IMPACT OF FDI ON PRODUCTIVITY & PROFITABILITY OF

BANKING INDUSTRY, INDIA

*Arpan Mahapatra
Research Scholar,
Sri Sri University, Odisha

**Dr.Pushpalata Mahapatra
Associate Professor, Management
Sri Sri University, Odisha

ABSTRACT: Today Indian Banks are as technology savvy as their counter parts in developed
countries. The banking sector plays an important role in the economic development of a country.
It supplies the support –money that supports and fosters growth in all the industries. FDI is a tool
for economic growth through its strengthening of domestic capital, productivity and
employment. FDI also plays a vital role in the up gradation of technology, skills and managerial
capabilities in various sectors of the economy. 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 inter-
connections. This paper discusses the FDI Equity inflows in Service Sector in India and also
highlights the top countries which are investing in the Service Sector in the form of FDI. This
paper analyzes the FDI inflows and impacts in Banking Sector from January, 2000 to December,
2017. The impact of FDI on Indian banks is measured on the performance of two factors, i.e., it’s
productivity and profitability. The productivity of all banks, in turn, is measured by Profit per
Employee (PPE) & Business per Employee (BPE). The profitability of Indian banks is measured
by FDI inflows, Net Profits, Net Interest Income, Return on Assets (ROA), and Return on Equity
(ROE).
Key Words: FDI equity inflows, productivity & profitability of Banking Sector, Indian Economy

I. INTRODUCTION

Foreign Direct Investment has become sin-quo-non for the economic development of both
developed and developing countries. The Foreign Direct Investment means “cross border
investment made by a resident in one economy in an enterprise in another economy, with the
objective of establishing a lasting interest in the investee economy. FDI is also described as
“investment into the business of a country by a company in another country”. Indian banking has
come a long way since India adopted reforms path and LPG sponsored FDI model in 1991.
Today, Indian banks are as technology savvy as their counterparts in developed countries. As a
result of liberalization, privatization and globalization model, Indian banks have entered
international market and global banks have become part of Indian market. Furthermore, FDI in
the banking sector ensures to provide the benefits of technology transfer, better risk
management, financial stability and better capitalization, integration into global economy,
knowledge transfer and increasing competition.

II. REVIEW OF LITERATURE

 Singh Arjun and Singh Narender (2011), says that Foreign Direct Investment is a tool for
economic growth by its power of local capital, power of creating productivity and
employment. FDI also plays a very important role in the polishing and upgrade of skills,
technology and capabilities of management in various sectors of the economy. They also
analysis that since 1991 FDI inflows in service sectors of India and relating the growth of
the service sector FDI in creation of employment in conditions of skilled and unskilled

 Singh J. (2010), “Economic Reforms and Foreign Direct Investment in India: Policy,
Trends and Patterns”, in the context of increasing competition among nations and sub
national entities to attract Foreign Direct Investment (FDI), the present paper tries to find
out the rising trends and patterns of FDI inflows into India in attraction to various policy
measures announced by the Indian government since mid-1980 and after. The
experiential analysis tends to suggest that the FDI inflows, in general, show an increasing
trend during the post-reform period. Furthermore, country-wise comparison of FDI
inflow also indicates that FDI inflow into India has increased considerably in comparison
to other developing economies in the recent years. Thus, the study indicates that the FDI
inflows into India responded positively to the liberalization measures introduced in the
early 1990s

 C.P.Chandrasekhar and Jayati Ghosh (2002) have pointed out that an important
objective of promoting FDI has been to promote efficiency in production and increase
exports. However, any increase in the equity stake of the foreign investors in existing
joint ventures or purchase of a share of equity by them in domestic firms would not
automatically change the orientation of the firm. That is, “the aim of such FDI investors
would be to benefit from the profit earned in the Indian market”.

 Laghane B.K (2011) empirically examined the impact of FDI model on borrower
account, bank branches, time deposits and profitability of domestic and foreign banks. In
the study, he suggested that FDI must be considered in poverty reduction, unemployment
reduction and primary education and priority sectors of banking. Finally, he concluded
that the LPG sponsored FDI model’s impact on foreign banks and Indian bank’s
profitability is positive. The impact of FDI on Indian banking sector is negative except
profitability.

 Kunal Badade & Medha katkar (2011) have studied that India has sought to increase
inflows of FDI with a much liberal policy since 1991 after decade cautious attitude. The
1990’s have witnessed a sustained rise in annual inflows to India. They rightly pointed
out that the present scenario looks more closely at the paradigm of exponential growth
and laments that India’s role as an engine for global growth has been limited by the still
relatively closed nature of its economy.
  Supriyachopra, Satvinder Kaur etl. (2014) in his paper “Analysis of FDI Inflows and
Out flows in India” tried to find out the Determinants of FDI Inflows, the pattern and
Direction of it and factors responsible for lesser FDI Inflow in India. She focused that for
achieving a higher level of economic development and technological up gradation the
FDI should allowed to India. She found that Market size, cost factors, real exchange
rates, rate of inflation etc. are the determinants of FDI inflows. She pointed out that there
is an increasing trend of FDI in a developing country like India, where the scare resources
like capital usually required for economic development.

III. Objectives of the Study:

 To analyze the Foreign Direct Investment inflows in Banking Sector.

 To analyze the impact of FDI on performance of Indian banking industry with respect to
productivity and profitability.

IV. Research Methodology:

This is a Descriptive as well as Analytical type of research in nature. This study is purely based
on secondary data. The secondary data was collected from various sources such as Journals,
Articles, RBI publications, Ministry of Finance publications, Department of Industrial Policy&
Promotion publications, SIA news letter, Online database of FDI and Newspapers etc. Data was
analyzed by using statistical tools such as Averages, Percentages, Tables, Charts and Diagrams
wherever necessary.

VI. Data Analysis

 Foreign Direct Investment inflows in Banking Sector

Table -1: Cumulative FDI Equity Inflows received in Indian Economy

Sl. Nos. Financial Year (April – March) Amount of FDI Inflows %age growth over previous
year (in terms of US $)
FINANCIAL YEARS 2000-01 TO 2018-19 In Rs In US$ Million
Crores
1. 2000-01 10,733 2,463 -
2. 2001-02 18,654 4,065 ( + ) 65 %
3. 2002-03 12,871 2,705 ( - ) 33 %
4. 2003-04 10,064 2,188 ( - ) 19 %
5. 2004-05 14,653 3,219 ( + ) 47 %
6. 2005-06 24,584 5,540 ( + ) 72 %
7. 2006-07 56,390 12,492 (+ )125 %
8. 2007-08 98,642 24,575 ( + ) 97 %
9. 2008-09 142,829 31,396 ( + ) 28 %
10. 2009-10 123,120 25,834 ( - ) 18 %
11. 2010-11 97,320 21,383 ( - ) 17 %
12. 2011-12 ^ 165,146 35,121 (+) 64 %
13. 2012-13 121,907 22,423 (-) 36 %
14. 2013-14 147,518 24,299 (+) 8%
15. 2014-15 # 181,682 29,737 (+) 22%
16. 2015-16 # 262,322 40,001 (+) 35%
17. 2016-17# 291,696 43,478 (+) 9%
18. 2017-18# 288,889 44,857 (+) 3%

Chart-1: Cumulative FDI Equity Inflows received in Indian Economy

Table – 2: Cumulative FDI Inflows in Services Sector

YEARS Financial Equity Inflows ( Non – Financial Equity Total Service Sector Equity
Rs Crore) Inflows ( Rs Crore) Inflows ( Rs Crore)
2000-2010 47,923.80 29,316.24 118,700.95
2010-2012 13,731.32 21,254.66 49,395.79
2012-2015 30,398.31 20,693.25 72,563.70
2015-2016 12,339.35 20,939.20 68,405.19
2016-2017 9,245.99 9,510.48 37,412.46
TOTAL in % 113,638.77 101,713.83 346,478.09

Chart – 2
Cumulative FDI Inflows in Services Sector
 Table -3
Sub Sectors of FDI Equity Inflows in Services Sector (From January, 2000 to December, 2017)

Sub Sectors Amount of FDI equity inflows %age with total FDI inflows
Rs crore US$ million
Financial 113,638.77 21,851.72 5.93
Banking Services 26,525.45 5,131.65 1.39
Insurance 56,686.46 9,521.86 2.58
Non-FinancialServices/Business Services 101,713.83 18,411.13 4.99
Outsourcing 9,650.42 1,862.49 0.51
Research & Development (R&D) 5,153.07 909.30 0.25
Courier 5,317.33 952.15 0.26
Technical Testing And Analysis 1,791.47 312.29 0.08
Commodity Exchange 1,855.44 451.79 0.12
Other Services 24,145.86 4,713.37 1.28
Total of above 346,478.09 64,117.76 17.40

Chart - 3
Sub Sectors of FDI Equity Inflows in Services Sector (From January, 2000 to December, 2017)

Table – 4: Cumulative FDI Inflows in Banking & Chart-4

YEARS Financial Equity Banking Equity

Inflows Inflows

2000-2010 47923.8 13,471.60

2010-2012 13731.32 398.68

2012-2015 30398.31 3,304.68

2015-2016 1239.35 7,874.03

2016-2017 9245.99 1,476.46

TOTAL in % 113638.77 26,525.45

  Impact of FDI on Productivity of Indian Banks

Table – 5: Productivity Public Sector Banks

PPE(Rs Millions) Employment No. of
YEARS BPE(Rs Millions) Average Average Generation Average Branches
2005 39.45160714 0.248821429 25550.28571 65585
2006 45.00689286 0.245703704 26031.35714 66198
2007 49.68235714 0.310892857 26583.32143 69062
2008 62.38685714 0.390714286 26743.03571 72358
2009 77.9687037 0.468333333 27394.2963 76588
2010 90.29911111 0.55 27093.48148 80396
2011 107.9437308 0.674346154 30712.88462 86074
2012 120.3011154 0.6645 29781.88462 92101
2013 134.4938846 0.633538462 29042.38462 99871
2014 136.7591111 0.479 30758.77778 108639
2015 144.9788148 0.431111111 31276.07407 113515
2016 146.3930741 -0.160888889 31706.33333 117354
2017 147.7818519 -0.457259259 29528.6 118781

Business Per employee(Chart-5.1) Employment Generation(Chart-5.2)

160 40000
140
120 30000
100 20000
80 Series1
Series1
60 10000
40
0
20
1 3 5 7 9 11 13
0
1 2 3 4 5 6 7 8 9 10 11 12 13

Profit Per Employee(Chart-5.3) No. of Branches(Chart-5.4)

0.8
140000
0.6
120000
0.4
100000
0.2
Series1 80000
0 60000 Series1
1 2 3 4 5 6 7 8 9 10 11 12 13
-0.2 40000
-0.4 20000

-0.6 0
1 3 5 7 9 11 13
 Table – 6: Productivity Private Sector Banks
YEARS BPE(Rs Millions) PPE(Rs Millions) Employment No. of
Average Average Generation Average Branches
2005 41.46265517 0.123259259 3186.862069 7076
2006 41.383 0.255535714 4092.777778 7029
2007 49.5768 0.263583333 5561.56 7891
2008 58.34847826 0.45926087 7219.227273 9195
2009 63.65668182 0.522681818 8015.409091 10253
2010 71.77727273 0.5095 8296.363636 11459
2011 83.207 0.680428571 8948.238095 13062
2012 84.5678 0.74255 12414.2 15203
2013 92.27965 0.85375 13653.5 18012
2014 92.89125 0.758 14748.4 19714
2015 99.4402 0.7476 15502.15 24368
2016 111.726619 1.252380952 17847.33333 26760
2017 117.1674478 0.807047619 19212.42857 28771

Business per Millions(Chart-6.1) Profit per Millions(Chart6.2)

1.5
150
1
100
Series1
0.5 50 Series1

0 0
1 2 3 4 5 6 7 8 9 10 11 12 13 1 2 3 4 5 6 7 8 9 10111213

Employment Generation(Chart-6.3)
35000
30000 No. of Branches(Chart 6.4)
25000 40000
20000 30000
15000 Series1
10000 20000
Series1
5000 10000
0
0
1 3 5 7 9 11 13
1 2 3 4 5 6 7 8 9 10111213
 Table – 7: Profitability of Public Sector Banks
YEARS ROA% Average ROE% Average NET INTREST INCOME (In NET PROFIT (In Millions)
Millions) Average Average
2005 0.9075 16.26313646 18428.79771 708.4468571
2006 0.474642857 1.606967536 20489.368 1352.437619
2007 0.936428571 17.0222485 22223.21964 1628.898095
2008 0.977857143 17.80685868 22918.71957 1275.984222
2009 0.976666667 18.1441853 29496.86415 1421.100579
2010 0.975925926 18.40412011 34830.55389 2365.599111
2011 0.978076923 17.51750919 51915.95754 3087.199353
2012 0.852307692 14.88730088 60054.95788 3515.085059
2013 0.733846154 12.57908665 64208.7665 3582.392
2014 0.444814815 7.111639615 67810.57389 3151.203222
2015 0.43 6.689532704 72299.58474 3565.590944
2016 -0.125185185 -3.503655441 73537.45974 -7047.390273
2017 -0.474444444 -8.958873249 74228.93033 -21468.8759

Chart-7.1: ROA% & ROE%

20

15

10

5 Series1

0 Series2
1 2 3 4 5 6 7 8 9 10 11 12 13
-5

-10

-15
Net Interest Income & Net Profit(Chart-7.2)

80000

60000

40000
Series1
20000
Series2
0
1 2 3 4 5 6 7 8 9 10 11 12 13
-20000

-40000
 Private Sector Banks
NET INTREST INCOME
YEARS ROA% Average ROE% Average NET PROFIT (In
(In Millions) Average
Millions) Average
2005 0.087857143 -1.702989517 3445.584276 309.2437143
2006 0.835 14.65033379 4898.275964 917.5944444
2007 0.0576 0.0915454 6684.02324 1785.782043
2008 1.107826087 14.07138113 9780.910826 3779.472619
2009 1.097727273 13.23004673 12779.07373 5051.7384
2010 0.944090909 10.82802836 14363.99723 7149.327684
2011 1.145714286 13.31188643 18839.99533 10944.65683
2012 1.245 14.227 23885.5831 16731.13312
2013 1.292 15.2174421 29676.6037 23242.83824
2014 1.112 11.900471 35151.21155 29492.78756
2015 1.0755 10.5438891 40948.01415 38226.69444
2016 0.964761905 8.257559098 46732.52976 44714.62895
2017 1.044285714 9.714088711 54363 55751.56758
ROA% & ROE%
18
16
14
12
10
8 Series1
6 Series2
4
2
0
-2 1 2 3 4 5 6 7 8 9 10 11 12 13

-4
Net Interest Income & Net Profit

60000

40000
Series1
20000 Series2

0
1 2 3 4 5 6 7 8 9 10 11 12 13
  Analysis & Interpretation
As per the analysis done the for time roll mentioned by the analysis done

1. FDI Equity inflows in Banking Sector have been increasing year by year in an
increasing trend. But as compared to other service sectors the financial equity inflows
are becoming more beneficial.
2. FDI is also sparking to make the business per employee and profit per employee
higher time to time for all commercial banks of private and public sector. The
deviation marked is very low also for the same.
3. This has put a high positive impact on the employment generations with number of
branches of banks. The private sector commercial banks are faster as compared to
public banks. It shows a good competitive market.
4. The profitability of all commercial banks is shown here by parameters like ROA%,
ROE%, and net interest income and in their net profits. Analysis has shown here that
return on assets and return on equity are increasing in public sector and private sector
banks. But private sector banks are again growing more as compared to public sector
banks. It shows a good sign towards banks for limiting their liabilities and increasing
their market popularity.
5. The net interest income and net profit is clearly showing that the current situation of
private sector banks is actually rising very fast. But the public sector banks are slow
in this category.

VII. CONCLUSION

FDI liberalization period shows significant positive impact on the productivity of banks through
the impact on profit per employee and Business per employee which are the productivity
parameters. However the same cannot be fully said about the profitability measures. The study
shows significant positive impact on Return on Assets (ROA) and Total profit (at 10 per cent
level of significance) of bank but negative significant impact on the Total Net Profit and Income
of banks. So it can be said that the FDI liberalization policy period did not have any significant
impact on Net Profits or Total Income of Banks. This means that except ROA, other profitability
parameters are not showing statistically significant impact of the liberalized FDI policy. Overall
observation shows that productivity has gone up in the FDI liberalization period and profitability
of Indian banks have grown in the period in case of some important indicators/parameters, while
there is no impact /negative impact in other indicators. So Profitability shows mixed results in
the post FDI Liberalization period.

VIII. REFERENCES
1. Garg R (2013) “Role of Foreign Direct Investment in the Indian Banking Sector”,
International Journal of Research in Finance and Marketing, Vol. 3, Issue. 2, pp. 63-68.
2. Jaiswal Preeti (2016) “ FDI Reforms in Banking Sector”, Anveshana’s International Journal of
Research in Regional Studies, Law, Social Sciences, Journalism and Management Practices, Vol.
1, Issue. 8, pp. 150-154.
3. Reserve Bank of India, Report on Trend and Progress of Banking in India 2014-15, RBI
Mumbai.
4. Reserve Bank of India, Report on Trend and Progress of Banking in India 2013‐14, RBI
Mumbai.
5. Reserve Bank of India, RBI Monthly Bulletin, various issues, RBI Mumbai
6. Laghane K.B (2007), “Foreign Direct Investment & Indian Banking Sector”, Recent Advances
in Management, Marketing, Finances, ISBN: 978-960-474-168-7.
7. Dr.Kunal Badade & Ms. Medha Katkar (2011), “Foreign Direct Investment in Banking
Sector-A Boon in Disguise”,
8. Sirari Singh Arjun and Bohra Singh Narendra (2011), “Foreign Direct Investment in Indian
Service Sector –A Study of Post Liberalization”, International Journal of Economic Review,
March –April, 2011, pp. 10-18.
9. Sabitha. G(2011), “The Role of FDI in Indian Banking Sector: Country wise Analysis”,
ASM’s International E-Journal of Ongoing Research in Management and IT, e-ISSN-2320-0065.
10. Ramakrishna. H(2011), “Foreign Direct Investment In India and China: Some Lessons for
India”, Indian Journal of Finance, December, 2011, pp. 4-12.
10. Chandrasekhar. C.P (2012), “Thirst for Foreign Capital”, Economic & Political Weekly, Vol.
XLVII, No. 4, pp. 1015.
11. Abdul Bari. Mohd.(2012), “Foreign Direct Investment and Economic Growth In Bangladesh
and India: A Comparative Study”, South Asian Journal of Management, Vol. 20, No. 1, Jan-
March, 2012, pp. 8-37.
12. Pradeep Kr (2011), “FDI in India and It’s Impact- A Critical Evaluation”, VSRD
International Journal of Business & Management Research, Vol. 1(3), 2011, pp. 185-196.
13. Richa Garg (2013), “Role of Foreign Direct Investment in Indian Banking Sector”,
International Journal of Research in Finance & Marketing, Vol. 3, Issue2, March, 2013, (ISSN-
2231-5985), pp. 63-68.
14. Steven Poelhekko (2011), “Home Bank Intermediation of Foreign Direct Investment”
CESIFO Working Paper No.3490, Category 8, June, 2011, pp. 1-36.
15. UNCTAD World Investment Report, 2012.
Websites
16. http://www.dipp.nic.in
17. http://www.sianewsletter.in
18. http://www.rbi.nic.in
19. http://www.allbankingsolutions.com
20. http://www.dipp.nic.in/fdi-statistics
21. http://www.unctad.nic.in/worldinvestmentreport