Banking Sector :Banking Sector An Overview of Foreign Investment In Indian Banking Sector. FDI FII ECB


Foreign Direct Investment :Foreign Direct Investment Important source of inflows Increasing being sought as a vehicle for technology flows Means of attaining competitive efficiency by creating a meaningful network of global interconnections. The last two years have been exceptional years for Foreign Direct Investment (FDI). The overall banking industry's business has grown to US$ 1172 billion by the end of March 2007.


Slide 3:FDI in the banking sector FDI limit in private sector banks to 74 per cent under automatic root including investment by foreign investment in India. India has improved its rank from fifteenth (in 2002) to become the second most likely FDI destination after China. THE LAST few weeks have seen substantial activity in the banking sector. Government has decided to encourage foreign banks wishing to enter India in order to strengthen the banking sector. Limit for FDI in public sector banks In the case of nationalised banks as well as SBI and its associate banks. the overall limit of 20 per cent


SECTORS ATTRACTING HIGHEST FDI INFLOWS Amount Rupees in crores :SECTORS ATTRACTING HIGHEST FDI INFLOWS Amount Rupees in crores


Between April and December 2007, there has been US$ 32 billion of portfolio investments in the banking stocks :Reason for it : Growing Banking Sector Return on Investment Economic condition Profitability Citibank, who has suffered so heavily in the subprime crisis, is still banking on India. This shows that potential of the Indian banks are very much real. GOVT. Policies Between April and December 2007, there has been US$ 32 billion of portfolio investments in the banking stocks


FDI, FII allowed in Indian Banking Sector :FDI, FII allowed in Indian Banking Sector FDI and Portfolio Investment in nationalised banks are subject to overall statutory limits of 20 percent. The increase in foreign investment limit in the Private banking sector to 74% includes portfolio investment [ie, foreign institutional investors (FIIs) and non-resident Indians (NRIs)], IPOs, private placement, ADRs or GDRs and acquisition of shares from the existing shareholders. 3 types of FDI: Wholly Owned Subsidiary Joint Venture Acquisition


Slide 7:FII or PORTFOLIO INVESTMENT If the investor has only a sort of a property interest in investing the capital in buying equities ,bonds or other securities abroad, it refers to as FII or portfolio investments. That is, in case of PI, the investor uses his capital in order to get a return but has not got much control over the use of capital. Therefore , PI is considered to be an indirect form of investment.


Slide 8:FDI flows have exceeded portfolio flows in the 5 years while Portfolio flows have exceeded FDI in the remaining 8 years. As a proportion to FDI flows to emerging market and developing countries, FDI flows to India have shown a consistent rise from 1.6% in 1998 to 3.7% in 2005'1


Emerging markets, especially India have come under FII hammer over the past few months as reflected in the manner in which they have been trimming their holdings in India Inc. In the banking sector in particular, :Rreason For: Tight global liquidity environment transmitting into the local market and slowing economic growth, which would impact the growth prospects of the banking sector. Erosion in share prices The GDP growth is likely to be lower this year Uncertainty in global financial market Indian banking system as a whole is not exposed directly to any US subprime credit, but has been affected to some extent by the global re-pricing of assets and the liquidity crunch for structured products . Emerging markets, especially India have come under FII hammer over the past few months as reflected in the manner in which they have been trimming their holdings in India Inc. In the banking sector in particular,


We can see here growth every year in FII, A large part of it invested in Banking Sector :We can see here growth every year in FII, A large part of it invested in Banking Sector


Factors affecting foreign investment :Factors affecting foreign investment Rate of interest Speculation Profitability Costs of production Economic conditions Government policies Political factors


ROUTE FOR FOREIGN DIRECT INVESTMENT in BANKING :ROUTE FOR FOREIGN DIRECT INVESTMENT in BANKING Automatic Route - No prior Government approval is required if the investment to be made falls within the sectoral caps specified for the listed activities. Only filings have to be made by the Indian company with the concerned regional office of the Reserve Bank of India (“RBI”) within 30 days of receipt of remittance and within 30 days of issuance of shares


Slide 14:Foreign banks have brought latest technology and latest banking practices in India. They have helped made Indian Banking system more competitive and efficient. Government has come up with a road map for expansion of foreign banks in India. The road map has two phases. During the first phase between March 2005 and March 2009, foreign banks may establish a presence by way of setting up a wholly owned subsidiary (WOS) or conversion of existing branches into a WOS. The second phase will commence in April 2009 after a review of the experience gained after due consultation with all the stake holders in the banking sector. The review would examine issues concerning extension of national treatment to WOS, dilution of stake and permitting mergers/acquisitions of any private sector banks in India by a foreign bank.


Progress of Commercial and Private Banks :Progress of Commercial and Private Banks The commercial banks have made tremendous progress with respect to : Its profitability, Capital adequacy, Risk management . The private banks too are playing an important role in the Indian banking industry. The private banks are growing at a rate of 35% per annum. As a result the share of the private banks has increased to nearly 16%.


What are Foreign Investors looking for? :What are Foreign Investors looking for? Good projects Demand Potential Revenue Potential Stable Policy Environment/Political Commitment Optimal Risk Allocation Framework


Why FDI, FII is needed in Banking Sector? :Why FDI, FII is needed in Banking Sector? 1) Technical Developments in the Foreign Markets 2) Problem of Inefficient Management 3) Non-performing Assets 4) Financial Instability 5) Poor Capitalization 6) Changing Financial Market Conditions


Prospect of Indian Banking Sector: :Prospect of Indian Banking Sector: Private sector banks have the potential to attract $16.3 billion of foreign direct investment (FDI) if foreign banks are allowed to buy up to 74 per cent of equity in these banks which has been given now. Another $2.3 billion of foreign portfolio investment is possible if the government raises foreign institutional investors (FII) ceiling to 30 per cent in public sector banks, according to a study by ICICI Securities (I-Sec) on bank ownership reforms2008


Slide 20:The private banks are growing at a rate of 35% per annum. As a result the share of the private banks has increased to nearly 16%.The limit of FDI + FII has also been increased from 49 % to 74% in the private banks. The overall banking industry's business has grown to US$ 1172 billion by the end of March 2007. New Foreign Banks coming to India.


The ECB policy focuses on three aspects: :The ECB policy focuses on three aspects: Eligibility criteria for accessing external markets. The total volume of borrowings to be raised and their maturity structure. End use of the funds raised. Include bank loans, suppliers' and buyers' credits, fixed and floating rate bonds (without convertibility) and borrowings from private sector windows of multilateral Financial Institutions such as International Finance Corporation.


External commercial borrowings touch $3 b in Feb :External commercial borrowings touch $3 b in Feb