Role of Foreign Banks

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The Role of Foreign Banks in India
Foreign Banks operating in India are banks of other countries having their branches in India. At present there are about sixteen such banks having a total of about 180 branches in most of the big cities of the country. These Foreign Banks have a flourishing business and earn large profits. Indian Banks also have their branches in other countries, and they, too, are doing well.

Some economists are of the view that Foreign Banks should, not be allowed to operate in the country. But permission to such banks to operate in the country is unavoidable on the basis of reciprocity. This is certainly the view of the Reserve Bank of India, and it is justified by the success of Indian Banks operating in foreign countries.

Indian Banks have been rapidly expanding their overseas operations. Between 1975 and 1978, the number of offices of Indian Banks in foreign countries had increased by 48, from 77 to 125. This is in contrast with the stagnant number of Foreign Bank Offices in India. As a consequence, the growth of business of Indian Banks has been phenomenal as compared to that of the branches of their foreign counterparts in India. Deposits and advances of Indian Banks abroad have increased by 14% and 18% respectively, whereas the corresponding figures of Foreign Banks in India are 28% and 30% respectively. In terms of remittances of the present banks also, Indian banks are ahead. In 1976, they remitted Rs. 90 millions to India, where their counterparts remitted Rs. 70 millions only.

Indian Banks abroad are involved in many new banking activities. State Bank of India and Bank of Baroda, the two leaders in the sphere, are raising foreign currency funds, for both private and public sector concerns. In addition, these banks are funding many joint ventures in South East Asia. For instance, SBI is funding joint ventures in Singapore, Indonesia and Malaysia. The Bank has arranged finances to the tune of $ 750 million dollars.

We can see clearly that Indian Banks are indeed generating a lot of business overseas. At present they are operating in as many as 26 countries of which only eight countries have their own bank branches in India. Thus, the question of reciprocity does indeed have relevance, because, if we want to seek profitable opportunities overseas, we must be prepared to open our own gates also. In short, the operation of foreign banks in India is fully justified. It is in our national interest.

--------------------------------------------------------------------------------------------------------------------- Foreign banks play a relatively minor role in the Indian economy, as reiterated in Global Development Finance 2008, an annual publication from the World Bank that was released last week. This fact is relevant right now for two reasons. First, the Reserve Bank of India is likely to open up the Indian banking market further in April, or around 300 days from now. Two, the global credit crisis has shown how problems in Western banks can reverberate through financial systems in emerging markets. The advantages of greater foreign bank participation are clear: They tend to increase the efficiency of the local banking system, bring in more sophisticated financial services and have the ability to nurse weak banks back to health. That underlies the case for greater freedom for foreign banks. The credit crisis has brought the dark underside into focus. Global banks that boast of the best practices in the way they allocate capital and manage risks are also prone to make elementary mistakes, partly because of the imperfect nature of regulations and partly because bankers have perverse incentives to be loose with other people’s money. So, which way should policy swing? It is tempting to conclude that India is better off with its current policy of caution about the entry of foreign banks. But that would be a mistake. While we agree that banking markets tend to be prone to crises and,...
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