FdI in Banking Sector in India

8/11/2019 FdI in Banking Sector in India

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FOREIGN DIRECT INVESTMENT IN BANKING SECTOR IN

INDIA

1.Abstract:

Foreign Direct Investment (FDI) is considered to be the

lifeblood of economic development especially for the

developing and underdeveloped countries. Multinational

companies (MNCs) capitalise on foreign business

opportunities by engaging in FDI, which is investment in real

assets (such as land, buildings, or existing plants) in foreign

countries. MNCs engage in joint ventures with foreign firms,

acquire foreign firms, and form new foreign subsidiaries. It

plays an important role in the long-term development of a

country not only as a source of capital but also for enhancing

competitiveness of the domestic economy through transfer oftechnology, strengthening infrastructure, raising productivity

and generating new employment opportunities (Deutsche

Bundesbank, 2003). MNCs are interested in boosting

revenues through FDI by attracting new sources of demand,

entering into profitable markets and exploiting monopolistic

advantages. Currently these corporations are increasinglyestablishing overseas plants or acquiring existing overseas

plants to learn the technology of foreign countries.


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2.Evolution of Banking/History:

The banking history is interesting and reflects evolution in

trade and commerce. It also throws light on living style,political and cultural aspects of civilized mankind. The

strongest faith of people has always been religion and God.

The seat of religion and place of worship were considered safeplace for money and valuables. Ancient homes didn't have the

benefit of a steel safe, therefore, most wealthy people heldaccounts at their temples. Numerous people, like priests or

temple workers were both devout and honest, alwaysoccupied the temples, adding an sense of security. There arerecords from Greece, Rome, Egypt and Ancient Babylon that

suggest temples loaned money out, in addition to keeping it

safe. The fact that most temples were also the financial

centers of their cities and this is the major reason that theywere ransacked during wars. The practice of depositing

personal valuables at these places which were also functioningas the treasuries in ancient Babylon against a receipt was

perhaps the earliest form of Banking.

Gradually as the personal possession got evaluated in term of

money, in form of coins made of precious metal like gold andsilver, these were being deposited in the temple treasuries. As

these coins were commonly accepted form of wealth,lendingactivity to those who needed it and were prepared to borrow

at an interest began. The person who conducted this lending

activity was known as the Bankerbecause of the bench he

usually set. It is also observed that the term bankrupt got

evolved then as the irate depositors broke the bench and table

of the insolvent banker.With the expansion of trade theconcept of banking gained greater ground.


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The handling of banking transcended from individual togroups to companies. Issuing currency was one of the major

functions of the banks. The earliest from of moneycoins,

were a certificate of value stamped on a metal, usually gold,silver, and bronze or any other metal, by an authority, usually

the king. With the increasing belief and faith in such authority

of their valuation and the necessities of wider trade asubstitute to metal was found in paper. The vagaries of

monarchial rule led to the issues of currency being vested withthe banks since they enjoyed faith, controlled credit and

trading. All forms of money were a unit of value andpromised to pay the bearer of specified value. Due to failure

on account of unwise loans, to rule and organize, a stablebanking system arose. The words earliest bank currency

notes were issued in Sweden by stock holms Banco in July1661.

The story of Indian coinage itself is very vast and fascinating,

and also throws tremendous light on the various aspects of life

during different periods. The Rig Veda speaks only gold,silver copper and bronze and the later Vedic texts also

mention tin, lead, iron and silver. Recently iron coins werefound in very early levels at Attranji Kheri(U.P.) and Pandu

Rajar Dhibi (Bengal). A money economy existed in India

since the days of Maurya Dynasty . In ancient India during the

Maurya dynasty (321 to 185 BC), an instrument called adesha

was in use, which was an order on a banker desiring him topay the money of the note to a third person, whichcorresponds to the definition of a bill of exchange as we

understand it today. During the Buddhist period, there wasconsiderable use of these instruments. Merchants in large

towns gave letters of credit to one another. Trade guilds acted

as bankers, both receiving deposits and issuing loans. The


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larger temples served as bankers and in the south the villagecommunities economically advanced loans to peasants. There

were many professional bankers and moneylenders like the

sethi, the word literally means chief. It has survived in the It has survived in the North India as seth. Small purchases

were regularly paid for in cowry shells (varataka), which

remained the chief currency of the poor in many parts ofIndia.

Indigenous banking grew up in the form of rural moneylending with certain individuals using their private funds for

this purpose. The scriptures singled out the vaishyas as theprincipal bankers. The earliest form of Indian Bill of

Exchange was called Hundi. Exports and import wereregulated by barter system. Kautilyas Arthasastra mentions

about a currency known as panas and even fines paid to courtswere made by panas. E. B. Havell in his work: The History of

Aryas Rule in India says that Muhammad Tughlaq issued

copper coin as counters and by an imperial decree made them

pass at the value of gold and silver. The people paid theirtribute in copper instead of gold, and they bought all the

necessaries and luxuries they desired in the same coin.However, the Sultans tokens were not accepted in counties in

which his decree did not run. Soon the whole external trade of

Hindustan come to a standstill. When as last the copper tankas

had become more worthless than clods, the Sultan in a rage

repealed his edict and proclaimed that the treasury wouldexchange gold coin for his copper ones. As a result of thisthousands of men from various quarters who possessed

thousand of these copper coins bought them to the treasuryand received in exchange gold tankas. The origin of the word

"rupee" is found in the Sanskrit rpya "shaped; stamped,

impressed; coin" and also from the Sanskrit word "rupa"


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meaning silver. The standardisation of currency unit as Rupeein largely due to Sher Shah in 1542.

2.1 The Early Phase of Banking in India- 18th Century to 1947.

The phase leading up to independence laid the foundations of

the Indian banking system. The beginning of commercial

banking of the joint stock variety that prevailed elsewhere inthe world could be traced back to the early 18th century. The

western variety of joint stock banking was brought to India bythe English Agency houses of Calcutta and Bombay(now

Kolkata and Mumbai). The first bank of a joint stock variety

was Bank of Bombay, established in 1720 in Bombay This

was followed by Bank of Hindustan in Calcutta, which wasestablished in 1770 by an agency house.5 This agency house,

and hence the bank was closed down in 1832. The GeneralBank of Bengal and Bihar, which came into existence in 1773,

after a proposal by Governor (later Governor General) WarrenHastings, proved to be a short livedexperiment . Trade was

concentrated in Calcutta after the growth of East IndiaCompanys trading and administration. With this grew the

requirement for modern banking services, uniform currency tofinance foreign trade and remittances by British army

personnel and civil servants. The first Presidency bank was

the Bank of Bengal established in Calcutta on June 2, 1806with a capital of Rs.50 lakh. The Government subscribed to20 per cent of its share capital and shared the privilege of

appointing directors with voting rights. The bank had the taskof discounting the Treasury Bills to provide accommodation

to the Government. The bank was given powers to issue notes

in 1823. The Bank of Bombay was the second Presidency

bank set up in 1840 with a capital of Rs.52 lakh, and the Bank


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of Madras the third Presidency bank established in July 1843with a capital of Rs.30 lakh. They were known as Presidency

banks as they were set up in the three Presidencies that were

the units of administrative jurisdiction in the country for theEast India Company. The Presidency banks were governed by

Royal Charters. The Presidency banks issued currency notes

until the enactment of the Paper Currency Act, 1861, whenthis right to issue currency notes by the Presidency banks was

abolished and that function was entrusted to the Government.The first formal regulation for banks was perhaps the

enactment of the Companies Act in 1850. This Act, based ona similar Act in Great Britain in 1844, stipulated unlimited

liability for banking and insurance companies until 1860, aselsewhere in the world. In 1860, the Indian law permitted the

principle of limited liability following such measures inBritain. Limited liability led to an increase in the number of

banking companies during this period. With the collapse of

the Bank of Bombay, the New Bank of Bombay was

established in January 1868.The Presidency Bank Act, whichcame into existence in 1876, brought the three Presidency

banks under a common statute and imposed some restrictionson their business. It prohibited them from dealing with risky

business of foreign bills and borrowing abroad for lending

more than 6 months, among others. In terms of Act XI of

1876, the Government of India decided on strict enforcement

of the charter and the periodic inspection of the books of thesebanks. The proprietary connection of the Government was,however, terminated, though the banks continued to hold

charge of the public debt offices in the three presidencytowns, and the custody of a part of the Government balances.

The Act also stipulated the creation of Reserve Treasuries at

Calcutta, Bombay and Madras into which sums above the

specified minimum balances promised to the presidency


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banks, were to be lodged only at their head offices. TheGovernment could lend to the presidency banks from such

Reserve Treasuries. This Act enabled the Government to

enforce some stringent measures such as periodic inspectionof the books of these banks. The major banks were organised

as private shareholding companies with the majority

shareholders being Europeans.The first Indian owned bank was the Allahabad Bank set up in

Allahabad in 1865, the second, Punjab National Bank was setup in 1895 in Lahore, and the third, Bank of India was set up

in 1906 in Mumbai. All these banks were founded underprivate ownership.

The SwadeshiMovement of 1906 provided a great impetus

to joint stock banks of Indian ownership and many moreIndian commercial banks such as Central Bank of India, Bank

of Baroda, Canara Bank, Indian Bank, and Bank of Mysore

were established between 1906 and 1913. By the end of

December 1913, the total number of reporting commercialbanks in the country reached 56 comprising 3 Presidency

banks, 18 Class A banks (with capital of greater than Rs.5lakh), 23 Class B banks (with capital of Rs.1 lakh to 5 lakh)

and 12 exchange banks. Exchange banks were foreign owned

banks that engaged mainly in foreign exchange business in

terms of foreign bills of exchange and foreign remittances for

travel and trade. Class A and B were joint stock banks.The SwadeshiMovement also provided impetus to the co-

operative credit movement and led to the establishment of a

number of agricultural credit societies and a few urban co-operatives. The evolution of co-operative banking movement

in India could be traced to the last decade of the 19th Century.

The late Shri Vithal L Kavthekar pioneered the urban co-

operative credit movement in the year 1889 in the then


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princely State of Baroda.7 The first registered urban co-operative credit society was the Conjeevaram Urban Co-

operative Bank, organised in Conjeevaram, in the then Madras

Presidency. The idea of setting up of such a co-operative wasinspired by the success of urban co-operative credit

institutions in Germany and Italy. The second urban co-

operativebank was the Peoples Co-operative Society in 1905in Bangalore city in the princely State of Mysore. The joint

stock banks catered mainly to industry and commerce. Theirinability to appreciate and cater to the needs of clientele with

limited means effectively drove borrowers to moneylendersand similar agencies for loans at exorbitant rates of interest

this situation was the prime mover for non-agricultural creditco-operatives coming into being in India. The main objectives

of such co-operatives were to meet the banking and creditrequirements of people with smaller means to protect them

from exploitation. Thus, the emergence of urban co-operative

banks was the result of local response to an enabling

legislative environment, unlike the rural co-operativemovement that was largely State-driven (Thorat, 2006).

After the early recognition of the role of the co-operatives,continuous official attention was paid to the provision of rural

credit. A new Act was passed in 1912 giving legal recognition

to credit societies and the like. The Maclagan Committee, set

up to review the performance of co-operatives in India and to

suggest measures to strengthen them, issued a report in 1915advocating the establishment of provincial cooperative banks.It observed that the 602 urban cooperative credit societies

constituted a meager 4.4 per cent of the 13,745 agriculturalcredit societies. The Committee endorsed the view that the

urban cooperative societies were eminently suited to cater to

the needs of lower and middle-income strata of society and

such institutions would inculcate banking habits among


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middle classes. Apart from commercial and co-operativebanks, several other types of banks existed in India. This was

because the term bank was an omnibus term and was used

by the entities, which, strictly speaking, were not banks.These included loan companies, indigenous bankers and

nidhis some of which were registered under the Companies

Act, 1913. Although very little information was availableabout such banks, their number was believed to be very large.

Even the number of registered entities was enormous. Manydoubtful companies registered themselves as banks and

figured in the statistics of bank failures. Consequently, it wasdifficult to define in strict legal terms the scope of organised

banking, particularly in the period before 1913(Chandavarkar, 2005).

2.2 Setting up of a Central Bank

The setting up of a central bank for the country wasrecommended by various committees that went into the causesof bank failures.11 It is interesting to note that many central

banks were established specifically to take care of bank

failures.For instance, the US Federal Reserve, was established

in 1913 primarily against the background of recurrent bankingcrises. It was felt that the establishment of a central bank

would bring in greater governance and integrate the looselyconnected banking structure in the country. It was also

believed that the establishment of a central bank as a separate

entity that does not conduct ordinary banking business (like

the Imperial Bank of India) was likely to have the stature to be

able to deftly handle the central banking functions without the

other joint stock banks feeling any rivalry towards it.Accordingly, the Reserve Bank of India Act 1934 was enacted

paving the way for the setting up of the Reserve Bank of


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India. The issue of bank failures and the need for catering tothe requirements of agriculture were the two prime reasons for

the establishment of the Reserve Bank. The banking sector

came under the purview of the Reserve Bank in 1935. At thetime of setting up of the Reserve Bank, the joint stock banks

constituted the largest share of the deposits held by the

banking sector, followed by the Imperial Bank of India andexchange banks. The Reserve Bank of India Act, 1934 gave

the Reserve Bank powers to regulate issue of bank notes, thecustody of the commercial banks cash reserves and the

discretion of granting them accommodation. The preamble tothe RBI Act set forth its functions as to regulate the issue of

bank notes and the keeping of reserves with a view tosecuring monetary stability in India and generally to operate

the currency and credit system of the country to itsadvantage.

The Reserve Banks main functions could be classified into

the following broad categories (a) to act as a banker to the

Government; (b) to issue notes; (c) to act as a banker to otherbanks; and (d) to maintain the exchange ratio. The RBI Act

had a limited control on banks although its obligations in eachsphere were spelt out in clear terms. There was some amount

of built-in flexibility as the Reserve Bank was vested with

extra powers and maneuverability under extra-ordinary

circumstances, that could be exercised only with the prior

approval of the Governor General in Council or the CentralBoard of the Bank as might be prescribed in each case.The Reserve Bank, as the lender-of-last resort, had a crucial

role in ensuring the liquidity of the short-term assets ofcommercial banks. The banking sector had adequate liquidity

in the initial years because it had a facility of selling

Government securities freely to the Reserve Bank. In 1935,

banks were required to maintain cash reserves of 5 per cent


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of their demand liabilities and 2 per cent of their timeliabilities on a daily basis. The task of managing the currency

that was assigned to the Controller of Currency came to the

Reserve Bank in March 1935 under Section 3 of the RBI Act,1934. The provisions of the RBI Act also required the Reserve

Bank to act as a bankers bank. In accordance with the general

central banking practice, the operations of the Reserve Bankwith the money market were to be largely conducted through

the medium of member banks, viz., the scheduled banks andthe provincial co-operative banks. The scheduled banks

were banks which were included in the Second Schedule tothe RBI Act and those banks in British India that subsequently

became eligible for inclusion in this Schedule by virtue oftheir paid-up capital and reserves being more than Rs.5 lakh

in the aggregate. The power to include or exclude banks in orfrom the Schedule was vested with the Governor General in

Council. The preamble of the Reserve Bank of India Act that

was accepted had no reference to a gold standard currency

for British India unlike that envisaged in the initial preambleof the 1928 Bill. This change occurred due to the fluidity of

the international monetary situation in the intervening period,following Great Britains departure from the gold standard in

September 1931. Some promotional role was envisaged for

the Reserve Bank from the very beginning as agricultural

credit was a special responsibility of the Reserve Bank in

terms of the RBI Act. The Reserve Bank assumed a proactiverole in the sphere of agricultural credit for the economy andtook concrete action by commissioning two studies in 1936

and 1937 in this area. Almost the entire finance required byagriculture at that time was supplied by moneylenders;

cooperatives and other agencies played a negligible part

(Mohan, 2004). During the period from 1935 to 1950, the

Reserve Bank continued to focus on agricultural credit by


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fostering the co-operative credit movement through theprovision of financial accommodation to co-operatives. As a

result of the concerted efforts and policies of the Reserve

Bank, a well-differentiated structure of credit institutions forpurveying credit to agriculture and allied activities emerged.

Within the short-term structure, primary agricultural credit

societies at the village level formed the base level, whiledistrict central co-operative banks were placed at the

intermediate level, and the State co-operative banks at theapex level. The long-term structure of rural co-operatives

comprised State co-operative agriculture and ruraldevelopment banks at the State level, and primary co-

operative agriculture and rural development banks at thedecentralised district or block level. These institutions focused

on providing typically medium to long-term loans for makinginvestments in agriculture and rural industries. The central

bank, if it is a supervisory authority must have sufficient

powers to carry out its functions, such as audit and inspection

to be able to detect and restrain unsound practices and suggestcorrective measures like revoking or denying licences.

However, the Reserve Bank in the earlier years did not haveadequate powers of control or regulation. Commercial banks

were governed by the Company Law applicable to ordinary

non-banking companies, and the permission of the Reserve

Bank was not required even for setting up of a new bank. The

period after setting up of the Reserve Bank saw increase inthe number of reporting banks. The classification of bankswas expanded to include the banks with smaller capital and

reserve base. Class A banks were divided into A1 and A2.Further, two new categories of banks, viz,. C and D were

added to include the smaller banks.

Banks with capital and reserves of greater than Rs.5 lakh and

included in the second schedule to the RBI Act 1934 were


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classified as Class A1, while the remaining non-scheduledbanks with capital and reserves of greater than Rs.5 lakh were

classified as Class A2. The rest of the non-scheduled banks

were classified according to their size; those with capital andreserves of greater than Rs.1 lakh and lower than Rs.5 lakh

were classified as Class B; banks with capital and reserves of

greater than Rs.50,000 and up to Rs.1 lakh were classified asClass C; and those with capital and reserves of less than

Rs.50,000 were classified as Class D. In 1940, the number ofreporting banks was 654. The underdeveloped nature of the

economy and the lack of an appropriate regulatory frameworkposed a problem of effective regulation of a large number of

small banks. The laisez faire policy that permitted free entryand exit had the virtues of free competition. However,

benefits of such a policy are best reaped in a system that ischaracterised by perfect competition unalloyed by market

failures and imperfect markets. Indian financial markets at

that stage, however, were certainly far from perfect. The

free entry ushered in a very high growth of bankingcompanies only to be marred by the problem of massive bank

failures. Mushrooming growth of small banks in a scenario,where adequate regulation was not in place, led to various

governance issues. The Reserve Banks statutealone then did

not provide for any detailed regulation of the commercial

banking operations for ensuring sound banking practices. The

submission of weekly returns made by scheduled banks underSection 42(2) of the Act was mainly intended to keep a watchover their compliance with the requirements regarding

maintenance of cash reserves with the Reserve Bank.Inspection of banks by the Reserve Bank was visualised for

the limited purpose of determining the eligibility of banks for

inclusion or retention in the Second Schedule to the Act.

Thus, apart from the limited scope of the Reserve Banks


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powers of supervision and control over scheduled banks, alarge number of small banking institutions, known as non-

scheduled banks, lay entirely outside the purview of its

control. When the Reserve Bank commenced operations, therewere very few and relatively minor provisions in the Indian

Companies Act, 1913, pertaining to banking companies. This

virtual absence of regulations for controlling the operations ofcommercial banks proved a serious handicap in the sphere of

its regulatory functions over the banking system. There wasambiguity regarding the functioning of the smaller banks as

there was no control on their internal governance or solvency.Measures were taken to strengthen the regulation first by

amending the Indian Companies Act in 1936. Thisamendment incorporated a separate chapter on provisions

relating to banking companies. Prior to its enactment, bankswere governed in all important matters such as incorporation,

organisation and management, among others, by the Indian

Companies Act, 1913 which applied commonly to banking as

well as non-banking companies. There were only certainrelatively innocuous provisions in the Companies Act 1913,

which made a distinction between banks and other companies.The enactment of the Indian Companies (Amendment) Act,

1936 incorporated a separate chapter on provisions relating

to banking companies, including minimum capital and cash

reserve requirement and some operational guidelines. This

amendment clearly stated that the banking companies weredistinct from other companies. In order to gradually integratethe non-scheduled banks with the rest of the organised

banking, the Reserve Bank continued to make efforts to keepin close touch with the non-scheduled banks and provide

them advice and guidance. The Reserve Bank also continued

to receive the balance sheets and the cash reserve returns of

these banks from the Registrars of Joint Stock Companies.


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According to the information received from them, in BritishIndia as on the 31st December 1938, about 1,421 concerns

were operating which might be considered as non-scheduled

banks. The real issue was to get them under the regulatorypurview of the Reserve Bank because a large number of these

companies claimed that they were not really banks within

the meaning of Section 277(F) of the Companies Act as thatsection defined a banking company as a company which

carried on as its principal business, the acceptance of depositssubject to withdrawal by cheque, draft, or order, and they did

not accept deposits so withdrawable.

In order to ensure a viable banking system, it was crucial thatthe weak links in the banking system were taken care of. For

this, it was essential to address the root cause of bank failures,which was then the lack of adequate regulation. Hence, the

need was felt to put in place sound regulatory norms. The fact

that most of the banks that failed were small and non-

scheduled underlined the need for monitoring the operationsof the non-scheduled banks regularly. In October 1939, a

report on the non-scheduled banks with a special reference totheir assets and liabilities was submitted to the Reserve

Banks Central Board. The report mentioned the low reserves

position of these banks and the overextension of advances

portfolios and large proportion of bad and doubtful debt. The

report stressed the need for comprehensive banking regulationfor the country. In 1939, the Reserve Bank submitted to theCentral Government its proposals for banking legislation in

India. The important features of the proposals were to definebanking in a simpler and clearer way than had been done in

the Indian Companies Act, 1936. Second, the proposals

sought to ensure that institutions calling themselves banks

started with sufficient minimum capital to enable them to


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operate on a scale large enough to make it possible for them toearn reasonable profits. Third, the proposals visualised certain

moderate restrictions on bank investments in order to protect

the depositors. Finally, an endeavour was made to expediteliquidation proceedings so that in the event of a bank failing,

the depositors were paid off with the minimum delay and

expense. However, the Government decided not to undertakeany comprehensive legislation during the war period when all

the energies of the Government were inevitably concentratedon the war effort. Certain interim measures were taken to

regulate and control by legislation certain issues that requiredimmediate attention. After the war, the aspect of inadequate

regulation was addressed partially by the promulgation of theRBI Companies (Inspection) Ordinance, 1946. New powers

were given to the Reserve Bank under the BankingCompanies (Restriction of Branches) Act, 1946 and the

Banking Companies (Control) Ordinance, 1948. Most of the

provisions in these enactments were subsequently embodied

in the Banking Companies Act in 1949. This Act gave theReserve Bank very comprehensive powers of supervision and

control over the entire banking system as detailed in thesubsequent section.

3.Post Independence Developments in Banking Sector upto

1991

When the country attained independence, Indian banking was

entirely in the private sector. In addition to the Imperial Bank,there were five big banks, each holding public deposits

aggregating Rs.100 crore and more, viz., Central Bank of

India Ltd., Punjab National Bank Ltd., Bank of India Ltd.,

Bank of Baroda Ltd. and United Commercial Bank Ltd.


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All other commercial banks were also in the private sector andhad a regional character; most of them held deposits of less

than Rs.50 crore. Interestingly, the Reserve Bank was also not

completely State owned until it was nationalised in terms ofthe Reserve Bank of India (transfer to Public Ownership) Act,

1948. Independence made a large difference to many spheres

of economic activity and banking was one of the most crucialareas where a phenomenal transformation took place. On the

eve of independence, several difficulties plagued the bankingsystem as noted by the then Governor C.D. Deshmukh:

The difficulty of the task of the Reserve Bankof India in dealing with the banking system

in the country does not lie in the multiplicityof banking units alone. It is aggravated by

its diversity and range. There can be nostandard treatment in practice although in

theory the same law governs all.

At the time of independence, the banking structure was

dominated by the domestic scheduled commercial banks.Non-scheduled banks, though large in number, constituted a

small share of the banking sector.

3.1 Bank Failures and Liquidation/Consolidation of

Smaller Banks

The partition of the country hurt the domestic economy, and

the banking sector was no different. Of the 84 banks operatingin the country in the organised sector before partition, two

banks were left in Pakistan. Many of the remaining banks in

two States of Punjab and West Bengal were deeply affected.

In 1947, 38 banks failed, of which, 17 were in West Bengalalone, having total paid-up capital of Rs.18 lakh. The paidup

capital of banks that failed during 1947 amounted to a little

more than 2 per cent of the paid-up capital of the reportingbanks. The average capital of the failed banks between 1947


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and 1955 was significantly lower than the average size ofpaid-up capital of reporting banks in the industry, suggesting

that normally it was small banks that failed.

3.2 Nationalisation of Banks

In India,Banking sector has been dominated by government or

public sector banks.In 1954, the All India Rural Credit Survey

Committee submitted its report recommending creation astrong integrated,state-sponsored,state-partnered commercial

banking institution with an effective machinery of branchesspread all over the country.The recommendation of this

committee led to establishment of first public sector bank in

the name of State Bank of India on July 1 1955 by acquiring

the substantial part of share capital by Reserve Bank ofIndia.Similarly during 1956-59,as aresult of reorganization of

princely states,the State Bank of India associate bank came

into fold of Public Sector Banking.On July 19 1969,the government promulgated Banking

Companies (Acquisition and Transfer of Undertakings)ordinance 1969 to acquire 14 bigger commercial banks with

deposits over Rs.50 Crores.The main objective behind the

nationalisation of banks ws to spread banking infrastructure in

rural india and make cheap finance available to indianfarmers.

The second phase of bank nationalisation took place in 1980

during Prime Ministerial tenure of Indira Gandhi in which 6more banks were nationalised with deposits over Rs 200

Crores.


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List of Nationalised Banks:

1.Allahabad Bank2. Andhra Bank

3. Bank of Baroda

4. Bank of India5. Bank of Maharashtra

6. Canara Bank7. Central Bank of India

8. Corporation Bank9. Dena Bank

10. Indian Bank11. Indian Overseas Bank

12. Oriental Bank of Commerce13. Punjab and Sind Bank

14. Punjab National Bank

15. State Bank of Bikaner & Jaipur

16. State Bank of Hyderabad17. State Bank of India (SBI)

18. State Bank of Indore19. State Bank of Mysore

20. State Bank of Patiala

21. State Bank of Saurashtra

22. State Bank of Travancore

23. Syndicate Bank24. UCO Bank25. Union Bank of India

26. United Bank of India27. Vijaya Bank


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4.Banking Sector Reforms (Liberalisation)

Since nationalisation of banks in 1969, the banking sector had

been dominated by the public sector. There was financialrepression, role of technology was limited, no risk

management etc. This resulted in low profitability and poor

asset quality. The country was caught in deepeconomic crises.The Government decided to introduce comprehensive

economic reforms. Banking sector reforms were part of thispackage. In august 1991, the Government appointed a

committee on financial system under the chairmanship of M.Narasimhan.

4.1 First Phase

To promote healthy development of financial sector, the

Narasimhan committee made recommendations.

I) RECOMMENDATIONS OF NARASIMHAN COMMITTEE :-

1. Establishment of 4 tier hierarchy for banking structure with3 to 4 large banks (including SBI) at top and at bottom rural

banks engaged in agricultural activities.2. The supervisory functions over banks and financial

institutions can be assigned to a quasi-autonomous bodysponsored by RBI.

3. Phased reduction in statutory liquidity ratio.

4. Phased achievement of 8% capital adequacy ratio.

5. Abolition of branch licensing policy.6. Proper classification of assets and full disclosure of

accounts of banks and financial institutions.7. Deregulation of Interest rates.


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8. Delegation of direct lending activity of IDBI to a separatecorporate body.

9. Competition among financial institutions on participating

approach.10. Setting up asset Reconstruction fund to take over a portion

of loan portfolio of banks whose recovery has become

difficult.

II)Banking Reform Measures Of Government :-On the recommendations of Narasimhan Committee,

following measures were undertaken by government since1991 :-

1. Lowering SLR And CRR

The high SLR and CRR reduced the profits of the banks. TheSLR has been reduced from 38.5% in 1991 to 25% in 1997.

This has left more funds with banks for allocation to

agriculture, industry, trade etc.

The Cash Reserve Ratio (CRR) is the cash ratio of a bankstotal deposits to be maintained with RBI. The CRR has been

brought down from 15% in 1991 to 4.1% in June 2003. Thepurpose is to release the funds locked up with RBI.

2. Prudential Norms :-

Prudential norms have been started by RBI in order to

impart professionalism in commercial banks. The purpose of

prudential norms include proper disclosure of income,classification of assets and provision for Bad debts so as toensure hat the books of commercial banks reflect the accurate

and correct picture of financial position.Prudential normsrequired banks to make 100% provision for all Non-

performing Assets (NPAs). Funding for this purpose was

placed at Rs. 10,000 crores phasedover 2 years.


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3. Capital Adequacy Norms (CAN) :-

Capital Adequacy ratio is the ratio of minimum capital to

risk asset ratio. In April 1992 RBI fixed CAN at 8%. By

March 1996, all public sector banks had attained the ratio of8%. It was also attained by foreign banks.

4. Deregulation Of Interest Rates :-

The Narasimhan Committee advocated that interest ratesshould be allowed to be determined by market forces. Since

1992, interest rates has become much simpler and freer.a) Scheduled Commercial banks have now the freedom to set

interest rates on their deposits subject to minimum floor ratesand maximum ceiling rates.

b) Interest rate on domestic term deposits has beendecontrolled.

c) The prime lending rate of SBI and other banks on generaladvances of over Rs. 2 lakhs has been reduced.

d) Rate of Interest on bank loans above Rs. 2 lakhs has been

fully decontrolled.

e) The interest rates on deposits and advances of all Co-operative banks have been deregulated subject to a minimum

lending rate of 13%.5. Recovery Of Debts :-

The Government of Indiapassed the Recovery of debts due

to Banks and Financial Institutions Act 1993 in order to

facilitate and speed up the recovery of debts due to banks and

financial institutions. Six Special Recovery Tribunals havebeen set up. An Appellate Tribunal has also been set up inMumbai.

6. Competition From New Private Sector Banks :-Now banking is open to private sector. New private sector

banks have already started functioning. These new private

sector banks are allowed to raise capital contribution from


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foreign institutional investors up to 20% and from NRIs up to40%. This has led to increased competition.

7. Phasing Out Of Directed Credit :-

The committee suggested phasing out of the directed creditprogramme. It suggested that credit target for priority sector

should be reduced to 10% from 40%. It would not be easy for

government as farmers, small industrialists and transportershave powerful lobbies.

8. Access To Capital Market :-The Banking Companies (Acquisation and Transfer of

Undertakings) Act was amended to enable the banks to raisecapital through public issues. This is subject to provision that

the holding of Central Government would not fall below 51%of paid-up-capital. SBI has already raised substantial amount

of funds through equity and bonds.9. Freedom Of Operation :-

Scheduled Commercial Banks are given freedom to open

new branches and upgrade extension counters, after attaining

capital adequacy ratio and prudental accounting norms. Thebanks are also permitted to close non-viable branches other

than in rural areas.10. Local Area banks (LABs) :-

In 1996, RBI issued guidelines for setting up of Local Area

Banks and it gave Its approval for setting up of 7 LABs in

private sector. LABs will help in mobilizing rural savings and

in channeling them in to investment in local areas.


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4.2 Second Phase

To make banking sector stronger the government appointed

Committee on banking sector Reforms under theChairmanship of M. Narasimhan. It submitted its report in

April 1998. The Committee placed greater importance onstructural measures and improvement in standards of

disclosure and levels of transparency. Following are the

recommendations of Narasimhan Committee :-

1) Committee suggested a strong banking system especially in

the context of capital Account Convertibility (CAC). Thecommittee cautioned the merger of strong banks with weakones as this may have negative effect on stronger banks.

2) It suggested that 2 or 3 large banks should be given

international orientation and global character.

3) There should be 8 to10 national banks and large number oflocal banks.

4) It suggested new and higher norms for capital adequacy.5) To take over the baddebts of banks committee suggested

setting up of Asset Reconstruction Fund.

6) A board for Financial Regulation and supervision (BFRS)can be set up to supervise the activities of banks and financial

institutions.

7) There is urgent need to review and amend the provisions of

RBI Act, Banking Regulation Act, etc. to bring them in linewith current needs of industry.

8) Net Non-performing Assets for all banks was to be broughtdown to 3% by 2002.

9) Rationalization of bank branches and staff was emphasized.Licensing policy for new private banks can be continued.

10) Foreign banks may be allowed to set up subsidiaries and

joint ventures.


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On the recommendations of committee followingreforms have been taken :-

1) New Areas :-

New areas for bank financing have been opened up, such as :-Insurance, credit cards, asset management, leasing, gold

banking, investment banking etc.2) New Instruments :-

For greater flexibility and better risk management new

instruments have been introduced such as :- Interest rateswaps, cross currency forward contracts, forward rate

agreements, liquidity adjustment facility for meeting day-to-day liquidity mismatch.3) Risk Management :-

Banks have started specialized committees to measure and

monitor various risks. They are regularly upgrading theirskills and systems.

4) Strengthening Technology :-

For payment and settlement system technology infrastructure

has been strengthened with electronic funds transfer,centralized fund management system, etc.

5) Increase Inflow Of Credit :-Measures are taken to increase the flow of credit to priority

sector through focus on Micro Credit and Self Help Groups.6) Increase in FDI Limit :-

In private banks the limit for FDI has been increased from

49% to 74%.7) Universal banking :-

Universal banking refers to combination of commercial

banking and investment banking. For evolution of universalbanking guidelines have been given.

8) Adoption Of Global Standards :-

RBI has introduced Risk Based Supervision of banks. Best

international practices in accounting systems, corporate


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governance, payment and settlement systems etc. are beingadopted.

9) Information Technology :-

Banks have introduced online banking, E-banking, internetbanking, telephone banking etc. Measures have been taken

facilitate delivery of banking services through electronic

channels.10)Management Of NPAs:-

RBI and central government have taken measures formanagement of non-performing assets (NPAs), such as

corporate Debt Restructuring (CDR), Debt RecoveryTribunals (DRTs) and Lok Adalts.

5.Introduction to Froeign Direct Investment

In India, FDI is considered as a developmental tool, which canhelp in achieving self-reliance in various sectors of the

economy. With the announcement of Industrial Policy in1991, huge incentives and concessions were granted for the

flow of foreign capital to India. India is a growing country

which has large space for consumer as well as capital goods.

Indias abundant and diversified natural resources, its soundeconomic policy, good market conditions and highly skilled

human resources, make it a proper destination for foreign

direct investments. As per the recent survey done by the

United National Conference on Trade and Development

(UNCTAD), India will emerge as the third largest recipient of

foreign direct investment (FDI) for the three-year periodending 2012 (World Investment Report 2010). As per the

study, the sectors which attracted highest FDI were services,telecommunications, construction activities, and computer


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software and hardware. In 1991, India liberalised its highlyregulated FDI regime.

Along with the virtual abolition of the industrial licensing

system, controls over foreign trade and FDI were considerablyrelaxed. The reforms did result in increased inflows of FDI

during the post reform period. The volume of FDI in India is

relatively low compared with that in most other developingcountries.

6. Foreing Direct Investment in Banking Sector

Foreign direct investment (FDI) is defined as investmentmade to acquire lasting interest in enterprises operatingoutside of the economy of the investor. The FDI relationship

consists of a parent enterprise and a foreign affiliate whichtogether form a Multinational corporation (MNC). In order to

qualify as FDI the investment must afford the parent

enterprise control over its foreign affiliate. The UN defines

control in this case as owning 10% or more of the ordinaryshares or voting power of an incorporated firm or its

equivalent for an unincorporated firm;lower ownership sharesare known as portfolio investment.

Indian federal government has opened up the banking sector

for foreign investors raising the ceiling of foreign direct

investment in the Indian private sector banks to 49 percent.However, the ceiling of FDI in the countrys public sectorbanks remains unchanged at 20 percent. Foreign banks having

branches in India are also entitled to acquire stakes up to 49%through automatic routes. It is to be noted that under

automatic route fresh shares would not be issued to foreign

investors who already have financial or technical

collaboration in banking or allied sector. They would requireFIPB approval. However, some statutory approvals of the


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Reserve Bank of India (RBI), countrys central bankingauthority, would be required.

6.1 Statutory Limits

1. Foreign direct investment (FDI) up to 49 percent ispermitted in Indian private sector banks under automatic

route which includes Initial Public Issue (IPO), PrivatePlacements, ADR/GDRs; and Acquisition of shares from

existing shareholders.2. Automatic route is not applicable to transfer of existingshares in a banking company from residents to non-residents.

This category of investors require approval of FIPB, followed

by in principle approval by Exchange Control Department

(ECD), Reserve Bank of India (RBI).3.The fair price for transfer of existing shares is determined

by RBI, broadly on the basis of Securities Exchange Board ofIndia (SEBI) guidelines for listed shares and erstwhile CCI

guidelines for unlisted shares. After receipt of in principle

approval, the resident seller can receive funds and apply to

ECD, RBI, for obtaining final permission for transfer ofshares.

4. Foreign banks having branch-presence in India are eligiblefor FDI in private sector banks subject to the overall cap of

49% with RBI approval.

5. Issue of fresh shares under automatic route is not available

to those foreign investors who have a financial or technical

collaboration in the same or allied field. Those who fall under

this category would require Foreign Investment PromotionBoard (FIPB) approval for FDI in the Indian banking sector.


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6. Under the Insurance Act, the maximum foreign investmentin an insurance company has been fixed at 26 percent.

Application for foreign investment in banks which have joint

venture/subsidiary in insurance sector should be made to RBI.Such applications would be considered by RBI in consultation

with Insurance regulatory and Development Authority

(IRDA).7. FDI and Portfolio Investment in nationalized banks are

subject to overall statutory limits of 20 percent.8. The 20 percent ceiling would apply in respect of such

investments in State Bank of India and its associate banks.

6.2 Voting Rights of Foreign Investors

Table:

Private Sector

Banks

Not more than 10% of total

voting rights of all theshareholders

Nationalizedbanks

Not more than 1% of totalvoting rights of all the

shareholders of nationalizedbanks.

State Bank ofIndia

Not more than 10% of theissued capital This does not

apply to Reserve Bank ofIndia (RBI) as a

shareholder. However,

government in consultation

with RBI, ceiling forforeign investors can be

raised.


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SBI Associates Not more than 1%. This

ceiling will not be appliedto State Bank of India. If

any person holds more than200 shares,he/she will not

be registered as shareholder

RBI Approval

1.Transfer of shares of 5 percent and more of the paid-up

capital of a private sector bank requires prioracknowledgement of RBI.2.For FDI of 5 percent and more of the paid-up capital, the

private sector bank has to apply in the prescribed form to RBI.3.Under the provision of Foreign Exchange Management Act

(FEMA), 1999, any fresh issue of shares of a bank, either

through the automatic route or with the specific approval of

FIPB, does not require further approval of Exchange Controldepartment (ECD) RBI from the exchange control angle.

4.The Indian banking company is only required to undertaketwo-stage reporting to the ECD of RBI as follows: (1) the

Indian company has to submit a report within 30 days of the

date of receipt of amount of consideration indicating the name

and address of foreign investors, date of receipt of funds andtheir rupee equivalent, name of bank through whom funds

were received and details of govt. approval, if any. (2) Indianbanking company is required to file within 30 days from the

date of issue of shares, a report in form FC-GPR (AnnexureII) together with a certificate from the company secretary of

the concerned company certifying that various regulations

have been complied with.


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6.3 Divestment by Foreign Investors

Sale of shares by non-residents on a stock exchange and

remittance of the proceeds there of through an authorizeddealer does not require RBI approval.

1.Sale of shares by private arrangement requires RBIs prior

approval.2.Sale of shares by non-residents on a stock exchange and

remittance of the proceeds thereof through an authorizeddealer does not require RBI approval.

A foreign bank or its wholly owned subsidiary regulated by afinancial sector regulator in the host country can now invest

up to 100% in an Indian private sector bank. This option of

100% FDI will be only available to a regulated wholly owned

subsidiary of a foreign bank and not any investmentcompanies. Other foreign investors can invest up to 74% in an

Indian private sector bank, through direct or portfolioinvestment. The Government has also permitted foreign banks

to set up wholly owned subsidiaries in India. The government,

however, has not taken any decision on raising voting rights

beyond the present 10% cap to the extent of shareholding.Allentities making FDI in private sector banks will be mandatory

required to have credit rating. The increase in foreigninvestment limit in the banking sector to 74% includes

portfolio investment [i.e., foreign institutional investors (FIIs)

and non-resident Indians (NRIs)], IPOs, private placement,

ADRs or GDRs and acquisition of shares from the existing

shareholders. This will be the cap for any increase through an

investment subsidiary route as in the case of HSBC-UTI deal.In real terms, the sectoral cap has come down from 98% to

74% as the earlier limit of 49% did not include the 49% stake

that FII investors are allowed to hold. That was allowed


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through the portfolio route as the sector cap for FII investmentin the banking sector was 49%.The decision on foreign

investment in the banking sector, the most radical since the

one in 1991 to allow new private sector banks, is likely toopen the doors to a host of mergers and acquisitions.

The move is expected to also augment the capital needs of the

private banks.

6.4 Public Sector Banks

In the case of public sector banks, the Government had earlierannounced that it is planning to reduce its stake in such banksto 33 per cent in a phased manner. This is mainly because the

Government does not have enough money to contribute the

additional capital that would be required over a period. Private

domestic capital may not be enough to fill the gap in capitalrequirements, which means that foreign capital would have to

be accessed. Such foreign capital can be either FII or FDIinvestments. The moot point is whether sufficient capital from

overseas investors would be forthcoming if there were no

change in management in the public sector banks. Induction

of FDI in public sector banks would probably have to beaccompanied by change in management style in public sector

banks. Politically such decisions are not easy to take.Therefore, lack of capital in addition to other well known

impediments may constrain the growth of public sector

banking segment as a whole.

7.FDI Inflows in India

Recognising the importance of FDI in the accelerated

economic growth of the country,Government of India initiated

a number of economic reforms in 1991. As a result of the

various policy initiatives taken, India has been rapidly


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changing from a restrictive regime to a liberal one, and FDI isencouraged in almost all the economic activities under the

Automatic Route. FDI is freely allowed in all sectors

including the services sector, except a few sectors where theexisting and notified sectoral policy does not permit FDI

beyond a ceiling. To make the investment in India attractive,

investment and return on them are freely repatriable, exceptwhere the approval is specific to specific conditions such as

lock-in period on original investment,dividend cap, foreignexchange neutrality etc. as per the notified sectoral policy

(Govt. of India, 2003). After the economic reforms areimplemented in the post 1990s, the inflows of FDI to India

have increased tremendously since 2000. The opening up ofthe Indian economy in the international trade front and more

liberal FDI policies has been one of the factors which led tohuge FDI inflows in India. However, India's FDI inflows have

fallen sharply this financial year as a stumbling global

recovery from global crisis hit investor appetite. Again,the

macroeconomic instability in terms of fiscal deficit, currentaccount deficit and high inflation rate also contribute to fall in

FDI inflows. As Economic Survey 2010-11 has reported,inflation is a dominant concern and India needs policies to

help reverse a fall in FDI inflows. In India, Reserve Bank of

India (RBI) publishes foreign investment data on a monthly

basis in the RBI Bulletin, which provides component-wise

details of direct investment and portfolio investment.Direct investment comprises of inflows through (i)Government (SIA/FIPB) route, (ii) RBI automatic route, (iii)

NRI and (iv) Acquisition of shares. Portfolio investmentcovers: (i) GDRs/ADRs (ii) FIIs and (iii) offshore funds and

others.


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8.Impact of FDI on Indian Banking

The RBI's decision to allow foreign direct investment in

Indian banks, the lifting of sectoral caps on foreigninstitutional investors and a series of other policy measures

could ultimately lead to the privatisation of public sector

banks. Banks. The series of policy announcements in recentweeks promises to unleash a shakeout in the Indian banking

industry. A major policy change, effected through aninnocuous "clarification" issued by the Reserve Bank of India

(RBI) a few weeks ago, set the stage for the increasedpresence of foreign entities in the industry. The RBI's move toallow foreign direct investment (FDI) in Indian banks has

been followed by the announcement in the Union Budget

lifting sectoral caps on foreign institutional investors (FII).

There are also reports that the RBI's forthcoming credit policymay feature more sops for private and foreign banks. These

changes are likely to hasten the process of consolidation of thebanking industry. Although there is some doubt over whether

the moves will have any immediate impact, there is consensus

that the changes are merely a prelude to the wholesale

privatisation of the public sector banks (PSBs). IDBI, thepromoter of IDBI Bank, has already announced its intention to

relinquish control of the bank. Foreign banks have alsomounted pressure on the Finance Ministry, seeking the

removal of legislative hurdles that set limits to private and

foreign holdings in PSBs. In the short term, the action is likely

to be focussed on the Indian private banks. Of the 100 banks

in India, 27 are PSBs (including eight in the State Bank of

India group). There are 31 private sector banks, of which eightare of recent vintage (for example, ICICI Bank and HDFC

Bank); and there are 42 foreign banks with branches in India.

The RBI's decision is seen as enabling foreign banks to extend


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their operations, primarily by acquiring other banks. Initially,foreign banks are likely to acquire control of private banks.

The PSBs are likely to be put on the block after their balance

sheets have been cleaned up and the workforce trimmed tomeet the demands of their foreign suitors. The private banks

are a mixed bag. Many of the older private banks cater to

niche markets. S.L. Shetty, Director, Economic and PoliticalWeekly Research Foundation, points that some of these banks

have played a useful role because they have adapted to localand regional requirements. "It is likely that a few of the

international banks are knocking at the doors of these banks,"he says. However, he reckons that takeovers may not be easy.

The promoters of especially the older private banks, who havea long tradition of banking and linkages with local

communities, may resist takeover bids. Shetty contends thatthe government's "negative attitude" to small savings and

provident funds may pave the way for foreign financial

institutions to extend their operations to include pension

funds. Prof. T.T. Ram Mohan, who specialises in banking atthe Indian Institute of Management, Ahmadabad, says that

the banking industry is likely to undergo consolidation. Someof the private banks are already wooing foreign banks. Vysya

Bank, whose promoters have sold 20 per cent stake to Bank

Brussels Lambert (BBL), part of the Dutch ING Group, is

likely to offer a controlling stake to the foreign bank. Vysya

Bank already has a tie-up with ING to sell insurance productsin India.Since the International Finance Corporation,promoted by the World Bank, has a 10 per cent stake in the

bank, BBL can increase its stake by only 19 per cent becauseof the 49 per cent ceiling on foreign stake in Indian banks.

However, banking industry sources say that even if BBL has a

stake of 39 per cent, it can control the private bank

effectively. In fact there have been suggestions that the RBI


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"clarification" came mainly because BBL decided to test theregulatory regime governing FDI in banking after acquiring

20 per cent of the stake in Vysya Bank. There is speculation

that foreign banks may be interested in picking up a stake inCenturion Bank, Bank of Punjab, IndusInd bank and the

Global Trust Bank. Since the RBI announcement, shares

of some of these banks have been volatile in anticipation ofbuying interest from foreign banks. The lifting of the cap on

FIIs is likely to increase further the volatility in bank stocks.The banking sector norms, a key feature of the financial sector

reforms since the 1990s, threaten to prise open Indian banks,particularly the PSBs. For instance, the norms for capital

adequacy ratio (CAR) require that capital be infused in theseinstitutions. If banks do not have the prescribed capital base,

the only course open to them is to make an offer in themarket. However, this will lower the promoters' stake in these

banks. This mechanism has already lowered the government

stake in several public sector banks. For instance, Bank of

India's recent decision to "return" equity capital to the tune ofRs.150 crores to the government will lower the government

stake from 75 per cent to 67 per cent. The RBI has directed 11old private sector banks having equity base of between Rs.6

crores and Rs.49 crores to increase their capital base. These

banks are now under threat. Prof. Ram Mohan believes that

the foreign banks, which generally have an asset base of

between Rs.3,000 crores and Rs.12,000 crores, "may preferfaster growth by acquisition rather than through organicexpansion". He calculates that such acquisitions will overnight

imply a growth rate of 50 per cent for some of the prominentforeign banks. Besides, it provides them an established client

base and access to low-cost funds, particularly in a regime in

which deposit rates are glued to low levels, barely above the

rate of inflation. Some of the old private banks have the


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advantage of working over a long period in geographicalniches in rural and semi-urban areas. And foreign banks, in

their pursuit of growth, would prefer taking over such banks

to the more risky option of establishing themselves in newareas. Incidentally, this has also been the route pursued by

some of the new generation private banks like ICICI Bank and

HDFC Bank. While ICICI Bank took over Bank of Madura,HDFC Bank bought Times Bank. The current market

capitalisation (market value of a company's stock) of the 11private banks whose shares are listed is about Rs.1,600 crores.

The under-capitalised old private banks are clearly vulnerable.A 49 per cent stake in each of these banks can be bought by

foreign banks at a total cost of less than Rs.800 crores. A 49per cent stake in Dhanalakshmi Bank would cost Rs.13 crores;

in Nedungadi Bank Rs. 21 crores; in Lakshmi Vilas BankRs.28 crores; in United Western Bank Rs.32 crores; in City

Union Bank Rs.27 crores; and in Federal Bank Rs.73 crores.

Although the CARs of many of these banks are higher than

the RBI-stipulated norm, Prof. Ram Mohan argues that thisalone does not offer them protection.

9.Conclusion

The anomalous situation needs to be rectified. It is capable ofbeing resolved by modifying this policy document presently at

a draft stage. A clarificatory amendment to the draft policy

document in favour of the domestic investment is called for.

For FDI, the draft policy document is unambiguous. But

under Clause 2 (f) of the Press Note 32 of 2004, Guidelines

for setting up a wholly-owned subsidiary of a foreign bank isto issue separately by RBI. This introduces an element of

uncertainty in this respect also. It makes little sense to invite

comments and suggestions to the FDI related part of the draft


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policy when it is not even a full draft. Over the last decade,the fast pace of economic growth and progressive policy

liberalisation has made India an attractive destination for

worlds investments. United States have been at the forefrontof investments in India strengthening the partnership between

the two largest democracies in the world.

10.References

1.www.rbi.org.in

2.www.indusedu.org (International Journal of Research in

Management,Economics and Commerce)

Documents

FdI in Banking Sector in India