Foreign Banks – Indian Economy Notes

Foreign banks are registered and have their headquarters in another country, but they have branches in our country. A foreign bank branch is a type of foreign bank that is required to follow both the home and host country's regulations. Banks frequently open a foreign branch in order to better serve their multinational corporate clients.

Currently, there are 45 foreign banks operating in the form of foreign bank branches and 34 foreign banks operating in the form of representative offices.

Foreign Banks – Historical Perspective

• Today's foreign banks in India, such as Standard Chartered Bank and HSBC, have their roots in financing Asia's growing trade with the rest of the world.
• The Chartered Bank of India, Standard Chartered Bank's forerunner, opened an office in Calcutta in 1858 after receiving a Royal Charter from Queen Victoria.
• The Hongkong and Shanghai Banking Corporation (HSBC), which had branches in pre-independence India, took a significant 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 that would form BNP Paribas, began operations in Calcutta in 1860, and represented the French as the country's second largest banking presence after the British.
• Major American banks were prohibited by law from operating outside the United States at the time. The relaxation of these laws paved the way for American banks to expand globally in the early twentieth century.
• Citibank, or The National City Bank of New York as it was known at the time, entered India in 1902, and JP Morgan, which had ambitions to enter India as early as 1902, did so in 1922 through an ownership stake in the Calcutta merchant banking firm Andrew Yule and Co. Ltd.

What are Foreign Banks?

• These banks are registered and have their headquarters in another country, but they have branches in our country.
• Foreign banks account for less than 1% of the country's total branch network. They do, however, account for approximately 7% of total banking sector assets and approximately 11% of profits.
• The RBI's policy toward the presence of foreign banks in India is founded on two fundamental principles:
  • Reciprocity
  • Single mode of presence
• By reciprocity, it is meant that foreign banks are given near-national treatment in India only if their home country allows Indian banks to open branches freely.
• By single mode of presence, the RBI means that in India, either the branch mode or a wholly owned subsidiary (WOS) mode is permitted.
• Other policy guidelines issued by the RBI to foreign banks include the following:
  • Banks must adhere to the Basel Standard's mandated Capital Adequacy requirements.
  • They must meet the INR 500 crore minimum capital requirement.
  • They should keep the CRAR at a minimum of 10%.
  • Foreign banks' priority sector targets in India are 40%.
  • Furthermore, foreign banks must adhere to other norms issued by the Reserve Bank of India.
• Foreign banks may also open representative offices in India. Representative offices have fewer authority than branches or agencies.
  • Foreign banks frequently open representative officesas a first step toward establishing a presence in the country.
  • These offices act as a point of contact between the parent bank and its clients and correspondent banks in India.
  • They can build relationships with potential clients, but they cannot conduct banking transactions on their own.
• Foreign bank branches are also more likely to operate in areas where regulatory barriers to entry are lower.
• Currently, there are 45 foreign banks operating in the form of foreign bank branches and 34 foreign banks operating in the form of representative offices.

Foreign Banks in India - Branch/WOS form of presence

Foreign banks in India – Representative Office form of presence

Foreign Banks – Advantages

• Foreign banks have a greater ability to invest in moresectorsthan domestic banks in the host country because they have a larger economic scale and risk diversification techniques.
• Foreign banks enter host countries with new technology that contributes to the country's technological development.
• The entry of foreign banks has a positive impact on the regulatory and supervisory regimes of the host country because they will be able to learn about the regulatory and supervisory regimes of foreign banks' home countries.
• The presence of a foreign bank in a developing country also contributes to the transmission of best practices in the banking industry.
• The entry of a foreign bank increases competition, which has an automatic positive impact on the development of the country's banking sector.
• Over the years, foreign banks have made significant contributions to the banking sector by bringing capital and global best practices, as well as grooming talent.

Foreign Banks – Disadvantages

• While foreign banks bring a large amount of capital to the host country, they also bring the potential to transfer financial shocks from their home country.
• Sinceforeign banks are profit-driven, they focus primarily on large cities with high business potential,and in such a case, foreign banks would be ineffective in achieving government policy to make banking services available throughout the country.
• During an economic or political crisis, foreign bank branches may face various challenges.
• They will be harmed by events in that foreign country because they are operating there during a crisis.
• A crisis-stricken government is more likely to use its limited resources to assist domestic banks. Foreign banks may be forced to bail out their own subsidiaries.

Conclusion

Banks are heavily regulated and closely monitored by the Reserve Bank of India (RBI). The first and most important reason for such close supervision is that a bank does not own the money deposited with it; rather, the bank serves as the custodian of such deposits. Even a minor breach of depositor trust or confidence in the banking and financial system can have disastrous consequences. For the same reasons, foreign banks' entry is subject to reasonable restrictions and the approval of competent authorities.