FOREIGN BANKS IN INDIA
Saturday, 18th August, 2007
FOREIGN BANKS IN INDIA
Foreign Banks operating in India are banks of other countries having their branches in India. At present, there are about 50 foreign banks having a total of more than 250 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.
Foreign Banks were established in India quite early during the British rule and have been around for over a century now. As a result of globalisation of Indian economy, the number of foreign banks is likely to increase in the coming years. The foreign banks are also called foreign exchange banks, as they also finance the foreign trade of India.
Of late, a sort of competition has developed between various foreign banks and Indian commercial banks because the foreign banks, which previously dealt only in big money, have now also started performing the day-to-day banking functions, which were previously performed only by the Indian commercial banks. These day-to-day banking functions include acceptance of deposits, creation of credit by fixing lending rate in accordance with the RBI policies, etc. ANZ Grindlay Bank has its presence in a number of Indian cities with as many as 56 branches in the country. The Standard and Chartered Banks has 24 branches while Hong Kong Bank has 21 branches in various Indian cities. One peculiar feature of these foreign banks is that they concentrate on the corporate clientele and have specialised in areas of international banking.
There is no denying the fact that the foreign banks are playing a pivotal role in Indian economy. They help the economy by financing the import and export trade of the country. They also receive deposits from the public as fixed deposits and current account deposits. They also give roans and advances to the traders and businessmen. They also issue bank drafts, TTs cheques and Mail Transfers to the customers.
Further, they also help in internal trade, by giving credit facilities to their customers for the procurement of raw materials for transporting goods between manufacturing and trade centres in the country. In this way, they are offering a stiff competition to the Indian commercial banks.
Foreign banks have opened up several options for the developing countries to attain economic growth. The achievement of this objective has been made possible partly by foreign exchanges transactions. Like every other facility, the foreign banks also create both advantages and disadvantages. The advantage is that the foreign banks help finance exports and imports under letter of credit, the medium of D.A. Bills and D.P. Bills, and by promoting internal trade. In this way they help in earning foreign exchange. As the foreign banks have branches in almost all the other countries of the world, they are able to maintain business links with all those countries for various purposes. Thus, through these banks, Indian businessmen are also able to maintain their contacts with their counterparts in other countries. So far as standard of performance is concerned foreign banks are considered to be more efficient and more competent than their Indian counterparts. However, one great disadvantage of foreign banks is that their attitude towards Indian businessmen is discriminatory. These banks have more or less monopolized the financing of India’s external trade through which they earn large sums of money as commission or brokerage, etc. They also extend preferential treatment to foreign institutions in the matter of grant of loans and advances. They also charge excessive commission for the currencies of those countries which do not have their own bank branches in India. The Indian capital invested in these banks is misused in the sense that their capital, instead of being utilised for the benefit of Indian business, is used for the purchase of shares and bonds from road, thus diminishing the profit share of India. Foreign banks are required to obtain license from the Reserve Bank of India but the RBI has failed to exercise an effective control over these banks, with the result that these banks have acquired large amounts of money in the London money market, thus rendering the Indian money market ineffective.
Under the provisions of Banking Companies Act of 1949, foreign banks are required to keep in India as least 75 per cent of their Demand and Time Deposits in such assets as eligible Bills or Promissory Notes. However, the problem for us is how to regulate the functioning of these banks so as to make them function more effectively in the interest of the development needs of the country. There is urgent need to make both structural as well as functional adjustments so as to fulfill the needs of the dynamic Indian economy. The guidelines issued by the Reserve Bank in this behalf lay down that all banks should be required to have a reasonable minimum reserve in the form of cash or deposits; the number of financial institutions should be kept as small as possible, effective control should be maintained over the foreign banks; foreign banks should be compelled to sell their shares in India and the like. In terms of efficiency, proficiency, profitability, productivity, etc., the top nine banks in the country are the foreign banks. These banks may be having a small number of branches, but they enjoy a sizeable presence in the non-fund business and are earning huge profits. In the days to come, the presence of foreign banks and new private banks in the country is sure to increase. During 1995-96, the deposits with the foreign banks increased by 10.2 per cent and their aggregate profit increased from Rs. 632 crore in 1994-95 to Rs. 757 crore in 1995-96 and it has increase by around 200% in 2005-06. Thus foreign banks also playa significant role in the economic growth of the country. Capital formation is the foremost requirement of economic growth and foreign banks promote capital formation by encouraging savings and investments. They help the entrepreneurs to increase their productive capacity.
It will thus be seen that the foreign banks have played a significant role in the growth of Indian economy during the post-Independence period. But at the same time, it is also a fact that in conditions of political and financial instability, especially in developing countries including India, foreign banks, with their vast resources and political influence abroad, can hold the national currencies and economies to ransom. The banking scams of the Harshad Mehta fame could not have been made possible without the manipulation of foreign banks operating within the country. The Indian commercial banks have neither the resources nor the freehand to finance such gigantic and scandalous transactions and deals. In the East-Asian countries also, when the foreign banks found the national economies in a state of confusion, they played havoc with the economies of the host countries by suddenly withdrawing huge amounts of money from the national economies thereby engineering economic disasters in those countries.
Foreign banks are very helpful in the development of India. It is necessary and desirable for us to maintain and encourage foreign banks in India to promote investments and finance international trade. But we should utilize their loans properly in the productive way as after economic development we have to repay their loans in time. It is equally important to exercise strict vigilance and control over their activities lest they should create another Indonesia or Thailand in India.
