Project On Foreign Banks

Foreign banks in India
CHAPTER-1
INTRODUCTION OF BANKING SECTOR
1
CHAPTER-1
INTRODUCTION OF BANKING SECTOR
1. 1 what is Bank?
A bank is a profit seeking Business firm dealing in money and credit. It

is a financial institution dealing in the money in the sense, that it accepts deposits of
money from the public to keep them in its custody for safety. So, also, it also deals in
credit, i.e. it creates credit by making advances out of funds received as deposits to
needy people. It, thus, functions as mobilize of savings in the economy. Commercial
banks are the main important sources of institutional credit in the money market.
A bank is therefore, like a reservoir into which flow the savings, the
idle surplus money of households, and from which loans are given on interest to
businessmen and others who need them for investment or productive uses.
A bank is an important institution of the money market as it gives short-term loans to its
customers.
2
1. 2
INTRODUCTION
TO
BANKING
SECTOR
The Indian banking system has a large geographic and functional

coverage. Presently the total asset size of the Indian banking sector is US$ 270 billion
while the total deposits amount to US$ 220 Billion with a branch network exceeding
66,000 branches across the country. Revenues of the banking sector have grown at 6 per
cent CAGR over the past few years to reach a size of US$ 15 billion. While commercial
banks cater to short and medium term financing requirements, national level and state
level financial institutions meet longer-term requirements. This distinction is getting
blurred with commercial banks extending project finance. The total disbursements of
the financial institutions in 2001 were US$ 14 billion.
Banking today has transformed into a technology intensive and customer friendly model
with a focus on convenience. The sector is set to witness the emergence of financial
supermarkets in the form of universal banks providing a suite of services from retail to
corporate banking and industrial lending to investment banking. While corporate
banking is clearly the largest segment, personal financial services is the highest growth
segment.
The recent favorable government policies for enhancing limits of foreign investments to
49 per cent among other key initiatives have encouraged such activity. Larger banks
will be able to mobilize sufficient capital to finance asset expansion and fund.
3
1.3. The Changing Face
of the Economy
In 1991 the Central Government embarked on a program of economic

liberalization. This included, among others removal of governmental control,
rationalization of regulation, attracting Foreign Investment. The government has also
identified the infrastructure sector (Power, Telecommunications, and Transportation) as
a key target and is taking steps to attract investments in the area.
Encouraged by economic developments over the past decade, the government is

committed score a GDP growth rate 9.5% by the year 2008. The fact is that the Indian
economy is growing faster than ever before. Between 2000-2001 and 2005-06, India's
GDP at 2005-06 has recorded a trend growth rate of 5.4 per cent.
4
Shift towards Service Sector
Previously India was primarily known as an agricultural economy,

but the face of the economy is changing rapidly. The share of the Secondary and
Tertiary are increasing rapidly. The services sector contributes about 49% to total GDP
and has grown by 6.5% during FY02, compared to 4.8% in FY01. Its share increased
from 43.7% in FY91 to almost 50% now. Quarterly growth rates accelerated from 5.7 to
6.4 to 6.9 and 7.0% over four quarters of FY02. This growth was backed by 6.2%
growth in trade, hotel, transport and communication and 7.8% growth in financing,
insurance and real estate sector.
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1. 3. KEY POINTS OF BANKING SECTOR
Liquidity is controlled by the Reserve Bank of India

Supply
(RBI).
India is a growing economy and demand for credit
Demand
is high though it could be cyclical.
Licensing requirement, investment in technology
Barriers to entry
and branch network.
High during periods of tight liquidity. Trade unions

Bargaining power of suppliers in public sector banks can be anti reforms. Depositors may
invest elsewhere if interest rates fall.
For good creditworthy borrowers bargaining power

Bargaining power of customers
is high due to the availability of large number of banks
High- There are public sector banks, private sector

Competition and foreign banks along with non banking finance
companies competing in similar business lines
6
1.4. Fact Files of Banks in India
The first, the oldest, the largest, the biggest, get all such types of information’s about
Banking in India is described in this section.
The first bank in India to be given an ISO Canara Bank

certificate
The first bank in Northern India to get ISO 9002 Punjab and Sind
certification for their selected branches Bank
The first Indian bank to have been started solely

Punjab National Bank
with Indian capital
The first among the private sector banks in Kerala South Indian Bank
to become a scheduled bank in 1946 under the RBI Act
India's oldest, largest and most successful

commercial bank, offering the widest possible range of State Bank of India
domestic, international and NRI products and services,
through its vast network in India and overseas
The Federal Bank

India's second largest private sector bank and is now
Limited
the largest scheduled commercial bank in India
Imperial Bank of
Bank which started as private shareholders banks,
India
mostly Europeans shareholders
7
Bank of India,
The first Indian bank to open a branch outside India
founded in 1906 in
in London in 1946 and the first to open a branch in
Mumbai
continental Europe at Paris in 1974
The oldest Public Sector Bank in India having

Allahabad Bank
branches all over India and serving the customers for
the last 132 Years
The first Indian commercial bank which was wholly Central Bank of India
owned and managed by Indians
CHAPTER – 2
8
KINDS OF BANKS
9
CHAPTER – 2
KINDS OF BANKS
2.1.Central Bank: -
The central bank of country is that institution which is vested with certain
prerogative powers by an Act of parliament to regulate the monetary system in the
country. It occupies a central position in the monetary and banking structure of country.
It acts as a leader of the money market in supervising, controlling and regulating the
activities of the all commercial banks and other financial institutions.
Central Banking has become an entirely separate branch of banking as it is

district from the function of other banks. It is very difficult to give an accurate
definition of central bank as the functions performed by the central bank are
multifarious. Many authors have tried to define a central bank briefly, but these
definitions are not widely accepted as every author has emphasized one function or the
other.
2. Commercial Banks: -
As the name indicates the primary objectives of the commercial banks is to
earn profit. A commercial bank receives money from the depositors and lends to trade,
industry and commerce. When a bank borrows money from the depositors through
deposit schemes, allow interest on such deposit. Similarly, when the banker lend money
to the industry or business by way of overdraft, cash credit loans and advances or by
any other means, he charge interest on such borrowing rate is his profit. The interest
rates are governed by the Reserve Bank of India direction.
10
The commercial banker allows the customer to draw cheques against their credit
balances and honors such cheques and when they are presented in the bank. In addition
to the primary functions of receiving deposits and lending to others, he undertakes a
wide variety of functions to assist their customers by performing agency services and
general utility services.
3. CO-OPERATIVE BANKS: -
India is an agricultural country. About 70% of four country’s population

depends upon agricultural for their livelihood. The Indian farmer is poor, illiterate and
heavily indebted. Non- availability of adequate and timely agricultural credit results in
low productivity and makes agricultural more capital intensive. As there is no agency to
supply credit, farmers are the ready victims of the money lenders and indigenous
bankers who charges exorbitant rates of interest. In order to protect them from
economic evils moral degeneration, the co-operative movement India was encouraged
The co-operative movements in India began with the passing of the Co-
operative Credit Societies Act, of 1904. The Act provides for the formation of credit
societies, emphasizing on rural credit. Ultimately liability was the rural societies. These
credit societies slowly paved the way in the formation of co-operatives banks.
4. INDUSTRIAL BANKS: -
The economic development of country depends on the developments of its

industries. The advanced countries like United Kingdom, United of States America,
Japan and Germany are the Pioneer in the field of industrial development. Some
countries like Japan and Germany started banks exclusively to meet of industries.
The industrial bank provides long-term loans and supply fixed capital to
industrial concern by subscribing the shares and debentures floated by the companies.
As they have financed the share capital, the industrial bank plays an important role in
the management and administration of the companies. The industrial banks have acted
11
as underwriters in the flotation of new industrial concern. These banks also arrange
medium-term loans.
Followings are the different types of banks existing in India:
1. Nationalized Banks in India
Banking System in India is

dominated by nationalized banks. The nationalization of banks in India took place in
1969 by Mrs. Indira Gandhi the then prime minister. The major objective behind
nationalization was to spread banking infrastructure in rural areas and make available
cheap finance to Indian farmers. Fourteen banks were nationalized in 1969. These
Banks were:
Before 1969, State Bank of India (SBI) was the only public sector bank in India. SBI
was nationalized in 1955 under the SBI Act of 1955.
The second phase of nationalization of Indian banks took place in the year 1980. Seven
more banks were nationalized with deposits over 200 crores.
List of Public Sector Banks in India is as follows:
• Allahabad Bank
• Andhra Bank
• Bank of Baroda
• Bank of India
• Bank of Maharashtra
• Canara Bank
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• Central Bank of India

• Corporation Bank
• Dena Bank
• Indian Bank
• Indian Overseas Bank
• Oriental Bank of Commerce
• Punjab and Sind Bank
• Punjab National Bank
• State Bank of Bikaner & Jaipur
• State Bank of Hyderabad
• State Bank of India (SBI)
• State Bank of Indore
• State Bank of Mysore
• State Bank of Patiala
• State Bank of Saurashtra
• State Bank of Travancore
• Syndicate Bank
• UCO Bank
• Union Bank of India
• United Bank of India
• Vijaya Bank
2. Foreign Banks in India
13
Foreign banks have brought latest technology and latest banking practices in India.
They have helped made Indian Banking system more competitive and efficient.
Government has come up with a road map for expansion of foreign banks in India.
The road map has two phases. During the first phase between March 2005 and March
2009, foreign banks may establish a presence by way of setting up a wholly owned
subsidiary (WOS) or conversion of existing branches into a WOS. The second phase
will commence in April 2009 after a review of the experience gained after due
consultation with all the stake holders in the banking sector. The review would examine
issues concerning extension of national treatment to Wholly Owned Subsidiary, dilution
of stake and permitting mergers / acquisitions of any private sector banks in India by a
foreign bank.
Major foreign banks in India are:
• ABN-AMRO Bank
• Abu Dhabi Commercial Bank Ltd.
• American Express Bank Ltd
• BNP Paribas
• Citibank
• Standard Chartered Bank
• DBS Bank Ltd
• Deutsche Bank
• HSBC Ltd
3. Private Banks in India
All the banks in India were earlier private banks. They

were founded in the pre-independence era to cater to the
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banking needs of the people. But after nationalisation of banks in 1969 public sector
banks came to occupy dominant role in the banking structure. Private sector banking in
India received a filip in 1994 when Reserve Bank of India encouraged setting up of
private banks as part of its policy of liberalisation of the Indian Banking Industry.
Housing Development Finance Corporation Limited (HDFC) was amongst the first to
receive an 'in principle' approval from the Reserve Bank of India (RBI) to set up a bank
in the private sector.
Private banks have played a major role in the development of Indian banking industry.
They have made banking more efficient and customer friendly. In the process they have
jolted public sector banks out of complacency and forced them to become nore
competitive.
Major Private Banks in India are:
• Bank of Rajasthan
• Bharat Overseas Bank
• Catholic Syrian Bank
• Centurion Bank of Punjab
• Dhanalakshmi Bank
• Federal Bank
• HDFC Bank
• ICICI Bank
• IDBI Bank
• IndusInd Bank
• ING Vysya Bank
• Jammu & Kashmir Bank
• Karnataka Bank
• Karur Vysya Bank
• Kotak Mahindra Bank
• SBI Commercial and International Bank
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• South Indian Bank

• United Western Bank
• UTI Bank
• YES Bank
CHAPTER – 3
CURRENT SITUATION OF BANKING IN INDIA
16
CHAPTER – 3
CURRENT SITUATION OF BANKING IN INDIA
Currently (2009), banking in India is generally fairly mature in terms of

supply, product range and reach-even though reach in rural India still remains a
challenge for the private sector and foreign banks. In terms of quality of assets and
17
capital adequacy, Indian banks are considered to have clean, strong and transparent
balance sheets relative to other banks in comparable economies in its region. The
Reserve Bank of India is an autonomous body, with minimal pressure from the
government. The stated policy of the Bank on the Indian Rupee is to manage volatility
but without any fixed exchange rate-and this has mostly been true.
With the growth in the Indian economy expected to be strong for quite
some time-especially in its services sector-the demand for banking services, especially
retail banking, mortgages and investment services are expected to be strong. One may
also expect Mergers &Acquisitions, takeovers, and asset sales.
In March 2006, the Reserve Bank of India allowed Warburg Pincus to

increase its stake in Kotak Mahindra Bank (a private sector bank) to 10%. This is the
first time an investor has been allowed to hold more than 5% in a private sector bank
since the RBI announced norms in 2005 that any stake exceeding 5% in the private
sector banks would need to be vetted by them.
The Banks in India have flourished not just in numbers but also in their
services, products and client base. They have succeeded in reaching out to Rural India
through the Mobile ATM's, special rural branches and specialized finance options for
the farmers, rural women and the Small-Scale Industries (SSI's). The mortgage rates and
interest rates are slashed to attract the masses to the banking facilities.
In the urban cities like the country capital New Delhi, trade capital Mumbai, IT capitals
- Bangalore and Hyderabad, NCR's prime cities Gurgaon, Noida, Mumbai's sister city
Pune and the metro cities of Kolkata and Chennai, all the major Banks have multiple
branches. Personalized services like Special Bank Accounts to cater to individual needs,
Mobile and Internet Banking, doorstep banking and multi city or international banking
have attracted customers in exponential multiplication.
The banks offer plenty mortgage options with most pocket-friendly interest rates on
loans - home loans for the housing needs, personal loan, auto loans for private and
18
commercial vehicles, education loans for educational pursuits, corporate loans for
business and other projects and loans against property and securities. The money
deposited is safe and secure and offers prospects of growth to the customers.
Investment Opportunities by Banks come in the form of Deposits - fixed deposits and
recurring deposits and mutual funds and bonds. Special services to NRI's and senior
citizens pensions and special savings accounts are also a regular with most banks.
The Banking Solutions itself employee a large number of people and provide numerous
job opportunities to many people. Finance, Banking and Customer Care are some of
most preferred profile in bank jobs. The policies differ from bank to bank but the core
remains the same - to provide the most convenient and safe banking options to the
people.
Currently, India has 88 scheduled commercial banks (SCBs) - 27 public sector banks
(that is with the Government of India holding a stake) after merger of New Bank of
India in Punjab National Bank in 1993, 29 private banks (these do not have government
stake; they may be publicly listed and traded on stock exchanges) and 31 foreign banks.
They have a combined network of over 53,000 branches and 17,000 ATMs. According
to a report by ICRA Limited, a rating agency, the public sector banks hold over 75
percent of total assets of the banking industry, with the private and foreign banks
holding 18.2% and 6.5% respectively.
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CHAPTER-4
FOREIGN BANKS
20
CHAPTER-4
FOREIGN BANKS
1 INTRODUCTION:-
FOREIGN BANK:-
Banks which are foreign in origin having their head offices outside India are
called Exchange banks. They are also Known as Foreign banks.
Foreign banks operating in India are all multinational having a widespread
banking business in many countries of the world?
Exchange banks/foreign banks have been doing business in India since 1870.
The exchange banks have exerted tremendous influence on the development of Indian
Joint stock banking and the growth of organized money market in India. They are
primarily meant to provide finance for India’s foreign trade. They also financed
included trade of the country.
At the time of bank nationalization in 1969, the entry of foreign banks in Indian
was banned. The Ban was however lifted in 1980.
The Bank of Tokyo, the chartered Banks, the first National City Bank Of New
York, the Grind lays Bank, The Lloyds Bank, The Mercantile Bank In India, etc. are
some of the prominent foreign banks which are presently operating in India.
21
At the end-March 1987, there were 21 foreign banks with 136 branches in India.
During 1960-80, the total assets of foreign banks have increased over five times from
RS.411.4 crores to Rs.2, 261.0 crores. In 1980, their assets growth rate was 22.5 per
cent as against 4 percent in 1965.Initially these banks were started merely to finance
India’s foreign trade. For quite sometime, they enjoyed a considerable monopoly in the
field of foreign trade finance because the imperial bank of India did enter the field,
other Indian Joint stock banks no adequate means and capacity to enter and compete
with the exchange banks.
Indian banks like the Alliance Bank of Simla and Tata Industrial Bank, however
did make some efforts in this direction, but ultimately failed. In recent years, however,
the situation has greatly changed.
With the enactment of the banking companies Act, 1949 and the exercise of
effective control through this Act by reserve Bank of India, many of the defects in the
functioning of foreign exchange bank have been eliminated. Besides, since without
approval of the Reserve bank, no exchange bank can open a branch in India, the
interests of Indian banks have been adequately protected.
The act also requires exchange banks to keep a minimum paid-up capital and
reserve of Rs.20 lakhs. It also enjoins upon exchange banks to maintain their assets in
such a way that their liabilities do not exceed 75 percent of their assets. This restriction
puts a check on the fight of capital abroad.
The Banking Companies (enactment) Act, 1962, further requires that exchange
banks keep an additional deposit of not less than 20 percent of their profits every year
with the reserve Bank of India to advise them on such matters as granting of loans etc.
AS A result of these restrictions, there has been a marked improvement in the
functioning of exchange bank in India.
22
Since Indian banks have also started participating actively and extensively in the
field of financing foreign trade, the monopoly of exchange banks in this area has been
broken and as a result, their important fields of financing of foreign trade has very much
diminished..
In recent days, it has been suggested in some quarters that the exchange bank be
nationalized but many others feel that such a step is neither an expedient nor feasible in
view of the international repercussion that such a measure may trigger off.
IN this context, it must also be remembered that Indian banks as yet do not have
an adequate trained staff, expertise or skill handling exchange business and compete
with foreign exchange bank.
However, it would be advisable to allow the exchange bank to continue their,
operations within the framework of the restrictions imposed on them by the reserve
bank in such a manner that they do not encroach upon the field allocated to Indian
banks.
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CHAPTER-5
FUNCTIONS OF FOREIGN BANK:
24
CHAPTER-5
FUNCTIONS OF FOREIGN BANK:
The functions of foreign bank are as follows:
1. FINANCING FOREIGN TRADE: -

They primarily finance India’s foreign trade. They undertake two-way
operations.
a) Financing of exports and imports of India; and
b) Financing of movement of goods from and to Indian ports/to or from the
distributing or collecting centers in the interiors parts of the country. In
this context, they discount or purchase foreign bills
2. BANKING BUSINESS: -
The exchange bank conducts all types of banking business. They accept
deposit from the public, grant loans, discount trade bills and provide remittance
facilities. And thus compete with Indian banks.
3. FINANCING INLAND TRADE: -
They also finance trade in many up country centers, as they opened a number if
branches in the main ports and trading centers of the country.
4. AGENCIES SERVICES:-
25
Like other commercial banks, foreign exchange bank render several agencies services to
their customers.
5. MERCHANT BANKING: -
Some exchange bank has opened merchant banking division to provide

banking services. For e.g.: - The National and Grind lays banks first started
merchant banking services in 1967, followed by the first National City bank in
1970.
The exchange banks have been doing a profitable business in the

country. Their financial ratio. I.e. Profit-to Income ratio is more than double that
of the Indian commercial bank. Their high profitability may be attributed to their
non-fund business, such as commission, brokerage, etc. Further they mostly
finance multinational corporations, and their returns are higher. Moreover, they
minute their risk in lending also.
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CHAPTER-6
BUSINESS OPPORTUNITIES IN INDIA
27
CHAPTER-6
BUSINESS OPPORTUNITIES IN INDIA
India is the largest democracy in the world. In terms of

population it ranks second in the world. The policy of liberalization pursued by the
government after 1991, has transformed the prospects for the Indian economy. Today
India is one of the favored destinations for global investments.
The government has come up with several incentives like

import of capital goods at concessional customs duty (under condition it fulfills certain
export obligations),natural gas, petrochemicals, power, services and
telecommunications have witnessed tremendous expansion.
FACTS ABOUT INDIA:-
There are several factors which create favorable business opportunities

in India.
• India has a huge middle class, with improved purchasing power, due to the high
growth in the economy. Increasingly Indians have become more brand conscious,
resulting in increased growth for the retail sector.
• Presence of vibrant trade links with South Asian Association For Regional
Cooperation (SAARC) nations like Bangladesh, Bhutan, Maldives, Nepal, Pakistan and
Sri Lanka.
• Improved infrastructure available for business ventures. India's competitive
advantage in Information Technology can be used to enhance productivity in Industries.
• Availability of huge pool of technical manpower has heralded the expansion of
manufacturing base across different industries.
• India is rich in natural resources and self sufficient in agriculture.
• A well established banking system consisting of public and private banks and
other financial institutions.
28
• The capital markets in India are one of the fastest growing markets in the world,
attracting huge investments from FII's.
• The economic reforms have brought in policy changes in terms of freedom of
entry, investment, location, usage of technology, import and export. These changes
have created an investment friendly environment.
• India is a well established democratic country, with free and fair judiciary.
In today’s “Global village”, scouting around for business is no problem.

In fact, with the touch of a button we could be in contact with someone in another
country and within a few minutes we could even close a deal. But then, such quick
fixes may be an elusive dream if we are dealing with a new client, or an unknown
country.
The fact remains that every businessman has his eyes trained on India
for; after all, it is the, fifth largest market in the world in terms of purchasing power
parity. India is one of the world's most exciting emerging markets with extensive
infrastructure for doing business. India has a good legal system which is reputed to
be among the world's most independent and efficient ones.
If, India is today in the news, it is because; it is a nation on the move.
India has dealt with its balance of payments crisis, its external debt problems, etc.,
and with help from the IMF and World Bank, has left these problems far behind.
This is like a clarion call to do business/invest in India.
The Uruguay round of GATT has improved the infrastructure for cross-
border and world trade. Further, India, in its outward looking- quest has liberalized
and opened its economy to the world - challenging industrialists as it were to set up
joint ventures or wholly owned subsidiaries in the field of power generation,
infrastructure development, telecommunications, etc. Procedures for import of
capital goods, approval for setting up industries, repatriation of income, etc. have
been liberalized with the effect that investment has flooded into India and Indian
companies have been able to raise loans at very fine rates in the Euro-dollar market.
The above development and the fillip given to exports have been
responsible for India now having foreign exchange reserves of more than 252 bn.
dollars as on Oct 31,2008. India is now looking for technology and for equipment
to upgrade its existing manufacturing facilities to meet exacting world standards. It
has also been shopping around for power generation equipment and
telecommunication networks in a big way in order to speed up the process of
industrialization.
CHAPTER-7
29
GUIDELINES FOR PRESENCE OF FOREIGN BANKS IN

INDIA
CHAPTER-7
30
GUIDELINES FOR PRESENCE OF FOREIGN BANKS IN

INDIA
The guidelines for setting up of wholly owned subsidiary by foreign

banks and conversion of existing branches of foreign banks into wholly owned
subsidiary are given below:-
ELIGIBILITY OF THE PARENT BANK:-
1. Foreign banks applying to the RBI for setting up a WOS in India must satisfy RBI
that they are subject to adequate prudential supervision in their home country regulator;
the RBI will have regard to the Basel standards.
2. The setting up of a wholly-owned banking subsidiary in India should have the
approval of the home country regulator.
3. Other factors (but not limited to) that will be taken into account while considering the
application are given below:
a. Economic and political relations between India and the country
of incorporation of the foreign bank
b. Financial soundness of the foreign bank
c. Ownership pattern of the foreign bank
d. International and home currency ranking of the foreign bank
e. Rating of the foreign bank by international rating agencies
f. International presence of the foreign bank.
CAPITAL:-
4. The minimum start-up capital requirement for a WOS would be Rs. 3 billion and the
WOS shall be required to maintain a capital adequacy ratio of 10 percent or as may be
prescribed from time to time on a continuous basis, from the commencement of its
operations.
5. The parent foreign bank will continue to hold 100 percent equity in the Indian
subsidiary for a minimum prescribed period of operation.
CORPORATE GOVERNANCE:-
6. The composition of the board of directors should meet the following requirements:
a. Not less than 50 percent of the directors should be Indian nationals

resident in India.
b. Not less than 50 percent of the directors should be non-executive

directors.
31
c. A minimum of one-third of the directors should be totally independent

of the management of the subsidiary in India, its parent or associates.
d. The directors shall conform to the ‘Fit and Proper’ criteria as laid
down in RBI’s extant guidelines dated June 25, 2004.
e. RBI’s approval for the directors may be obtained as per the procedure
adopted in the case of the erstwhile Local Advisory Boards of foreign
bank branches.
7. ACCOUNTING, PRUDENTIAL NORMS AND OTHER

REQUIREMENTS:-
a. The WOS will be subject to the licensing requirements and condition,

broadly consistent with those for new private banks.
b. The WOS will be treated on par with the existing branches of
foreign banks for branch expansion. The Reserve Bank may also
prescribe market access and national treatment limitation consistent
with international practices and the country’s requirements.
c. The banking subsidiary will be governed by the provisions of the
Companies Act, 1956, Banking Regulation Act,1949, Reserve Bank
Of India Act, 1934, other relevant status and the directives,
Prudential regulations and other guidelines/instructions issued by
RBI and other regulators from time to time.
8. CONVERSION OF EXISTING BRANCHES INTO A WOS:
All the above requirements prescribed for setting up a WOS will be

applicable to existing foreign bank branches converting into a WOS. In addition they
would have to satisfy the following requirements:-
SUPERVISORY COMFORT:-
Permission for conversion of existing branches of a foreign bank into

a WOS will inter alia be guided by the manner in which the affairs of the branches of
the bank are conducted, compliance with the statutory and other prudential requirements
and the overall supervisory comfort of the Reserve Bank.
CAPITAL REQUIREMENTS:-
The minimum net worth of the WOS on conversion would not be

less than Rs. 3 billion and the WOS will be required to maintain a minimum capital
adequacy ratio of 10 percent of the risk weighted assets or as may be prescribed from
time to time on a continuous basis. While reckoning the minimum net worth the local
32
available capital including remittable surplus retained in India, as assessed by the RBI,
will qualify. Reserve Bank will cause an inspection/audit to assess the financial position
of the financial position of the branches operating in India and arrive at the aggregate
net worth of the branches. RBI’s assessment of the net worth will be final.
9. ACQUISITION OF HOLDING IN SELECT PRIVATE SECTOR

BANKS:-
Foreign banks may apply to the RBI for making investment in private sector
banks that are identified by RBI for restructuring. Reserve bank will examine the
application with regard to the eligibility criteria prescribed for foreign banks to set up a
WOS vide paragraphs 1 to 4 above as well as their track record in restructuring banks.
While permitting foreign banks to acquire stake in the identified private
sector banks, RBI may undertake enhanced due diligence on the major shareholders to
determine their ‘Fit and Proper’ status. Reserve Bank may also prescribe additional
conditions in this regard as may be considered appropriate.
10. APPLICATION PROCEDURE:-
Applications for setting up a wholly-owned banking subsidiaries by foreign

banks including conversion of existing branches should be made to the chief General
Manager-in-charge, Department of banking Operations and Development, Reserve
Bank of India, World Trade Centre, Cuffe Parade, Colaba, Mumbai 400 005. The
prescribed application form will be placed on the RBI’s website.
CHAPTER-8
DEFECTS IN WORKING
33
OF FOREIGN BANK: -
CHAPTER-8
DEFECTS IN WORKING
34
OF FOREIGN BANK: -
Many complaints have been made against the functioning of the exchange bank in
India. Several defects have been noticed in the working of the exchange banks.
Some of them have been stated below:
1. NO LEGAL RESTRICTIONS:-
For several years in the past, they where no subject to legal restrictions or statutory
obligations.
2. FOREIGN DIRECTORS:-
Their directors, governing bodies and shareholders were entirely foreign.
3. INADEQUATE CASH RESERVE: -
For several years in the past, exchange bank did not maintain adequate cash reserve.
4. MONOPOLY:
Till recently, the exchange bank enjoyed a substantial monopoly in financing
foreign trade of the country. They exploited their advantage and earned high profits.
They also forced Indian exporters and importers to give business to the foreign
shipping companies, insurance companies, while accommodating them. This
restricted the scope of growth of Indian enterprises in shipping and insurance.
5. UNFAIR COMPETITION:-
35
They have entered into unfair competition with the Indian bank by attracting
deposits in India by under quoting Indian bank
6. DIFFERENTIAL TREATMENT:-
Exchange banks give differential treatment in financing the export trade of the
country by D/A bills (i.e. documents against acceptance) and the import trade by
D/P bills ((i.e. documents against payments).They, thus discriminate between Indian
and foreign firms. They give foreign importers the benefits of lower rates of interest
prevailing in the London money markets, which is denied to Indian importers.
7. NO PROPER INFORMATION:
They do not provide any guidance information regarding foreign market, prices, etc.
to the Indian exporter.
8. HAMPERING THE DEVELOPMENT OF INDIAN BANKS: -
By extending their business from financing of foreign trade to banking in the

upcountry centers, they restrict the growth of Indian commercial banks.
9. SPLTTING THE MONEY MARKET: -
The exchange bank due o their monopolistic in the financed of foreign trade have
split the money market into European and Indian
10.LACK OF INDIANISATION:-
36
Till, now the exchange bank did not have any Indian in the higher posts, expects on
the clerical side.
CHAPTER-9
EFFECTS OF FOREIGN BANKS ON INDIAN ECONOMY: -
37
CHAPTER-9
EFFECTS OF FOREIGN BANKS ON INDIAN ECONOMY: -
38
Foreign banks have brought latest technology and latest banking practices in India.
They have helped made Indian Banking system more competitive and efficient.
Government has come up with a road map for expansion of foreign banks in India.
There are various advantages and disadvantages of having foreign

banks in India. Some of them are given below:-
• Globalization:-
The entry of foreign banks in India has made India to be at an

international level. It has given India an international status. Thus India is
moving towards globalization.
• Competitiveness:-
After the set up foreign banks in India, the banking sector in

India also become competitive and accurative.
• Employment:-
As new foreign banks are doing business in India and the

number of branches of foreign banks is increasing day by day. So it creates
job opportunities for many people. Thus it makes a lot of educated
unemployed people employed.
• Increase in standard of living:-
39
As foreign banks have created job opportunities the

standard of living of people have improved. They have become aware of the
international standards.
• Improved technology:-
The foreign banks have brought in new and more

sophisticated technology. This has improved the working of banks and the
work can be now done within few seconds.
9.2 Upcoming Foreign

Banks in India
By 2009 few more names is going to be added in the list of foreign banks in
India. This is as an aftermath of the sudden interest shown by Reserve Bank of
India paving roadmap for foreign banks in India greater freedom in India.
Among them is the world's best private bank by Euro Money magazine,
Switzerland's UBS.
The following are the list of foreign banks going to set up business in India:
Royal Bank of Scotland
40
Switzerland's UBS
US-based GE Capital
CreditSuisse Group
Industrial and Commercial Bank of China
Merrill Lynch is having a joint venture in Indian investment banking space -- DSP
Merrill Lynch. Goldman Sachs holds stakes in Kotak Mahindra arms.
GE Capital is also having a wide presence in consumer finance through GE Capital
India.
India's GDP is seen growing at a robust pace of around 7% over the next few years,
throwing up opportunities for the banking sector to profit.
9.3 FACTS ABOUT FOREIGN BANKS IN INDIA:-
The India chief executives of most foreign banks say capital is not a concern
and that their growth will be fuelled by profits from the local operations that they will
retain, but the numbers show that in the past year, their business here has slowed.
The growth, in terms of loans issued, for 30 foreign banks slowed to 16.9% in the year
to 2 January, against 30.7% a year ago, according to Reserve Bank of India (RBI) data.
And their year-on-year deposit growth shrunk to 12.1%, from 34.1%.
In contrast, the growth of public sector banks, in terms of loans issued, was 28.6%, up
from 19.8%, and their deposit growth remained stable at 24.2%, RBI said.
In the year ended 31 March, foreign banks accounted for about 7.5% of banking assets
in India. A slowdown in growth will see them lose market share, though all of them
consider India as a growth market.
RBS led a consortium that acquired for €71 billion (Rs4.5 trillion today) Dutch bank
ABN Amro Bank NV in 2007.
Citigroup Inc. reported a $8.29 billion (Rs40,372 crore today) loss in the fourth quarter
(Q4) of 2008. Deutsche Bank AG expects to make an estimated loss of €4.8 billion in
41
Q4 of last year. The German bank’s Q4 and full year earnings will be released later this
week.
Among other foreign banks operating in India, Bank of America Corp. has posted a net
loss of $1.79 billion in Q4 of 2008, but ended the year with a profit of $4.01 billion.
HSBC Holdings Plc.’s profit before tax was down 28% in the first half of 2008. It will
announce its annual earnings in the first week March. Standard Chartered Bank Plc.,
which made profits in the first half of 2008, will announce its annual earnings at around
the same time.
Another British bank, Barclays Plc., has stuck to its forecast that its 2008 pretax profit
will be “well ahead” of £5.3 billion, but international rating agency Moody’s Investors
Service recently cut the long-term ratings on the lender by two notches on expectation
that losses would rise due to credit related write-downs and rising impairments.
Anticipating pressure on capital, foreign banks have sought RBI’s permission to tap the
local debt market for their so-called tier II capital, in line with Indian banks. Tier II
capital consists of hybrid debt-equity instruments and long-term debt, while tier I is
the core capital—a bank’s equity and reserves.
Most foreign banks operating in India have registered handsome growth in profits in
the past year.
For instance, HSBC India’s net profit for the year ended 31 March increased to Rs1,192
crore, from Rs846 crore in the previous year. Standard Chartered Bank’s net profit for
the year ended 31 March increased to Rs1,706.23 crore, against Rs1,364.31 crore in the
previous year. Citibank India posted a profit of Rs1,804.26 crore in 2008, up from
Rs900 crore in 2007 and Deutsche Bank’s profit in 2008 rose 95% to Rs789 crore.
The US government has so far infused around $2 trillion into its banking system and the
British government has unveiled two rescue packages worth £800 billion since October.
42
CHAPTER-10
Role of foreign banks:-
43
CHAPTER-10
Role of foreign banks:-
Foreign Banks in India always brought an explanation about the prompt services to
customers. After the set up foreign banks in India, the banking sector in India also
become competitive and accurative.
Foreign banks play a relatively minor role in the Indian economy, 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. 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.
New rules announced by the Reserve Bank of India for the foreign banks in India in this
budget have put up great hopes among foreign banks which allow them to grow
unfettered. Now foreign banks in India are permitted to set up local subsidiaries. The
policy conveys that foreign banks in India may not acquire Indian ones (except for weak
banks identified by the RBI, on its terms) and their Indian subsidiaries will not be able
to open branches freely.
The options for foreign banks in India have increased. They have much more flexibility
vis-a-vis the nature of their operations in India.
44
Banks will take a choice on what option they would follow depending on their strategies
and the way they operate in other markets. Some banks are comfortable operating as
subsidiaries while some are comfortable with the merger and acquisition route.
Some on the other hand, may prefer to stick to the branch operation route since this
would maintain a status quo and not entail some of the additional burdens like increase
priority sector lending and adhering to the Companies Act.
This is the route that is likely to be followed by the smaller foreign banks who are niche
players in the Indian banking sector.
It is really difficult to give an opinion about what to expect from the new rules for
setting up subsidiaries by foreign banks. It will be up to individual banks to take a call
on the route that they want to take. Assessment is that some of the bigger foreign banks
in India, especially the ones who have indicated they may want to take up a 49 per cent
stake in a private bank, may go in for a subsidiary. But the smaller foreign banks will
not go in for this kind of a set-up and will prefer to continue operating the way they
have been.
The option of setting up a subsidiary will have its own pros and cons. It will allow
foreign banks to raise subordinate debt in the local market. But it would also mean
adhering to the provisions of the Companies Act, changes in the quantum of directed
lending and in the remuneration of senior bankers in tune with guidelines of the Indian
law. It will be up to individual banks to use the subsidiary option. However, it may not
affect the taking over of 49 per cent in an Indian private sector bank.
Foreign bankers are of the view that one of the major draws for setting up a subsidiary
would have been the ability to set up branches without requiring a Reserve Bank of
India (RBI) license (like other Indian banks), but now getting a license for a branch
from the central bank has also become much easier.
Foreign banks in India now, have three options before them. The first, of course, is to
continue as a branch operation with the necessary RBI approvals and grow the business
organically.
This option would have ramifications for tier-1 and tier-2 capital and they will have to
either bring in capital or retain their profit to carry on the same level of business. Some
banks may decide that it is better to be a bank in this category i.e. be a better but
different bank and grow its business.
The second option is to continue in India and then take a stake of 49 per cent in a
private bank in India. But this option is not an easy option since it would entail two
brands in the same country and dilute the brand equity.
It may be a good option for a bank from outside, since it can take control of a local bank
with an existing infrastructure. But the bank will have to take the third option is
45
local incorporation. But a network will still have to be build since an existing network
will not be present. But the bank will have access to capital with the choice of raising
tier-2 capital in the local market like the Indian banks.
Finance minister in the Budget had allowed foreign banks the option to function as a
subsidiary as against a branch set up in India, which is what the foreign banks have at
the moment.
But foreign banks will have to adhere to the rules and regulations which the private and
state run banks follow. The operational guidelines have not yet come out and the RBI is
said to be in the process of formulating the same.
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.
46
India actually favors foreign banks:-
At present, there are 50 foreign banks operating in India with a network

of a number of branches and off-site ATMs.
The facts indicate that the regulatory regime followed by the RBI in respect of foreign
banks is non-discriminatory, and is, in fact, very liberal by global standards.
India issues a single class of banking license to foreign banks and does not require them
to graduate from a lower to a higher category of banking license over a number of years
as is the practice followed in certain other jurisdictions.
This places them virtually on the same footing as an Indian bank and does not place any
restrictions on the scope of their operations. This is in contrast with practices in many
other countries.
No restrictions have been placed on the establishment of non-banking financial

subsidiaries in India by foreign banks or their group companies. Deposit insurance
cover is uniformly available to all foreign banks at a discriminatory rate of premium. In
many other countries there is a discriminatory regime.
The prudential norms applicable to foreign banks for capital adequacy, income
recognition and asset classification are, by and large, the same as for the Indian banks.
Unlike some of the countries where overall exposure limits have been placed on the
foreign-country related business, India has not placed any restriction on the kind of
business that can be routed through the branchesofforeignbanks.
This has been advantageous to foreign bank branches as the entire home-country
business is generally routed through these branches. Substantial FII business is also
handled exclusively by foreign banks.
In fact, some Indian banks contend that a certain amount of positive discrimination
exists in favor of foreign banks by way of lower priority sector lending requirement at
32 per cent of the adjusted net bank credit as against a level of 40 per cent required for
Indian banks.
Unlike in the case of Indian banks, the sub-ceiling in respect of agricultural advances is
also not applicable to foreign banks whereas export credit granted by foreign banks can
47
be reckoned towards priority sector lending obligation, which is not permitted for
Indian banks.
At the end of June 2007, foreign banks had a 6.11 per cent share in total deposits in the
Indian commercial banking system and 6.83 per cent in terms of advances. Foreign
banks were far more dominant in the off-balance sheet business with a market share of
as high as72.66percent.
Besides foreign banks, there are also two large Indian private sector banks in which the
non-resident ownership is very close to the 74 per cent permitted, which is why they can
be considered as incorporated in India but predominantly foreign-owned banks.
These banks together with the foreign banks have a combined market share in the
deposits, advances and off-balance-sheet business of 17.46, 18.65 and 76.63 per cent,
respectively, which, by no means, are insignificant levels.
Moreover, there are also about 10 large listed public sector banks (PSBs) in which the
non-resident/FII shareholding was close to the permitted ceiling of 20 per cent, as at
March-end 2007. In these PSBs, resident private shareholding would thus be close to 30
per cent only.
In the foreign exchange market, these banks had a 41 per cent share in the total forex
turnover in 2005-06 and this rose to 52 per cent in the first half of 2007-08.
Another dimension of the foreign banks' functioning in India is the returns generated
from their Indian operations. The net profit per branch for foreign banks in India for the
year 2005-06 was Rs 11.99 crore (Rs 119.9 million) as against the corresponding figure
of Rs0.33crore(Rs3.3million) for PSBs.
Further, for the year 2006-07, the Return on Assets (ROA) of foreign banks was 1.65
per cent while the Return on Equity (ROE) was 14.02 per cent, as against the
corresponding figures of 0.82 per cent and 13.62 per cent for PSBs.
These returns need to be viewed in the context of the international benchmarks for these
parameters, which are generally considerably lower.
Yet another aspect of the foreign banks' operations is the authorization of their branches
in India. As per India's existing WTO commitments, our obligation is to permit to
foreign banks only 12 licenses per year, including new entrants and existing banks - this
does not include ATMs.
48
During the period 2003 to October 2007, RBI authorized as many as 75 branches of
foreign banks in India, excluding the off-site ATMs set up by them.
In this context, an illustration would be revealing of the ground realities. Between 2003
and October 2007, India had granted 19 authorizations to US-based banks, most of
which also stand utilized.
However, during the same five-year period, the US did not authorize any office of
Indian banks in US territory, vis-à-vis the requests for setting up three branches, two
subsidiaries and nine representative offices. Some of the requests have been pending
with US authorities for more than five years.
Yet another aspect of foreign participation in the Indian financial sector is the foreign
ownership of NBFCs operating in India. As of August 2007, in systemically important
non-deposit-taking (ND-SI) NBFCs, those with some element of foreign ownership had
an asset base of Rs 87,542 crore (Rs 875.42 billion) and accounted for more than 26 per
cent of the total assets of this class of NBFCs.
Of these, the NBFCs with majority foreign ownership had an asset base of Rs 34,095
crore (Rs 340.95 billion) accounting for 9.2 per cent of the total assets of this class of
companies. The ND-SI NBFCs, which are not closely regulated by the RBI, therefore,
provide in certain ways a means of expanding the reach of the foreign banks in India.
Thus, the current policy environment enables a fair level of foreign participation even in
the non-banking financial sector of the country.
49
CHAPTER-11
HSBC A FOREIGN BANK
50
CHAPTER-11
HSBC A FOREIGN BANK
HSBC AN OVERVIEW:-
HSBC's origins in India date back to 1853, when the Mercantile Bank of India was
established in Mumbai. The Bank has since, steadily grown in reach and service
offerings, keeping pace with the evolving banking and financial needs of its customers.
In India, the Bank offers a comprehensive suite of world-class products and services to
its corporate and commercial banking clients as also to a fast growing personal banking
customer base.
HSBC Group entities in India
• The Hong Kong and Shanghai Banking Corporation Limited (HSBC)

• HSBC Asset Management (India) Private Limited
• HSBC Global Resourcing / HSBC Electronic Data Processing (India) Private
Limited
• HSBC Insurance Brokers (India) Private Limited
• HSBC Operations and Processing Enterprise (India) Private Limited
• HSBC Private Equity Management (Mauritius) Limited
• HSBC Professional Services (India) Private Limited
• HSBC Securities and Capital Markets (India) Private Limited
• HSBC Software Development (India) Private Limited
History:-
51
The antecedents of the HSBC Group in India can be traced back to October 1853 when
the Mercantile Bank of India, London and China was founded in Bombay (now
Mumbai). Starting with an authorized capital of Rs 5 million, the Mercantile Bank soon
opened offices in London, Madras(Chennai), Colombo and Kandy, followed by
Calcutta(Kolkata), Singapore, Hong Kong, Canton(Guan chow) and Shanghai by 1855.
The following hundred years were in many ways propitious for the Mercantile Bank. In
1950 it moved into its new head office building in Mumbai.at Flora Fountain.
The acquisition in 1959 by The Hong Kong and Shanghai Banking Corporation Limited
of the Mercantile Bank was a decisive factor in laying the foundation for today's HSBC
Group. Founded in 1865 to serve the needs of the merchants of the China coast and
finance the growing trade between China, Europe and the United States, HSBC has
been an international bank from its earliest days.
After the Mercantile Bank was acquired by The Hong Kong and Shanghai Banking
Corporation, the Flora Fountain building became and remains to this day, the Head
Office of the HSBC Group in India.
Through the 1990s, HSBC has vigorously developed its role as one of the leading
banking and financial services organizations in the world. Its strategy of 'managing for
value' emphasizes the Group's unique balance of business and earnings between older,
mature economies and faster-growing emerging markets.
HSBC in India is proud to have retained the Group's pioneering streak by being an
active partner in the development of the Indian banking industry - even giving India its
52
first ATM way back in 1987. The organisation's adaptability, resilience and
commitment to its customers have further enabled it to survive through turbulent times
and prosper through good times over the past 150 years.
BUSINESS OF HSBC Bank:-

Personal Banking
HSBC offers a wide range of personal financial services, including personal

lending and deposit products, through its branch network in Ahmedabad, Bangalore,
Chennai, Chandigarh, Coimbatore, Gurgaon, Hyderabad, Jaipur, Kochi, Kolkata,
Ludhiana, Mumbai, New Delhi, Noida, Pune, Thane, Trivandrum and Visakhapatnam.
Also offered branch-wide are international Gold and Classic credit cards from VISA
and MasterCard and debit cards from Visa. Customers have access to 24-hour banking
services through an extensive network of automated teller machines (ATMs), an
integrated Call Centre, and internet banking.
Non Resident Indian Banking
HSBC's Non Resident Indian Banking (NRI) centres located in Asia-

Pacific, the Middle East, Europe and North America, together with HSBC's offices
worldwide, provide the international Indian Diaspora access to a range of products and
services. These include NRI related investment (both international and domestic),
transactional and deposit products, together with a full range of personal and private
banking products in India and overseas. Internet banking also provides easy access to
HSBCservices.
Financial Planning Services
Services include investment and custodian management and access to

stock broking and insurance services, which are offered to resident as well as non-
residen Indians.
Corporate Banking
53
HSBC has well-established, long-term corporate banking

relationships with large domestic Indian corporations and foreign multinationals
operating in India. Services include term and working capital finance, trade facilities,
corporate deposits, syndications, payments and cash management services and
factoring.
Business Banking
HSBC's Extra Mile Business Banking offers two types of account to small and
medium-sized businesses - The Business Account and the Business Vantage Account.
Services include Business Phone Banking, Business Doorstep Banking and Multi
Branch Business Banking.
Payments and Cash Management
HSBC provides integrated domestic and regional transaction support to

corporate clients through a sophisticated range of cash management solutions, including
collection and payment services and integration with customer back-end systems.
Operations and client services are ISO 9001 certified. Hexagon, the HSBC Group's
dedicated electronic banking service allows users to perform financial transactions,
obtain international financial markets information, and review details of their domestic
and international accounts, from anywhere in the world, 24 hours a day.
Trade (international and domestic) and Factoring Services
A wide range of solutions tailored to meet customer's requirements for

both domestic and international businesses is offered. HSBC is also one of the leading
banks involved in the bullion business through its offices in Ahmedabad, Bangalore,
Chennai, Hyderabad, Kolkata, New Delhi and is supported by the Group's global
expertise in the precious metal business. HSBC is the leading provider of trade services
in India and its trade centers are ISO 9002 certified.
Institutional Banking
Working closely with Group offices in India and overseas, trade services,
payments and cash management, treasury and capital markets, custody and clearing, and
correspondent and electronic banking activities are offered to banks, financial
institutions, securities houses, insurance companies, asset management companies and
other non-banking companies, non-government and development organizations
54
operating inIndia.
Treasury and Capital Markets
Clients consistently rate HSBC's Treasury business as one of the best in

India. Its dealing room in Mumbai is one of the largest in the country, serving clients in
Mumbai and in the major metropolitan centers across the country. It provides a
comprehensive range of products which include - foreign exchange, money market and
fixed income products and derivatives in both rupees and major currencies.
Custody and Clearing
The leading custodian in Asia, HSBC's custody and clearing services

are available in 28 markets in Asia-Pacific and the Middle East. With experienced staff
and the latest technology, HSBC is the premier provider of sub-custodian and clearing
services to foreign institutional investors (FIIs) in India. HSBC clients include the
domestic fund management sector in both the retail and institutional segments.
Institutional Fund Services launched by the bank offers a comprehensive suite of
products to domestic mutual funds and insurance companies ranging from custody, fund
administration services, unit distribution and Cash Management Services.
Insurance
HSBC Insurance Brokers (India) Private Limited is licensed by the
Insurance Regulatory Development Authority (IRDA) to operate as a composite
insurance broking company, which will function as a direct and a reinsurance
broker.
Investment banking
HSBC Securities and Capital Markets (India) Private Limited has two main business
lines. It’s Institutional and proprietary broking business is based in Mumbai and, has
seats on two of India's premier stock exchanges, the Bombay Stock Exchange and the
National Stock Exchange. It deals in Indian securities for both Indian and international
institutions and for select retail clients and is backed by an extensive research team. The
Corporate Finance and Advisory business, with offices in Mumbai and New Delhi,
offers a full range of integrated investment banking services in India and
internationally.
55
CHAPTER-12
The impact on financial and economic stability:-
56
CHAPTER-12
The impact on financial and economic stability:-
Foreign banks entry may enhance financial stability by permitting greater

diversification of exposures and by improving risk management. It could also contribute
to making more capital or liquidity available when need. A foreign bank presence could
be practically valuable during periods of banking stress, to diversify against country
specific (systematic) risk that can severely impair the capital of the banking system.
The fact that foreign banks are diversified across different country could well
change the cyclical behavior of the host country financial system since foreign banks
are less sensitive to host country cycles. How valuable this proves to be in practice
depends on how closely the domestic economic cycle is correlated with the global
economy.
Country cyclical changes in foreign bank lending could also help to

amplify the effectiveness of monetary policy. Foreign banks could also be more
resilient during currency crises. Not only do they tend to be more aware of currency
mismatches, they can also call on their parent organizations to provide foreign currency
liquidity.
A number of empirical studies suggest foreign banks do indeed play a

stabilizing role. Using BIS banking statistics for a set of Latin American countries over
the period 1985-2000, Martinez parietal (2002) find that, while foreign bank transmit
external shocks to their host country they become more responsive to host country
57
conditions over time and their lending reacts more strongly to positive than to negative
host shocks. They also find that foreign bank lending is not significantly curtailed
during crisis; hence greater foreign bank participation may be associated with a reduced
probability of crisis.
The behavior of foreign banks during certain crisis episodes illustrates the
potentially stabilizing role they can play. It was found that foreign banks did not
abandon the local market during 1997-98 crisis in Malaysia and received less
government support.
Their measure of bank competition differs from others because it is based

on a structural contestability approach. It tests whether an increase in input prices raises
both marginal costs and total revenues by the same amount as the rise in costs (perfect
competition), or whether an increase in input prices increases marginal costs, reduces
equilibrium output and therefore total revenues (monopoly).
In another instance, that lending by foreign bank in Argentina and Mexico

grew faster than leading by domestic banks during 1994-95 crisis. The behavior of
foreign bank in Argentina during that earlier period is confined by the paper by Lacoste
in this volume. There are nonetheless three important questions about the role of foreign
banks.
First, a large foreign banking presence could mean that information

available to host country supervisors can be reduced to the extent that decision-making
and risk management shifts to the parent bank. .the delisting of the equity of local
affiliates on the local exchange removes an important source of market intelligence. In
addition if the integrated firms’ equities are delisted in the local market host country
supervisors can also lose access to key foreign bank decision-makers.
Second, a large foreign bank presence can expose a country to shocks due to
purely external events, such as those affecting the parent bank. The factors that
determine vulnerability to such external shocks, whether the exposure is greater with
58
onshore foreign banking as compared to traditional cross-border bank lending, and the
implications for regulatory and supervisory policy also warrant further investigation.
A third issue is the regulatory treatment of foreign currency

denominated lending. A borrower that chooses dollar borrowing to cover local currency
business makes itself a worse credit risk – but this is often not sufficiently recognized
either by the bank in its risk management techniques or by the regulators.
As Basel II aligns capital requirements more closely to differences in credit

risk than Basel regulatory distortions should be reduced. And over time the more
systematic use of default data should clarify which foreign currency loans should be
regarded as a worse credit risk than local currency loans.
The first two concerns have been cited by a report on fdi in the financial
sector by the committee on the global financial system (CGFC 2004) and apply to a
number of countries, including Mexico and New Zealand and Bollard. The series of
events that culminated in Argentina‘s financial crisis in 2001 raises several important
questions. Lacoste find that foreign banks played no stabilizing role in these
circumstances.
59
CHAPTER-13
SUGGESTIONS FOR IMPROVEMENT IN FOREIGN

BANKS
60
CHAPTER-13
SUGGESTIONS FOR IMPROVEMENT IN FOREIGN

BANKS
The central banking committee which enquired into the working of the
exchange banks in India made many suggestions of their improvement similarly. The
suggestions for the improvement of the working of exchange banks in the country are as
follows: -
1. EFFECTIVE CONTROL OF RESERVE BANK:-
61
There should be more effective control by the reserve bank over the exchange
banks. Statutorily, the exchange banks should be treated on with other commercial
banks in the country.
2. APPOINTMENT OF LOCAL ADVISORY BOARD:-
Each branch of every exchange bank should appoint a local advisory boards while
will advise the bank regarding the grant of advances and cash credit. The board is
supposed to maintain sympathetic control with their Indian clients. This will help in
reserving the difficulties presently experienced by Indian customers.
62
3. RESTRICTIONS OF DEPOSITS:-
While granting licenses to these banks, the Reserve Bank should put
restrictions on the size of deposits raised by them.
4. RESTRICTIONS ON BRANCH OPENING: -
The exchange bank should not be permitted to open branches

indiscriminately at any place other than the main ports in India. This will present from
the unjustified encroachment in the field of financing of internal trade which is carried
on by the Indian banks at present. Exchange banks are meant to finance foreign trade
only and they should be made to stick to it.
5. NO CONTROLLING INTERST IN INDIAN BANKS: -
The exchange banks should not have any direct or indirect controlling
interest in any Indian banks. To ensure this, Indian Joint Stock banks should maintain
separate registers of their Indian and non- Indian shareholders and even transfer of
shares between them should be carefully scrutinized.
6. RUPEE BILL: -
Exchange banks should help Indian importers if the latter want foreign
exporters to draw on them in rupee bills. Indian traders should be permitted to make a
choice between rupee bills and bills in foreign currencies, as per their convenience.
63
7. NO TRUSTEE BUSINESS: -
The exchange banks should not be allowed to undertake trustee business

in the country.
8. NO BUSINESS COMBINES: -
The exchange banks should not be allowed to form any business

combinations, mergers, pools, trusts, rings, etc. without the permission of Reserve Bank
of India.
9. CHECK ON THE FLIGHT OF CAPITAL: -
In order to restrict the flight of capital abroad, the exchange banks should
not be allowed to transfer their profits/capital to their head office abroad.
10. RUPEE SHARE CAPITAL: -
The exchange banks must register their share capital in Indian rupee to
enable Indian to acquire share to increase their participations in these banks
11. ESTABLISHMENT OF INDIAN EXCHANGE BANK: -
The committee of finance for the Private Sector, appointed by the

Reserve Bank of India, had recommended that the government establish an Indian
exchange Bank to carry on business in foreign exchange and financing of foreign trade.
This recommendation must be immediately accepted and implemented.
64
CONCLUSION
The banking system is one of the institutions that impinge on the economy and
affect its performance for better or worse. Banks as the development agency are the
source of hope and inspirations to the masses.
Foreign banks started doing business in India as there are many business
opportunities available. India is potential of business. Foreign banks have great impact
on the Indian economy. They have brought in new and sophisticated technology. The
Indian scenario of banking is changed with the evolution of foreign banks in India. The
services of foreign banks are very sophisticated.
However, it would be advisable to allow the foreign banks to continue their

operations within the framework of the restrictions imposed on them by the Reserve
Bank Of India in such a manner that they do not encroach upon the fields allocated to
Indian banks.
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, hence, need tighter regulation than
markets in goods and services, India needs more foreign bank participation.
65
66
QUESTIONNAIRE
1. When foreign banks were given approval to do business in India?
2. Foreign banks are governed by which act?
3. What are the guidelines of RBI for foreign banks?
4. What is the procedure to be followed by foreign banks in order to do

business in India?
5. What are the extra requirements that have to be fulfilled by foreign

banks to do business in India?
6. under what situation, can the license of foreign banks be cancelled?
7. What are the effects of having foreign banks in India?
8. What are the capital requirements for foreign banks?
BIBLIOGRAPHY AND REFERENCES

67
Books and magazines:
• Banking law and practices in India – By M.L. Tannan

• Indian Banking – By S Natrajan
• A Profile of Banks – By RBI
• Disclosures and norms for private and foreign banks in India- By RBI
Websites:
• www.RBI.org.in
• www.hsbcbank.com
68

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Foreign banks in India

INTRODUCTION OF BANKING SECTOR

INTRODUCTION OF BANKING SECTOR

A bank is a profit seeking Business firm dealing in money and credit. It

The Indian banking system has a large geographic and functional

1.3. The Changing Face

In 1991 the Central Government embarked on a program of economic

Encouraged by economic developments over the past decade, the government is

Shift towards Service Sector

Previously India was primarily known as an agricultural economy,

1. 3. KEY POINTS OF BANKING SECTOR

Liquidity is controlled by the Reserve Bank of India

High during periods of tight liquidity. Trade unions

For good creditworthy borrowers bargaining power

High- There are public sector banks, private sector

1.4. Fact Files of Banks in India

The first bank in India to be given an ISO Canara Bank

The first Indian bank to have been started solely

India's oldest, largest and most successful

The Federal Bank

The oldest Public Sector Bank in India having

Central Banking has become an entirely separate branch of banking as it is

India is an agricultural country. About 70% of four country’s population

The economic development of country depends on the developments of its

Followings are the different types of banks existing in India:

1. Nationalized Banks in India

Banking System in India is

List of Public Sector Banks in India is as follows:

• Central Bank of India

2. Foreign Banks in India

Major foreign banks in India are:

3. Private Banks in India

All the banks in India were earlier private banks. They

Major Private Banks in India are:

• South Indian Bank

CURRENT SITUATION OF BANKING IN INDIA

CURRENT SITUATION OF BANKING IN INDIA

Currently (2009), banking in India is generally fairly mature in terms of

In March 2006, the Reserve Bank of India allowed Warburg Pincus to

The functions of foreign bank are as follows:

1. FINANCING FOREIGN TRADE: -

3. FINANCING INLAND TRADE: -

Some exchange bank has opened merchant banking division to provide

The exchange banks have been doing a profitable business in the

BUSINESS OPPORTUNITIES IN INDIA

BUSINESS OPPORTUNITIES IN INDIA

India is the largest democracy in the world. In terms of

The government has come up with several incentives like

FACTS ABOUT INDIA:-

There are several factors which create favorable business opportunities

In today’s “Global village”, scouting around for business is no problem.

GUIDELINES FOR PRESENCE OF FOREIGN BANKS IN

GUIDELINES FOR PRESENCE OF FOREIGN BANKS IN

The guidelines for setting up of wholly owned subsidiary by foreign

ELIGIBILITY OF THE PARENT BANK:-

a. Not less than 50 percent of the directors should be Indian nationals

b. Not less than 50 percent of the directors should be non-executive

c. A minimum of one-third of the directors should be totally independent

7. ACCOUNTING, PRUDENTIAL NORMS AND OTHER

a. The WOS will be subject to the licensing requirements and condition,

8. CONVERSION OF EXISTING BRANCHES INTO A WOS:

All the above requirements prescribed for setting up a WOS will be