INCON13-FIN-048

The Role of FDI in Indian Banking Sector: Country wise Analysis

Dr. G. Sabitha, Professor & Head School of Business Management Anurag Group of Institutions, Hyderabad.

ABSTRACT FDI inflows are essentially long-term in nature and are primarily driven by growth prospects of the Indian economy and confidence of international investors in India as an attractive long-term. Foreign Direct Investment as seen as an important source of non-debt inflows, and is increasing being sought as a vehicle for technology flows and as a means of attaining competitive efficiency by creating a meaningful network of global interconnections. FDI plays a vital role in the economy because it does not only provide opportunities to host countries to enhance their economic development but also opens new vistas to home countries to optimize their earnings by employing their ideal resources. As the banks are expanding their area of operation, there is a need to change their strategies exert competitive pressures and demonstration effect on local institutions, often including them to reassess business practices, including local lending practices as the whole banking sector is crying for a strategic policy for risk management. This paper discusses the role of FDI in Indian banking sector, explores the country wise FDI inflow in India. Key words: FDI, Indian Economy, Banking Sector. 1. Introduction Foreign Direct Investment as seen as an important source of non-debt inflows, and is increasing being sought as a vehicle for technology flows and as a means of attaining competitive efficiency by creating a meaningful network of global interconnections. FDI plays a vital role in the economy because it does not only provide opportunities to host countries to enhance their economic development but also opens new vistas to home countries to optimize their earnings by employing their ideal resources. India has sought to increase inflows of FDI with a much liberal policy since 1991 after decade's cautious attitude. The 1990's have witnessed a sustained rise in annual inflows to India. Basically, opening of the economy after 1991 does not live much choice but to attract the foreign investment, as an engine of dynamic growth especially in view of fast paced movement of the world forward Liberalization, Privatization and Globalization. 2. History of FDI in India The FDI inflows in India during mid 1948 were Rs, 256 corers. It is almost double in March 1964 and increases further to Rs. 916 corers. India received a cumulative FDI inflow of Rs. 5,384.7 corers during mid 1948 to march 1990 as compared to Rs.1, 41,864 corers during August 1991 to march 2010. There was a steady flow of FDI in India after its independence. But there is a sharp rise in FDI inflows from 1998 onwards. U.K. the prominent investor
1

INCON13-FIN-048

during the pre and post independent era stands nowhere today as it holds a share of 6.1 percent of the total FDI inflows to India. In recent years Services sector puts the economy on a proper gliding path by contributing 55 percent to GDP. There is a continuously increasing trend of FDI inflows in services sector with a steep rise in the inflows from 2005 onwards. Services sector received an investment of 19.2 billion from 1991 to 2008. Among the sub-sectors of services sector, financial services attract 10.2 percent of total FDI inflows followed by banking services (2.22 percent), insurance (1.6 percent) and non- financial services (1.62 percent). Table: FDI Inflow and Flow of India (Amount in US million $) Year India Inflow India Out flow 2,007 25,350 17,234 2008 42,546 19397 2,009 35,649 15,929 2,010 24,640 14,626 Source: Ministry of Finance, Government of India 3. FDI in Indian Banking In the private banking sector of India, FDI is allowed up to a maximum limit of 74 % of the paid-up capital of the bank. On the other hand, Foreign Direct Investment and Portfolio Investment in the public or nationalized banks in India are subjected to a limit of 20 % in totality. This ceiling is also applicable to the investments in the State Bank of India and its associate banks. FDI limits in the banking sector of India were increased with the aim to bring in more FDI inflows in the country along with the incorporation of advanced technology and management practices. The objective was to make the Indian banking sector more competitive. The Reserve Bank of India governs the investment matters in the banking sector. The global banking industry weathered turbulent times in 2007 and 2008. The impact of the economic slowdown on the banking and insurance services sector in India has so far been moderate. The Indian financial system has very little exposure to foreign assets and their derivative products and it is this feature that is likely to prove an antidote to the financial sector ills that have plagued many other emerging economies. Owing to at least a decade of reforms, the banking sector in India has seen remarkable improvement in financial health and in providing jobs. Even in the wake of a severe economic downturn, the banking sector continues to be a very dominant sector of the financial system. The aggregate foreign investment in a private bank from all sources is allowed to reach as much as 74% under Indian regulations. The insurance sector has also been fast developing with substantial revenue growth in the non-life insurance market. However, despite its enormous population, India only accounts for 3.4% of the Asia- Pacific general insurance markets value. The cap on foreign companies equity stakes in insurance joint ventures is 26%, but is expected to rise to 49%.
2

INCON13-FIN-048

The third quarter of 2008 saw the beginning of negative net capital inflows into the country. Notwithstanding this bleak scenario, the investment pattern with regard to foreign direct investment (FDI) and inflows from non-resident Indians remains resilient and FDI inflows into the country grew by an impressive 145% between fiscal 2006 and 2007 and by a respectable 46.6% between fiscal 2007 and 2008. However, owing to the economic downturn, the growth in FDI inflows in fiscal 2009 slowed to 18.6% from the previous fiscal. 4. Nature and Source of Data The present study is of analytical in nature and makes use of secondary data. The relevant secondary data are collected from various publications of Government of India, Ministry of Finance, Department of Economic Affairs, Economic Division, India, Reserve bank of India reports and World Investment Report Published by UNCTAD etc. 5. Objectives The main objective of the study is to analyze the FDI inflows in Indian Insurance Sector with special reference to Country wise inflows. The other objectives are: To analyze the FDI flows as to identify country wise approvals of FDI inflows to India. To explore the Country wise distribution of FDI inflows in order to point out the dominating company, that has attracted the major share to rank them. To find out the co relation between FDI and Economic Development. 8. Analysis of Country-wise Inflows of FDI It is proposed to analyze the company-wise share of FDI in India from 2007-2011. The data relevant to the analysis is presented in Table 1. Table 1: Percentage flow of FDI in various countries 200620082009Cumulative % Flow of Source/Industry 07 2007-08 09 10 Flow FDI Total FDI 9,307 19,425 22,697 22,461 73,890 100.00 Country-wise Inflows Mauritius 3,780 9,518 10,165 9,801 33,264 45.02 Singapore 582 2,827 3,360 2,218 8,987 12.16 U.S.A 706 950 1,236 2,212 5,104 6.91 Cyprus 58 570 1,211 1,623 3,462 4.69 Japan 80 457 266 971 1,774 2.40 Netherlands 559 601 682 804 2,646 3.58 United Kingdom 1,809 508 690 643 3,650 4.94 Germany 116 486 611 602 1,815 2.46 UAE 215 226 234 373 1,048 1.42 France 100 136 437 283 956 1.29 Switzerland 57 192 135 96 480 0.65 Hong Kong 60 106 155 137 458 0.62 Spain 62 48 363 125 598 0.81
3

INCON13-FIN-048

South Korea Luxembourg Others

68 1,055

86 15 2,699

95 23 3,035

159 40 2,376

408 78 9,165

0.55 0.11 12.40

Source: RBI annual report 2010-11 The above table explains the FDI flow in different countries from 2006-07 to 2009-10. Cumulative flow of each country has taken and its percentage of flow too. Total FDI from the year 2006-07 to 2007-08 is increased almost 110%. From the year 2007-08 to 2008-2009 is very less i.e. only 10% increased. From the year 2008-09 to 2009-10 the FDI inflow is declined. During the period, flow of FDI is huge in Mauritius with 45% and less by Luxembourg with .11%. Luxembourg started getting FDI inflow from the year 2007-08. Rank of the countries based on its FDI in flow is given in the below table 3. Fig 1: Inflow of FDI in countries from 2006-07 to 2009-10.

Table 3: Ranks of the countries based on its inflow Source/Industry Mauritius Singapore U.S.A United Kingdom Cyprus Netherlands Germany Japan UAE Cumulative Flow 33,264 8,987 5,104 3,650 3,462 2,646 1,815 1,774 1,048 % Flow of FDI 45.02 12.16 6.91 4.94 4.69 3.58 2.46 2.40 1.42 Rank 1 2 3 4 5 6 7 8 9
4

INCON13-FIN-048

France Spain Switzerland Hong Kong South Korea Luxembourg

956 598 480 458 408 78

1.29 0.81 0.65 0.62 0.55 0.11

10 11 12 13 14 15

Mauritius occupied with first rank based on its cumulative flow of consecutive 4 years. i.e. it has got inflow of $ 33264 US billion and followed by Singapore, USA, UK and last rank, 15 is occupied by the country Luxembourg and proceeded by South Korea, Hong Kong, Switzerland. FDI inflows projected at $35 billion in 2011/12 against the level of $23.4 billion in 2010-11 FDI and Economic Development FDI is considered to be the life blood and an important vehicle of for economic development as far as the developing nations are concerned. The important effect of FDI is its contribution to the growth of the economy. FDI has an important impact on countrys trade balance, increasing labour standards and skills, transfer of technology and innovative ideas, skills and the general business climate. FDI also provides opportunity for technological transfer and up gradation, access to global managerial skills and practices, optimal utilization of human capabilities and natural resources, making industry internationally competitiveness, opening up export markets, access to international quality goods and services and augmenting employment opportunities. The reliance on FDI is rising heavily due to its al round contributions to the growth of the economy. FDI to developing countries since 1990s is the leading source of external financing. The rise in FDI volume is accompanied by marked change in its composition. Year 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 FDI 4029 6130 5035 4322 6051 8961 22826 34835 37838 37763 GDP 1925017 2097726 2261415 2538171 2877706 3275670 3790063 4303654 3635496 3962691
5

INCON13-FIN-048

Source: Department of Industrial Policy and Promotion, GOI, Ministry of Commerce and Industry Correlation Value FDI (Life Insurance) and GDP The value of Karl Pearson co relation(r) is found to be +.87. It means that there is high degree positive correlation between the FDI (Life insurance) and Economic Development.

FDI Issues and Policy Recommendation These companies need more capital to grow and meet their solvency needs excess of assets over liabilities, maintained as a prudential measure in the interest of policyholders. Raising the FDI cap is in order, but incremental reform is not. The limit should be raised to 51% to let foreign promoters acquire a majority stake in their Indian joint ventures.
References: 1. Agosin, M. and R. Mayer (2000). Foreign investment in Developing Countries: Does it Crowd in Domestic Investment? Discussion Paper No. 146, UNCTAD, Geneva. 2. Borensztein, E., J. De Gregorio and J. Lee (1995). How does Foreign Direct Investment Affect Growth, Journal of International Economics, 45, pp. 115-135.

3. Foreign Direct Investment Policy (2010), department of Industrial policy and promotion,
Ministry of Commerce and Industry, Government of India.