Impact of foreign banks on Indian economy

Abstract

Banks play an important role in the building of an economy. Not only do they provide employment to large number of people, they also provide financing to `large number of businesses especially the small and medium scale enterprises (SMEs). Hence the role of banks is heightened, considering the fact that unlike developed countries, it is the SMEs that drive the economy of the developing countries. Till 1991, the Indian economy and financial systems was heavily regulated. The regulation required every business to obtain licences to start operation. Bank nationalization happened in 1969 and 1980 and the main purpose of the public sector bank was to finance government deficit and serve priority sector such as agriculture. The report has discussed the attitude of RBI towards foreign banks and the various committee RBI has set up and discussion paper that it has published relating to this issue. It has also discussed the response from foreign banks vis-à-vis the regulatory changes that have taken place. The report has also discussed the impact of foreign banks in Emerging economies and developing countries with respect to the Flow of funds and real credit growth post and pre 2008 financial crisis. The impact of foreign banks on Indian economy has been observed by looking at three main parameters namely the rural presence measured by percentage of banks in rural areas, priority sector lending, return on assets and technological development that has been brought about. There has been a clear focus by foreign banks on urban and semi-urban areas (accounting to 98% of their branches) and also lending mainly to the exports- imports sector in order to satisfy the priority sector lending requirements. The data that has been collected over the years brings out the same fact. The report also has detailed analysis of two foreign banks: HSBC bank and BCCI bank. HSBC bank has clearly focused on presence in rural areas through its sustainability projects that are implemented across the country. HSBC bank also is known for the technology transfer that it has brought in to the country. The analysis about BCCI bank focuses on merger of SBICI bank with BCCI bank and its latest amalgamation to SBI. In all report concludes with a brief summary of some positives about foreign banks and also a few negatives regarding their impact on economy.