and norms applied to domestic banks and it has to share information with home country supervisor for the purpose of consolidated supervision.

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.

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.

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. 

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.

Foreign banks in India today: A snapshot

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. Although the discussion around differential licensing is still nascent, there is one foreign bank present as a credit card issuer with limited banking licence. In addition, a number of foreign banks have also entered India via the NBFC route, while a considerable number have set up captive centres in the country. 

Foreign banks present in India as representative offices often have correspondent banking relationships with domestic banks and provide a useful platform for foreign banks to access opportunities for foreign currency lending to Indian corporate and financial institutions.

Foreign banks have less than 1% of the total branch network but about 7% of the total banking sector assets and a sizeable 11% of profits. With 334 branches in all, the share of foreign bank branches is less than 1%. (Exhibit 1 and 2)

For most foreign banks, their relationship with Indian corporate clients is pivoted around their ability to provide access to global capital and debt markets. Although data relating to individual bank’s exposure to India through onshore credit and offshore ECB and trade finance is not available, taking the total ECB data as a proxy for offshore exposure, it is interesting to see the consistent upward trendline for external debt. Understandably, the onshore exposure and its growth are related to the performance of the economy and market share of foreign banks. (Exhibit 3)

Although foreign banks largely operate at higher levels of efficiency and maintain low net NPA ratios, due to exposure to the same group of clients, the risks are co-related. Interestingly, one of the biggest challenges facing foreign banks is client selection. Although the Indian economy has grown at a healthy rate, there are only a handful of Indian corporates with credible governance processes and global reputation required to pass muster with the credit divisions of these banks. Increasingly, such clients are also being pursued by domestic banks with larger single obligor limits and greater autonomy to take decisions locally. This automatically segments foreign banks as ‘niche’ service providers which often collides with the ‘universal banking’ policy regime.

Foreign banks: Evolution and approaches to banking in India

Due to the local branch regime and the operating model of choice, foreign banks have, for the large part, remained niche players, focussing on trade finance, external commercial borrowing, wholesale lending, investment banking and treasury activities. Some large foreign banks have focussed on capturing the retail market but have remained confined to the high end of private banking and wealth management, while a few others have created valuable niche offerings in the areas of transaction banking, cash management and remittance products.

With India emerging as a major Information Technology (IT) service provider in the 21st century, many global banks set up business processing offices (BPO) in India; primarily to take advantage of the low-cost technology and availability of English-speaking employees. Some foreign banks also created centres of excellence that provided services at the higher end of the value chain. Although not in scope for the present survey, these operations of foreign banks have created attractive and large-scale employment opportunities for educated Indians and have been an interesting part of India’s economic, social and cultural landscape.

With the growing importance of IT to banks, foreign bank BPO centres in India have expanded the scope of their services, providing data analytics, and data-backed solutions, that contribute to the efficiency and profitability of these banks globally. 

Liberalisation of Foreign Direct Investment (FDI) norms for financial services provided further strategic entry routes for foreign banks in the form of NBFCs that could provide specialised non-banking financial services such as stock broking, merchant banking, leasing and finance and others to specific segments of the economy. 

Foreign banking groups present in India as branches also took this opportunity to set up separate entities to provide specialised services. This led to the formation of financial conglomerates or large franchises with multiple entities. In the absence of flexibility on expanding the branch network, the lending NBFCs also created an opportunity for foreign banks targeting retail clients to create the level of outreach required for their operations. 

However, the 2006 guidelines on Financial Regulation of Systemically Important NBFCs and Banks’ Relationship With Them and subsequent regulations have significantly limited this opportunity by stipulating consolidated capital market limits and otherwise frowning upon what regulators consider to be ‘regulatory arbitrage’ between a bank and an NBFC engaged in an activity permitted in the bank. 

“Opening up to foreign banks and other financial firms and to foreign direct investment in the financial sector has many potential benefits. These include the introduction of financial innovations and sophisticated financial instruments by foreign financial firms, added depth in domestic financial markets due to foreign inflows, and more efficiency in the domestic banking sector through increased competition.” - Raghuram Rajan Committee Report on Financial Sector Reforms, 2008

Foreign banks: Bringing global innovation standards to banking practice in India

In addition to setting up the first formal banking institutions in India, foreign banks have made considerable contribution to the banking sector over the years by bringing capital and global best practices as well as grooming talent.

Foreign banks have been innovative in identifying specific needs of the market, creating products, and developing organisational constructs. A good example is the cash management offering in the early 1990s, that targeted inefficiencies in cash collection and check processing, identified as a specific issue for the Indian market. Built around this were products such as Citicash and Citicheck. More importantly, the bank had a dedicated division in the organisation to address the needs of this market and after a successful stint in India, the product was successfully introduced in other emerging markets. There are many such examples, including securitisation, foreign exchange derivatives, travellers’ cheques, channel financing and credit scorecards. Similarly, these banks often introduced risk management practices from their countries and were took steps to become part of the local cultural and community landscape through their initiatives relating to corporate social responsibility, sustainability, and contribution to protection of heritage buildings, local arts and crafts.

Prior to 1990s, foreign banks easily distinguished themselves vis-a-vis public sector banks. They used technology to their advantage to create and often maintain lead in premium services such as integrated cash management, private banking, 24-hour phone banking, internet banking, securitisation, forex and interest rate derivatives trading, risk management and Know Your Customer (KYC) software solutions. The first Automated Teller Machine (ATM) in the country, for instance, was set up by HSBC in 1987. This focus on innovation helped foreign banks build profitable businesses with a relatively high share of investment and fee income. (Exhibit 4) 

In the early stages through expatriate employees, and later integrating local talent in a big way, foreign banks trained and nurtured talent in India. In the process, foreign bank executives in India have also become a rich source of talent for their global banking networks. An established global network, ability to specialise, gain access to latest developments in banking technology and services, and the opportunity to gain international experiences were key factors contributing to their talent retention. 

The banking landscape changed dramatically post the entry of new private sector banks. Not only did foreign banks face competition from the new private sector banks that were often run by their own ex-employees with the opportunity to take quick decisions and upscale in a fostering environment using local technology, but also from some of the public sector banks that did well on the back of what was then called ‘computerisation’ and a better way of engaging with the customer.

2005: First roadmap for foreign banks in India

One and half decades post liberalisation, a robust regulatory framework governing foreign bank presence in the country became imperative. Twelve new private sector banks had been given licences under the guidelines issued in 1993 and 2001. Beginning with the voluntary merger of Times Bank with HDFC, consolidation of the newly licensed banks had also started. ICICI and HDFC Bank had established themselves as iconic Indian brands with scale and distribution power. Many public sector banks had been listed and the adoption of technology powered by Indian technology giants had changed the face of Indian banking considerably, putting them on a profitable growth path for the near future.

On 28 February 2005, the RBI released a roadmap for the presence of foreign banks in India along with guidelines on ownership and governance in private sector banks. This was indeed a watershed event as it provided the first ever documented policy on foreign banks in the country, and for the first time, spurred a debate about the present and future role of foreign banks in India.

It was also no coincidence that the guidelines on private sector bank ownership and foreign bank roadmap were released together. The press release prefacing both documents makes an interesting point about the ‘need for enabling shareholding higher than 10% to facilitate restructuring in the banking system and consolidation.’ Ironically, that debate remains as relevant today as in 2005, despite an Act of Parliament in December 2012 having paved the way for enhanced voting rights upto 26%. 

The new private sector banks also spurred an opportunity for foreign banks and investors to participate in the Indian banking sector through equity investments. For example, ING hiked its stake in ING Vysya Bank to 44% in 2002, up from 20%, HSBC acquired 14.71% stake in UTI Bank (today known as Axis Bank) in 2003, Temasek Holdings acquired 5% stake in ICICI Bank in 2003 and later increased it to 9%, Rabobank acquired 20% stake in Yes Bank in 2004 and HSBC acquired 4.74% stake in Yes Bank in 2008. 

“I would love to own a big bank in India.” - Jamie Dimon, CEO, JP Morgan Chase – Economic Times, 2011 

The discussion paper proposed a gradual increase in the presence and activities of foreign banks in two phases. The period from 2005 to 2009 was to be utilised to strengthen the domestic banking sector. Special emphasis was laid on enabling Indian banks to compete in the international arena. Foreign banks were to be encouraged to grow their presence in the country post 2009.

The promised growth path and the perception of India as an emerging economic power attracted many banks to set up presence in India in the period after the roadmap. In many ways, developments during this period and subsequent to it bear out the not-so-popular belief that despite its closed policies, India remained exposed to global turmoil. While the strict regulatory regime around derivatives and risk transfer prevented a sub-prime type of crisis, the boom in the pre-crisis period was not very different from the good times elsewhere.

Remarkably, while many foreign banks have set up branches in India, few have followed a consistent growth path over the long-term. One case in point is Bank of America, which sold a successful retail business in India to ABN AMRO Bank in 2001 as a part of its global strategy (consequent upon merger of Bank of America and Nations Bank) to withdraw from international retail operations. In 2001, RBS took over ABN AMRO Bank and the business was rechristened in India as RBS. More recently, this business has been sold to Ratnakar Bank Limited (RBL), a domestic bank. The management of RBL Bank has many of the old Bank of America senior personnel, thus marking a full circle. This is a good example of the changing dynamics of the market, depending on local and international conditions. 

American Express Bank’s exit from all but the card business, Barclays Bank’s foray in retail and subsequent exit from that business and some of the other banks’ experiments with SME lending and exit have also attracted attention to the flux in the non corporate banking space. While the ability to enter and exit businesses is an integral part of strategic business decisions, in India, such decisions are often difficult or time-consuming to implement due to a lack of direct and unambiguous regulatory guidance.

Recent news about the surrender of their bank licences by Morgan Stanley and UBS have further added to the impression that India presents unique challenges to foreign banks. During the survey, most banks referred to the difficulty in fulfilling regulatory expectations on branches in unbanked areas and agricultural advances. Most banks were also supportive of priority sector lending in principle but felt that a flexible strategy to support agricultural lending through established institutions would be practical. So would the inclusion of infrastructure and export finance within priority areas. Meanwhile, many banks that came to India after 2005 awaited further clarity on the roadmap, maintaining their presence and evaluating opportunities. After much anxiety resulting from regulatory discussions around ring fencing and local incorporation, the RBI released a discussion paper on presence of foreign banks in India in January 2011.

The financial crisis of 2008 and impact on foreign banks

In the aftermath of the financial crisis of 2008, the attention of multinational banks, particularly of those with a large presence in the west, turned to their home countries as they struggled with sudden liquidity problems, many of them going to the brink. The rapid collapse of few of the most respectable global investment banks and the domino effect on the global financial system was dramatic enough to cause tectonic shifts in the banking landscape.

Although the crisis was truly global in nature, its effects on different economies were varied in impact as well as timing. After the crisis, governments and regulators launched a series of measures to restore their financial systems. This period also saw greater collaboration among regulators on the global platform and greater consensus on systemic risks, financial stability and the challenges of too big to fail financial institutions.

“Among some circles, a doubt is sometimes expressed as to whether the regulatory environment in India is liberal in regard to the functioning of the foreign banks and whether the approach towards foreign participation in the Indian banking system is consistent with the liberalised environment. Undoubtedly, the facts indicate that regulatory regime followed by the RBI in respect of foreign banks is non-discriminatory, and is, in fact, very liberal by global standards.” – V Leeladhar, former Deputy Governor, Reserve Bank of India, 2007

Changes in global liquidity conditions as governments embarked on stimulus programmes created a fresh set of challenges and opportunities. The survival of the Indian economy in the immediate aftermath of the crisis had interesting consequences for this liquidity seeking attractive returns. After 2009, India actually granted licences to 13 new foreign banks to commence business in India. (Exhibit 5)

Western banks, battered by the global financial crisis and regulatory measures such as increased capital requirements and the pressure to de-leverage their balance sheets had to re-evaluate their investments across emerging markets. Some responded by curtailing their operations, selling off businesses and assets and trimming their exposures to countries increasingly perceived as non-core. Others withdrew all together, leaving behind advisory and capital markets activities that were not capital-intensive.

For most foreign banks, India accounts for a minor part of their parents’ books. Examining the India exposure of foreign banks in the country, 31 foreign banks had less than 1% of their global assets in India whereas Barclays, HSBC, Standard Chartered and Citibank have India exposures between of 1 to 5 % of their parent’s asset book (this is the in-country share as offshore exposure data is not available in public domain)*. This impacts the ability of the champions of long-term growth in India to build consensus within the larger organisation, often losing ground to the faster growing economies.

In some ways, the reaction of the foreign banks post-crisis bears out the worst fears that regulators in emerging economies have regarding the behaviour of foreign financial institutions as fair-weather friends. Although the withdrawal of foreign banks from India has not created a dramatic impact unlike in the Asian or Latin American crisis, the memory of banks withdrawing from the economy lingers with regulators and the public. Consequently it is often not easy to reenter the market.

Of course, in the Indian context, due to specific Foreign Exchange Management Act (FEMA) and banking regulations restrictions on capital repatriation and liquidity management, the withdrawal was not disruptive. Nevertheless, this led to further tightening of liquidity and capital guidelines and prompted discussion around systemic risk management and local incorporation of foreign banks, eventually culminating in the discussion paper on presence of foreign banks in India in January 2011. 

“In view of the current global financial market turmoil, there are uncertainties surrounding the financial strength of banks around the world. Further, the regulatory and supervisory policies at the national and international levels are under review. In view of this, it is considered advisable, for the time being, to continue with the current policy and procedures governing the presence of foreign banks in India.” – Dr D Subbarao, former Governor, Reserve Bank of India, Annual Policy Statement for the Year 2009-10

The onset of the financial crisis had distorted the world envisioned six years ago, into something new and uncertain. The RBI’s conservative stance and its successful defence of the Indian banking system in the face of the global meltdown created greater confidence in the system. The global financial crisis shattered the confidence in the ability of developed markets to regulate their global financial institutions. This created the need for emerging markets to protect their own markets from systemic risk of failure of global institutions. 

On the benefits of ring-fencing of capital and liquidity in times of crisis and acknowledged that foreign banks would need some incentives to incorporate locally. Greater expectation of local risk management, data aggregation and reporting under the subsidiary mode and the enhanced role of local and independent directors in decision-making concerning the India subsidiary were detailed. Interestingly, the discussion paper did not propose the same framework for priority sector lending (PSL) for foreign bank subsidiaries, acknowledging their role as primary providers of export finance. It laid out a simpler PSL requirement, including mandatory financing to agriculture (10%) and small enterprises (10%), but allowing export to fulfil the remaining 20%.

Hitting the headwinds after 2011-12

If there were any doubts regarding the continuation of the ‘coupling’ of economies, they have been dissipated by the events in the last couple of years. With a lag, the Indian economy also started showing the results of the slowdown and macroeconomic indicators caught up with some of the structural issues with the economy. This was somewhat expected as the increased liquidity from the developed economies initially buoyed up the emerging markets and the subsequent adjustments, coupled with slow recovery in the western markets began to play their course. (Exhibit 6).

For India, all this also came in the backdrop of an upcoming election, fiscal imprudence as well as negativity generated from widely reported retrospective changes in tax laws, rating downgrade fears and reports of violence and poor social and physical infrastructure.

 Another relevant event between the  final guidelines was the release of The Nair Committee Report on PSL in 2012. Marking a break in thinking, the committee recommended that Wholly Owned Subsidiary (WOS) of foreign banks be brought on par with domestic banks. Although recommendations of the Nair Committee were only partially accepted, foreign banks with more than 20 branches in India were brought on par with domestic banks for PSL compliance purpose. However, banks with less than 20 branches were allowed to continue with fulfilling 32% requirement largely through export finance.

“In India, the fallout from recent financial stress has likely contributed to greater vulnerability of corporate and bank balance sheets and a further downward revision of growth forecasts, which were already very low in the historical context. This reflects persistent supply constraints and slow progress on structural reforms. Despite weak demand, however, food prices will likely keep headline inflation close to double digits” – IMF, Asia and Pacific region Economic Outlook Update, October 2013

“Currencies and bonds in Brazil, India, Indonesia, South Africa and Turkey came under intense weakening pressure since May as their current account deficits persist, inflation remains elevated, and monetary policy room seems limited in the face of decelerating growth” -IMF, Global Financial Stability Report, October 2013

Scheme for subsidiarisation of foreign banks in India: Is it the end of the wait?

Given the backdrop of the 2014 general elections and the uncertain macroeconomic environment, the timing for the release of the scheme for subsidiarisation could have been better. According to this document, foreign banks present in India prior to 2010 will have the option to subsidiarise or continue to operate as branch. Given the macroeconomic and political condition as well as uncertainties of global economic recovery, this must be a welcome relief

To banks that gave an undertaking to convert into subsidiaries, the change in the economic environment must appear stark and the lack of flexibility, difficult. Also, some of the parameters described for mandatory conversion into subsidiary are somewhat subjective and therefore clarity will emerge with time. 

Interestingly, Indian banking regulation makes it mandatory for banks to transfer parts of profits to reserves. Repatriation of such profits to the head office requires RBI approval. Both before and after the financial crisis, regulations have been issued under FEMA and the Banking Regulation Act to restrict cross border movement of liquidity. These measures limit the likelihood of free capital repatriation to parent by branches. In countries with relative ease of capital movement, this is one of the important tenets driving the agenda on local incorporation.

The other genuine concern that regulators have developed based on experience is the dominance of the banking system by foreign banking organisations; thereby increasing vulnerability of the domestic financial system. This is apparent from the stated intent to curb growth beyond 15% of assets and 20% of capital dominance. However, the measures to curb further growth (specific approval for new capital infusion in WOS and limiting the number of branches of new banks) do not appear to incentivise the WOS mode as constraints apply to WOS growth and new banks, but not to existing banks operating in branch mode.

And yet, the scheme creates an opportunity for foreign banks to grow in India in almost the same way as domestic banks. This makes it worth examining the possibilities and business impact of local incorporation. In the following sections, we examine some aspects of the new framework that is likely to unfold as the scheme is operationalised and clarity emerges on some of the other regulations in the pipeline.

Global rebalancing of capital

Fast growth in global finance in the precrisis era led to the emergence of really large banks, particularly in Europe. For instance, in many European countries, the asset size of the largest banks is greater than the GDP of the country. (Exhibit 7)

Hence, it is not surprising that the reform in Europe is leading to the deleveraging of these banks. Similarly, in the US, bailouts and subsequent attention on banks has limited the capacity of most banks for aggressive international expansion. While the European Union (EU) and the European Central Bank (ECB) are still to close the chapter on post reform banking regulations, clearly the discomfort with too-big-to-fail banks is here to stay.

On the other hand, many Asian economies and Australia were largely unaffected by the crisis, many having surplus capital that needs to find its way offshore. The oilproducing Middle- Eastern countries have also weathered the storm well and have provided capital to many of the banks.

Rebalancing of global capital, greater trade interconnectivity of Asia, Africa, Australia and the Middle East, migrating populations and geopolitical realignment are likely to lead to changes in the foreign bank landscape in India, and the window of opportunity to grow as a WOS may be an important strategic imperative in that context. 

This trend is evident from the fact that of the 75 new bank branches granted to foreign banks since the financial crisis, approximately 40% are new foreign bank entrants. After the financial crisis, 13 new foreign banks have been granted licenses by the RBI, which include five Asian, four Australian and two European banks. 

Retail and inclusive banking vs differentiated banking

The preference for retail banks over ‘niche’ banks. While in reality, only few foreign banks offer full suite retail services, due to the regulatory expectations, all foreign banks operating in India need to offer retail liability and basic banking products.

In most countries, regulation for retail deposit accepting banks is more stringent than regulation for banks that offer limited facilities to non retail clients. In India, on the other hand, incentive (in the form of branch licences that are discretionary) is tagged to retail banking.

In August 2013, the RBI released a discussion paper on banking structure in India, wherein, among other things, the discussion on differentiated licensing has been initiated.

This will be an important step in the right direction to create the right structure for aspiring retail banks that are likely to grow as subsidiaries with large branch networks as against banks whose business models are suited to niche activities with limited growth ambitions and limited capacity to create systemic risk.

Organic growth: The twin challenges of near national treatment and reciprocity

Under the current branch licensing regime, each branch location is approved by the regulators. In the last few years, foreign banks have found it difficult to get additional branches in metropolitan centres and have been able to find business opportunities in smaller centres.

Yet, foreign bank branches remain concentrated in the metropolitan centres of Mumbai, Delhi, Kolkata, Chennai and Bangalore. Only eight foreign bank branches (out of 334) are located in the rural areas, as against 250 in the metropolitan areas. (Exhibit 8) 

The new scheme opens the field for foreign banks to access the automatic approval to open branches (except in specified sensitive areas). It also brings with it the challenge of managing the operating model of having 1:1 branch ratio between urban and other centres and having to branch out to unbanked areas with less than 9,999 people (often with little physical infrastructure).

Some of the foreign banks operating in India have the experience of banking in rural, semi-urban or inaccessible geographies in their own countries. Some have successfully leveraged mobile or internet technology to completely cut out brick-and-mortar branches and attendant costs and constraints.

Under Indian banking regulations, while distribution of assets is possible through agents, distribution of liability products requires creation of client touchpoint through branch or Banking Correspondent (BC), which must be within specified radius of 30 kms of the branch. As the competitiveness in the banking sector grows, there is likely to be increasing demand for liberalisation of norms in this area. It is interesting to bear in mind that in the long-term, the incentive in the form of brick-and-mortar branches may not remain an incentive.

Also, it is unclear how reciprocity will play out for foreign banks choosing to incorporate as WOS if Indian banks have not had the opportunity to grow in their home territories. The likelihood of bilateral agreements allowing preferential treatment will change the nature of foreign bank segment by allowing banks from countries with bilateral agreements to grow at a faster pace than that possible for foreign banks in general.

Inorganic growth: Better visibility, but uncertain timeline

Inorganic growth opportunities via acquisitions will be important for foreign banks going forward, because they may find it difficult to build organically under the new branch licensing formula and also, because once consolidation in the banking sector kicks in, being excluded from inorganic opportunities could mean further competitive disadvantage.

While the scheme does not provide full clarity on the timeline within which foreign banks may be allowed to acquire a bank, it signals clearly that such acquisition is possible in the near future. Unfortunately, for those banks that need to make a decision to incorporate in the short run, this lack of clarity is problematic.

Another important issue relating to inorganic growth is the misalignment of shareholding with voting rights. The Banking Regulation Amendment Law of December 2012 allowed for the alignment of shareholding with voting rights within the limit of 26%. However, the RBI circular on bank ownership continues to be in force with restriction on voting rights upto 10%. This makes acquiring control in a bank difficult. This also may be a reason for the unattractiveness of the option to dilute or list locally. Incidentally, most banks that have gone through mergers and acquisitions globally have found it challenging to effect such mergers in India for their operating branches. Some banks have not been allowed to use branding consistent with new global branding, while others have found it hard to exit portfolios or buy India businesses of seller banks in the global transaction.

Banking and technology  

In the midst of rising costs and increasing regulatory and political pressure to expand banking access to rural areas, foreign banks are also experimenting with partnerships and the use of different forms of technology for providing banking services. Globally, banks have started to move beyond the branch, and in some cases, the ATM formats, and have begun to deploy banking services via channels that promote flexibility and mobility.

Technology as value driver

On the distant horizon, disruptive technology seems to emerge as a challenger to the long-term sustainability of banking as the world has known it so far. Yet, in India, concerns around operational and systemic risk from nonbank operators will continue to make banks important partners to innovative technology companies for mutual benefit. The regulatory preference for banks as better regulated and therefore safer vehicles for financial services will continue to work for banks for the foreseeable future.

Survey on International Trade in Banking Services, 2019-20

Today, the Reserve Bank released the results of the survey on International Trade in Banking Services (ITBS), 2019-20 on its website. This annual survey, inter-alia, collects information on core banking services (e.g., deposits, credit) and financial auxiliary services rendered by banks with cross-border presence, based on explicit / implicit fees / commissions charged to customers (details of these services are given in the Annex). The survey provides responses on the functioning of overseas branches and branches associated with subsidiaries / joint ventures of Indian banks as well as the branches of foreign banks operating in India. The number of employees posted in foreign locations by these banks were also reported.

Highlights

• Indian banks did not increase their overseas branch network though they added some foreign subsidiaries; their overseas staff strength also declined during 2019-20 (Table 1).

• Overseas subsidiaries of Indian banks and foreign banks in India expanded their consolidated balance sheet during 2019-20, whereas the business of overseas branches of Indian banks contracted in US dollar terms which also resulted in their lower income and expenditure during the year (Table 2).

• Foreign bank branches in India recorded 13.8 per cent growth in their income which was largely driven by interest income (Table 3).

• Overseas branches of Indian banks’ generated a major share of fee income by rendering credit related services, foreign exchange trading services and trade finance related services. Foreign banks operating in India continued to generate fee income from payment & money transmission services, foreign exchange trading services and trade finance related services (Table 4).

• Indian banks’ branches in the UK generated the highest fee income, followed by their branches in the Hong Kong, UAE and Singapore (Table 5). 

Banking Services Covered in the Survey

Banking services include, acceptance of deposits and lending (core banking services), and the other financial services (para-banking services) like payment services, securities trading, asset management, financial advice, settlement and clearing service, etc. With the improvements in economic integration of financial markets and activities, the international trade in banking services has significantly increased.

The General Agreement on Trade in Services (GATS) of World Trade Organisation (WTO) framework envisages that the delivery of any commercial services can be through four different modes, viz., Mode 1 – Cross Border Service, Mode 2 – Consumption abroad, Mode 3 – Commercial presence and Mode 4 – movement of natural persons. In Mode 3, the bank has a commercial presence in the territory of the service importing country and the service is delivered therein. The commercial presence can be through various investment vehicles like representative offices, branches, subsidiaries, associates and correspondents.

A Technical Group on Statistics for International Trade in Banking Services (TG-SITBS) was set up by the Reserve Bank of India including members from Ministry of Finance, Ministry of Commerce and various departments of the Bank.

The TG-SITBS, after examining the different data sources available in the Reserve Bank, recommended collection of activity-wise international trade in banking services through annual surveys and suggested that initially the data may be collected on banking services from foreign banks operating in India and Indian banks having operations abroad. The TG-SITBS also recommended that a suitable questionnaire with explanatory notes should be prepared / framed in consultation with the banks and suggested conducting annual survey from the financial year 2006-07. Accordingly, a survey schedule was prepared after detailed discussions with the major Indian banks with overseas presence and foreign banks operating in India.

Banking services covered in this survey include financial auxiliary services such as (i) deposit account management services, (ii) credit related services, (iii) financial leasing services, (iv) trade finance related services, (v) payment and money transmission services, (vi) fund management services, (vii) financial consultancy and advisory services, (viii) underwriting services, (ix) clearing and settlement services, (x) derivative, stock, securities and foreign exchange trading services, and (xi) other financial services. While carrying out the banking business, banks cater to the financial services needs of the residents of the country of operation as well as non-residents of that country. Keeping this in view, the survey also collected the information with bifurcation of financial services rendered to residents and non-residents separately.

Services Covered

• Deposit Account Management Services include fees and commissions charged to or received from the deposit account holders, for maintaining deposit accounts such as fee for cheque book, fee for internet banking, commission on draft and other instrument provided, penalty for not maintaining minimum balance, etc. and any other fees charged to deposit account holders. Any fees charged to NRE / FCNR (B) account have to be reported as fees charged to Non-residents.

• Credit Related Services include fees received for credit-related or lending related services like credit processing fees, late payment or default charges and early redemption charges. Charges for facility and management fees, fees for renegotiating debt terms, mortgage fees, etc. also to be reported here.

• Financial Leasing Services include fees or commission received for arranging or entering into financial lease contracts. This also includes fees received directly or deducted from the proceedings.

• Trade Finance Related Services include commission or fees charged for arranging trade finance like buyers' and suppliers' credit, fees for establishing/originating, maintaining or arranging standby letters of credit, letter of indemnity, lines of credit, fees for factoring services, bankers’ acceptance, issuing financial guaranty, commitment fees, handling charges for trade bills.

• Payment and Money Transmission Services include fees or charges for electronic fund transfer services like SWIFT, TT, wire transfer, etc. ATM network services, annual credit / debit card fees, Interchange charges, fees for point of services, etc. also have to be reported here. Further, charges on the customer for making remittances abroad or receiving remittances from abroad have to be reported here.

• Fund Management Services include fee or income received for managing or administering financial portfolios, all forms of collective investment management, pension fund management, custodial, depository and trust services. Commission or fees for safe custody of shares / equities, transaction fee for custodian account, communication cost or any other fees / charges related to custodian account should also be reported.

• Financial Consultancy and Advisory Services include fees for advisory, intermediation and other auxiliary financial services including credit reference and analysis, portfolio research and advice, advice on mergers and acquisitions and on corporate restructuring and strategy. Arrangement / management fees for Private placement of share / equities are also to be included.

• Underwriting Services include underwriting fees, earning from buying and reselling an entire or substantial portion of newly issued securities.

• Clearing and Settlement Services include settlement and clearance services for financial assets, including securities, derivative products, and other negotiable instruments.

• Derivative, Stock, Securities, Foreign Exchange Trading Services include commissions, margin fees, etc. received for carrying out financial derivative transactions, placement services, and redemption fees. Earnings received on banks' own account as well as on behalf of customers for carrying out foreign exchange trading has to be reported under this item. Explicit brokerage fees and commissions for foreign exchange brokerage services are also to be reported. Earnings received on banks' own account for carrying out trading in derivative, stock, securities etc.