A REPORT ON

“IMPLICATIONS OF WTO ON INDIAN BANKING”

By: Ashish Chatrath PGDM 07-09 FT-07-529

FINAL DISSERTATION

DECLARATION FORM
I hereby declare that the Project work entitled IMPLICATIONS OF WTO ON INDIAN BANKING submitted by me for the partial fulfillment of the Post Graduate Diploma in Business Management Program to Institute for Integrated Learning in Management, Greater Noida is my own original work and has not been submitted earlier either to IILM GSM or to any other Institution for the fulfillment of the requirement for any course of study. I also declare that no chapter of this manuscript in whole or in part is lifted and incorporated in this report from any earlier / other work done by me or others.

Place : Date :

Greater Noida 23rd April 2009 Signature of Student

Name of Student Address

: Ashish Chatrath : 1804, Gandhi Lane, Islamabad, Amritsar.

IMPLICATIONS OF WTO ON INDIAN BANKING

Dissertation submitted in partial fulfillment of the requirements of the two year full-time Post Graduate Diploma in Business Management Programme.

Submitted by

Ashish Chatrath Roll No: FT-07-529 Batch: 2007-2009

Institute for Integrated Learning in Management
Graduate School of Management 16, Knowledge Park Greater Noida– 201 306 Month & Year

Contents
FINAL DISSERTATION.........................................................................2 DECLARATION FORM..........................................................................2 1.1 1.2 1.3 1.4 2.1 2.2 2.3 2.4 2.5 2.6 Introduction..................................................................................7 Objectives....................................................................................8 Limitations...................................................................................8 Methodology................................................................................8 Introduction..............................................................................10 WTO & Developing Economies...................................................10 Special& Differential Treatment Under the WTO.......................12 Functions of WTO.......................................................................13 GENERAL AGREEMENT ON TARIFFS AND TRADE (GATT)..........13 WTO & GATT............................................................................14

1. The Project.........................................................7

2. WTO ...............................................................10

3. GENERAL AGREEMENT ON TRADE IN SERVICES (GATS)...................................................................14

4. FINDINGS & OBSERVATIONS.............................23

3.1 Principles of GATS......................................................................15 3.2 Advantages of GATS...................................................................17 3.3 Disadvantages of GATS..............................................................18 3.4 Modes of GATS.........................................................................19 3.5 Pillars of GATS ..........................................................................21 3.6 GATS Schedule...........................................................................21 3.7 India’s Commitments under GATS.............................................22

5. SUGGESTIONS AND RECOMMENDATIONS............50 6. CONCLUSION....................................................53 7. ANNEXURE......................................................55 8. REFERENCES....................................................63

4. Financial sector & banking service...............................................23 4.2 Major reform initiatives in Indian banking sector ....................25 4.3 Foreign investments in capital of Indian banks .......................27 4.4 Mergers& Acquisitions in banking sector ..................................29 4.5 WTO Requirements & Indian Banking........................................31 4.6 Regulations for foreign banks in India........................................33 4.7 WTO financial services agreement, 1997 – banking commitments ..........................................................................................................35 4.8 Banking Services in United States.............................................37 4.9 Banking services in India & United States..................................38 4.10 Banking services in China........................................................38 4.11 Challenges against Indian banking sector ...............................46 5.1 WTO & future of Indian Banking Sector.....................................50

LIST OF TABLES

Table No. Table 1 Table 2 Table 3 Table 4 Table 5 Table 6 Table 7 Table 8 Table 9

Subject

Page No. Foreign investment in public sector banks in 2004 28 and 2006 Foreign investment in private sector banks in 2004 28 and 2006 Return on Net Worth% of Indian and foreign banks 43 in 2006 and 2007 Operating Profit of Indian and foreign banks in 2006 44 and 2007 ROA% of Indian and foreign banks in 2006 and 2007 45 Net Profit of Indian and foreign banks in 2006 and 46 2007 Interest Income of Indian and foreign banks in 2006 47 and 2007 Total Income of Indian and foreign banks in 2006 47 and 2007 TIER I Capital of Indian and foreign banks in 2006 48 and 2007

ABSTRACT
The project deals with analyzing the impact of WTO on the Indian banking sector. The need of growth of the developing economies gives opportunities to the foreign banking players to enter into the new markets in new economies and expand their businesses on global level. The entry of the foreign banks in the developing economies helps them to grow at a faster pace. Foreign banks also bring with them the latest technology being used in the developed economies which helps the developing economies to take advantage of the technological advancements being used in the other nations. Hence it is very essential for the developing economies to open their economies for the international trade by allowing foreign banks to establish their businesses over there. In this project, the major concern was to analyze the implications of WTO on the Indian banking system. The future projections have been made by analyzing the change in the foreign capital investments in public sector banks and private sector banks from the year 2004 to the year 2006 and by analyzing the change in the earnings or profits earned by the foreign banks in the year 200 and 2007. The project required a detailed study of the Indian banking sector with respect to the presence of foreign banks. The main purpose of the project was to find out the impact of the agreements governing under WTO which has a direct impact on the Indian banking sector. GATS (General Agreement on Trade in Services) govern the negotiations regarding services between the member nations. In different round of negotiations happened under GATS, Government of India removed many barriers for the foreign banks to enter into the Indian banking market. This has proved to be one of the major reasons for the increase in the growth rate of the Indian economy. This project will help the reader to know about the change in the regulations made by RBI for the foreign banks to liberalize the trade in services in the Indian banking sector. The reader will also come to know about the future prospects of the Indian banking system and the improvement in the financial performance of Indian and foreign banks.

1. The Project

1.1 Introduction
The WTO came into existence on January 1, 1995, with many countries joining it with immediate effect. It has its headquarters in Geneva, Switzerland. The WTO was born to usher in a new era of global economic cooperation, reflecting the widespread desire to operate in a fairer and more open multilateral trading system for the benefit and welfare of member countries’ principles. According to the Planning Commission, the population of India will be 130 crores by the year 2020, out of which 40 percent will be urban, highly educated, healthier and prosperous as compared to 28 percent in 2004. Only 40 per cent of the population will be engaged in agriculture as against 60 percent now. Share of agriculture in GDP will be a nominal 6 per cent as against 18.5 percent according to Economic Survey 2006-07. Small and Medium Enterprises (SMEs) will emerge as a vibrant sector and prime job provider. Exports will constitute 35 per cent of GDP as against 15 per cent at present. The economy will be indeed, market driven, productive and competitive. In this competitive market, banking system will naturally have a dominant and controlling role to play and the Indian Financial System should be inherently strong, functionally diverse and flexible. WTO has opened up a lot of opportunities to the banks in the world to enter into the new markets in different economies by lowering down the trade barriers. This has helped the banking sector to grow at a rapid pace which in turn has helped the world economy to grow faster. The banking sector of any economy plays a vital role in the circulation of money by facilitating the different modes of payment. Therefore, it is crucial for every economy to have a sound and healthy financial sector. WTO has helped in liberalizing the trade between different countries by facilitating negotiations between different countries. WTO has also played an important role in setting the global standards for the banks to improve their performances with the help of investment in other countries. FDIs (Foreign Direct Investments) and FIIs (Foreign Institutional Investments) in banking sector of different economies has facilitated the banks to make

use of the latest technology available in the world and to improve their profitability by providing better services to the customers. The banking activities these days are concentrated around major foreign banks, niche banks, and community-based banks. The quality of assets with the banks has improved in the past few decades and the Indian banks these days are also concentrating towards establishing their global presence. Today, the focus areas of banks for investment and lending are infrastructure, education, tourism, entertainment, and health services.

1.2 Objectives
 To access the role of WTO in helping trade flow of banks with no undesirable side-effects.  To study the organizational structures of banks with global requirements.  To analyze the “simplification and harmonization of international banking trade procedures” to trade in a more effective manner.  To evaluate the implications of WTO and services agreement on the Indian banking system.  To evaluate the performance of foreign banks in the Indian economy.

1.3 Limitations
 The quantified data regarding banks available may have been manipulated.  The study is limited and does not cover all banks considering the time frame.

1.4 Methodology
 Usage of Secondary Data: The secondary data has been collected from the various sources like journals, articles, magazines, newspapers and internet. The magazines studied includes magazines

dealing in the financial services like Business World, Business India and newspapers like Financial Times, Economic Times, Business Line, Financial Review, The Hindu. The data collected was then analyzed in respect of the impact of policies laid down by WTO and its effects on the Indian banking sector which indirectly affects the financial sector of the whole Indian economy. The data regarding foreign capital investments in banks was collected with the help of internet for analyzing the increase in the foreign investment in both public and private sector banks in India.

 Comparative study of performance of Indian banks and foreign banks in Indian economy: This report also includes a comparative study of the banking sector of a developed economy i.e. U.S. economy with the banking sector of the Indian economy. In this, the foreign capital employed in various banks was studied to know the liberalization of services and foreign investment allowed in the capital of the banks in different economies.

2. WTO
2.1 Introduction

The WTO is an international organization of 151 member countries that is a forum for negotiating international trade agreements and the monitoring and regulating body for enforcing agreements. The WTO was created in 1995, by the passage of the provisions of the "Uruguay Round" of the General Agreement on Tariffs and Trade (GATT). Prior to the Uruguay Round, GATT focused on promoting world trade by pressuring countries to reduce Tariffs. But with the creation of the WTO, this corporate-inspired agenda was significantly ratcheted up by targeting so-called "non-tariff barriers to trade" - essentially any national or local protective legislation that might be construed as impacting trade. WTO is the only global international organization dealing with the global rules of trade between nations and ensuring trade flows as smoothly, predictably and freely as possible therefore resulting into a more prosperous, peaceful and accountable economic world.

2.2 WTO & Developing Economies
The gains accruing to the developing countries from liberalization in world trade under the multilateral trade regime of the WTO has been an issue

largely debated. Realizing that the playing field is not level before opening up for competition, the provisions for Special and Differential Treatment to developing countries are inherent in the Uruguay Round (UR) Agreements of the WTO. The preface to the WTO agreement claims that efforts are designed to ensure a share in the growth in international trade adequate with the needs of their economic development. The special treatment is embedded in all the agreements of WTO like the Agreement on Agriculture (AOA). Trade Related Intellectual Property Rights (TRIPS), Trade Related Investment Measures (TRIMS), Anti-dumping measures, Technical Barriers to Trade, Agreement on Textiles and Clothing and the Trade in Services. The concessions given to developing countries are seen in terms of lower reduction commitments of support, flexibility in terms of export subsidies, longer time period for reducing the support, implementing TRIPS, TRIMS, special concessions on Sanitary and Phytosanitary measures technical barriers to trade, etc. Recognizing the fact that three-fourths of the membership of the WTO is formed by the developing countries, and their interests cannot be neglected, the fourth WTO Ministerial meeting held in Doha in November 2001 launched a comprehensive set of multilateral trade negotiations known as the Doha Development Agenda. The launch of these negotiations claimed to ensure that the trading system is relevant and responsive to the needs of the developing countries. The benefits to the developing countries from the declaration were expected to be largely in terms of enhanced market access of the developed country products. The negotiations on the Doha agenda did not make much headway at the Cancun ministerial in September 2003 or at Hong Kong in December 2005, despite the fact that the negotiations are to be completed before the end of year 2005. But much credibility of WTO now depends on its ability to provide development opportunities for developing and least developing countries. As per the definitions under the WTO, there is no unique definition of “developed” and “developing” economies in the WTO. Members announce for themselves whether they are developed or developing countries. However, other members can challenge the decision of a member to make use of provisions available to developing countries. Developing country status in the WTO brings certain rights. But a WTO member announcing itself as a developing country does not automatically mean that it will benefit from the unilateral preference schemes of some of the developed country members such as the Generalized System of Preferences (GSP). In practice, it is the preference giving country which decides the list of developing countries that will benefit from preferences. However, all

developing countries that are eligible to benefit from technical assistance provided by the WTO secretariat and WTO members.

2.3 Special& Differential Treatment Under the WTO
The special provisions in favor of developing countries are incorporated into the individual agreements and decisions of the Uruguay Round. Within each section, the special measures have also been grouped under four headings which reflect their general nature; those recognizing the interests of least developed/developing countries in a general manner; those easing the rules or number of obligations to be met; those providing longer timeframes for the implementation of certain obligations and those providing for technical assistance. The committee on trade and development periodically review the special provisions in favor of developing country members and particularly the LDCs which are included in the multilateral trade agreements. Agreement: General Agreement on Trade in Services Special provisions for Developing countries: Within two years of the entry into force of the agreement, developed country members and to the extent possible all other members are to establish enquiry points to help suppliers from developing countries get information on the commercial and technical aspects of supplying different kinds of services, the registration of suppliers, the obtaining of professional qualifications and the availability of services technology. WTO members are allowed to enter economic integration agreements that liberalize trade in services, provided the agreement has substantial sectoral coverage and provides for the eliminations of substantially all discrimination in the covered sectors. The multilateral nature of the WTO agreement is especially attractive to small developing countries that would otherwise have difficult time negotiating many different bilateral trade agreements. In addition, there are benefits associated with the dispute settlement of the WTO which provides a legal backup to deal with inter-

country trade laws which cannot be handled by countries independently. However, the gains to the developing countries could be accrued only under the condition that trade is not just sufficiently free but fair, recognizing the interests of the developing countries.

2.4 Functions of WTO
     Administering and implementing the multilateral trade agreements. Acting as a forum for multilateral negotiations. Seeking to resolve trade disputes. Overseeing national trade policies. Cooperating with other international institutions involved in global economic presence.

2.5 GENERAL AGREEMENT ON TARIFFS AND TRADE (GATT)
Uruguay Round (1986-1983) marks a watershed, and for the first time, multilateral trade negotiations under General Agreement in Tariff and Trade (GATT) encompass not only the traditional goods sector, but also extended to three new areas, namely investment, intellectual property rights and services. The final act was signed on 1 April 1994, at Marrakech in Morocco, which resulted in the formation of World Trade Organization (WTO) w.e.f. January 1, 1995 with 123 members, including India. Now there are 151 members including China, Vietnam and Saudi Arabia.

2.6

WTO & GATT

 Decisions of the Dispute Resolution Mechanism are binding on member countries. Therefore provides a neutral forum for grievance redress to all countries irrespective of economic clout.  A rules-based, member-driven organization — all decisions are made by the member governments, and the rules are the outcome of negotiations among members. In effect, every member country has a veto, i.e. a ‘no’ vote from any member can scuttle a deal.

3. GENERAL AGREEMENT ON TRADE IN SERVICES (GATS)
The General Agreement on Trade in Services (GATS) came into existence as a result of the Uruguay Round of negotiations and entered into force on 1 January 1995, with the establishment of the WTO. GATS is the first ever set of multilateral, legally-enforceable rules covering international trade in services. The multilateral legal instruments resulting from the Uruguay Round were treated as a single undertaking. India also signed all the WTO agreements under the single undertaking rule and GATS is a part of this whole package. The WTO was born to usher in a new era of global economic cooperation, reflecting the widespread desire to operate in a fairer and more open multilateral trading system for the benefit and welfare of member countries. Like the agreements on goods, GATS

operates on three levels: the main text containing general principles and obligations; annexes dealing with rules for specific sectors; and individual countries’ specific commitments to provide access to their markets. The obligations under GATS may be categorized into two groups: General obligations: General obligations apply directly and automatically to all member countries of the WTO and it includes most favored nation (MFN) treatment and transparency. Conditional obligations: Conditional obligations apply to sectors where the member country has assumed market access and national treatment obligations. Under conditional obligations, GATS follows a positive list approach under which each member is expected to undertake specific liberalization commitments through a process called "scheduling". Any commitment can be added or improved at any time autonomously by the member concerned but it becomes a binding commitment only if it is scheduled. The Request-Offer approach is the main method of negotiations, with the starting point for negotiations being the current schedules of commitment.

3.1 Principles of GATS
The GATS create certain obligations on all members which they must follow in the implementation of their obligations under the agreement. The members are free to state in their schedules the services they intend to bring under the purview of GATS and the terms and conditions of their commitments. They may also amend them later after appropriate negotiations with other members. But once they have made their commitments they are required to adhere to the following principles.  National Treatment: Under the article XVII this means that a member shall treat the persons belonging to all other members the way

it treat its own nationals. This means it cannot discriminate between foreigners and its own nationals in a manner. This could also mean that: • Foreign companies cannot be subjected to additional performance requirements like meeting environment safeguards. • They cannot be compelled to hire or train local staff or build domestic capacity. • There can be no compulsion regarding technology transfer. • Foreign person must be extended the same tax exemption or subsidies that are given to domestic companies. • Foreigner can be placed on foreign companies regarding acquisition of land and other assets. • Members must provide the “equal competitive privileges” to both domestic and foreign companies.

 Most-Favored Nation Treatment (MFNT): Under Article II, MFNT means that every member shall treat all others the way it treats its best friend among them. That is, member shall extend the best of the trade terms it offers to a member to all others on an equal footing. While, “national treatment” obligates a member not to make any discrimination between its own nationals and foreign nationals, MFNT requires a member not to discriminate between other member-states and that it should offer them uniform treatment. This is also referred to as Generalized System of Trade Preferences (GSP). Sometimes MFNT is offered on the condition of reciprocity, that is State would extend to another State MFNT only if the latter also commits itself to extend the same. But under GATS the MFNT has to be unconditional.  Minimum Treatment: Under Article XVI, a member has to extend to all other members a treatment not less favorable than what it has committed itself under its schedule. But if it were to offer to any member a better deal than what it has committed itself under its schedule, then it has to extend to all other members the same treatment under MFNT clause. If a member modifies its schedule and either enhances its commitment, then it has to extend the same to all other members. This may be in terms of number of service suppliers in the form of quotas, total value or number of operations, or number of persons, or specific types of legal entities, etc.  Schedule of Specific Commitments: Under Article XX, each member is required to set out in a schedule the specific commitments it proposes to

undertake vis-à-vis other members. With respect to each sector the schedule shall specify: • • • • Terms, limitations and conditions on market access; Conditions and qualifications on national treatment; Undertakings relating to additional commitments; and The date of entry into force of such commitments.

A member may, however, modify or withdraw its commitments in its schedule after three years have elapsed and by giving a notice to the Council for Trade in Services (to be established under Article XXIV) within three months before the intended modification or withdrawal. The modifying member is required to enter into negotiations with any affected member for reaching compensatory adjustment, etc. There are provisions for dispute settlement through arbitration, etc. However, GATS creates an obligation on a member State to progressively enhance its commitments over a period of time.

3.2 Advantages of GATS
 Economic Performance: An efficient services infrastructure is must for economic success. Services such as telecommunications, banking, insurance and transport supply strategically important inputs for all sectors, goods and services.  Spur of competition would encourage excellence, quality of output and reduction in prices. This is evident from the recent Indian experience in cell phone sector.  Access to world-class services would revolutionize the domestic production.  The benefit of quality services would penetrate down to the ultimate consumer.

 Liberalization of services sector is bound to generate process and product innovation.

 Protectionism has led to inefficiency. Liberalization would lead to greater transparency and stability.  It will lead to greater technology transfer as it would be in the interest of the investor to utilize local manpower by giving the requisite training.  In short, GATS would bring in (a) FDI; (b) industrialization; (c)employment; (d) transfer of technology; and (e) generation of wealth.

GATS do not compel any State either to accept or continue to accept any obligations under the agreement. Is any State feels it would be beneficial by the GATS, it might accept its obligations Any State is free to opt out of GATS if its interests are adversely affected.

3.3 Disadvantages of GATS
The GATS has attracted considerable opposition from many developed countries and various commentators for being a device for wholesale auction of vital service sectors to MNCs of developed countries. The following are some of the criticisms that are made against GATS.  Though GATS supporters claim that it is a “bottom up” treaty in the sense that a member can progressively enhance its commitments and that there is no compulsion on any State to accept obligations it is unwilling to, in reality it is said that the GATS never gave any opportunity for any democratic debate at the local communities, or regional and national parliaments. Being an imposed one, it is “topdown” agreement.  The whole gamut of obligations under the GATS entrenches into the culture national resources and vital service sectors of developing countries.

 The past experience of privatization of resources like water in Bolivia, Argentina and Puerto Rico has proved to be disastrous, Prices of water had gone up and the poor suffered.  Indian experience with Enron in privatizing power production in Maharashtra has not been a happy one.

 In sectors like health and education, entry of foreign MNCs is likely to make healthcare and education beyond the reach of the common man. The quality of services that they boast of would be the privilege of the rich and the elite.  Agriculture is another sector where poorer countries might suffer irreparably.  There is no evidence that liberalization would lead to increased FDI and enhanced competition might snuff out local competition.

 What are known as “commons” i.e., forests, watersheds, culture, arts, etc, would come under the onslaught of profit-oriented corporations that have little regard for this common heritage of mankind. This will result in prioritization of markets and profits over public interest and well-being.

3.4 Modes of GATS
The GATS sets out four models of supplying services, namely: Mode Mode Mode Mode I: II: III: IV: Cross-border trade Consumption abroad Commercial presence Presence of natural persons.

MODE I

Cross-border trade corresponds with the normal form of trade in goods and maintains a clear geographical separation between seller and buyer. In this case, services flow from the territory of another member crossing national frontiers. (e.g. banking or architectural services transmitted via telecommunications or mail). For instance, a user in India receives services from abroad through its telecommunications or postal infrastructure. Such supplies may include consultancy or market research reports, tele-medical advice, distance training, or architectural drawings.

MODE II Consumption abroad refers to situations where a service consumer moves into another member’s territory to obtain a service (for example, or nationals of India moved abroad as tourists, students, or patients to consume the respective services).

MODE III Commercial presence is the supply of a service through commercial presence of the foreign supplier in the territory of another WTO member. In this case, a service supplier of one member establishes a territorial presence in another member’s territory to provide a service. (For example, the services provided within India by a locally-established affiliate, subsidiary, or representative office of a foreign-owned and controlled company such as bank, hotel group, construction company, etc.).

MODE IV Presence of natural persons involves the admission of foreign nationals to another country to provide services there. An annex to the GATS makes it clear, however, that the agreement has nothing to do with individuals looking for employment in another country, or with citizenship, residence or employment requirements. The members still have a right to regulate the entry and stay of the persons concerned, for instance, by requiring visas. (For example, a foreign national provides a service within India as an independent supplier such as consultant, health worker or employee of a service supplier which can be a consultancy firm, hospital, or a construction company).

3.5 Pillars of GATS
GATS have three main pillars to rest –  The first pillar is the framework agreement, which contains basic obligations applicable to all member countries.  The second pillar is that of national treatment and national schedules of commitment on market access.

 The third pillar constitutes a number of Annexes and attachments on special situations of individual service sector.

3.6 GATS Schedule
The commitments by the member countries can be scheduled in one of the following ways: 1. Full commitment: “None” or “No limitations”, which implies that the member does not seek in any way to limit market access or national treatment through measures inconsistent with Articles XVI or XVII of GATS. 2. Commitment with limitations: The member details the measures maintained which are inconsistent with market access or national treatment, and implicitly commits itself to take no other inconsistent measures. 3. No commitment: “Unbound”, indicates that the member remains free to maintain or introduce measures inconsistent with market access or national treatment.

4. No commitment technically feasible: “Unbound”, indicates that in the sector in question, a particular mode of supply cannot be used. In banking, no commitment is allowed in Modes 1, 2 and 4. In Mode 3, grant of branch licenses to foreign banks is subject to a cap of 12 licenses per year both for new and existing banks. Licenses for new foreign banks may be denied if the share of the assets of foreign banks in the total banking assets (on and off balance sheet) in India exceeds 15 per cent. In both insurance and banking, requests received from other countries in WTO commitments include allowing full market access and national treatment commitments as well as removal of limitations on foreign equity participation.

3.7 India’s Commitments under GATS
India is a founder member of WTO and ratified the agreement establishing the WTO on 30.12.1994. As in the case of other multilateral agreements, India’s commitments to GATS are guided by the following general principles in varying degrees:  Gradual Approach: India believes in gradual and step by step approach and not a Big Bang or short therapy approach.  Human Face: All the reform programs have strong emphasis on human face and least sacrifice made by the people.  Sovereignty constraint: Indian government tries to minimize the loss of power for national policy formulation that could result from international cooperation.  Political Constraint: India is a sovereign democratic republic with independent judiciary, and all external relations are based on general political consensus.  Agency constraint: Policies are influenced by the ideology of the political in power. But once adopted, policies are irreversible.

 Preference for decentralization: India prefers national level policies that take into account external factors, rather than polled mechanisms at the international level.  Priority Reforms: Basic purpose of commitment is to strengthen our economic position and global competitiveness, but not at the cost of national security, public health and safety, and environmental protection.

4. FINDINGS & OBSERVATIONS
4. Financial sector & banking service
The term ‘financial services’ is broadly used for a set of services provided to ensure efficient mobilization and allocation of funds towards the overall growth of an economy. By directing investment funds to their most productive use, an efficient financial services sector can significantly promote growth and income. As a result, the effective provision of these services is a basic prerequisite for a dynamic and modern economy. Across most developing countries, including India, financial services constitute a part of the regulatory system that manages inflow and outflow of foreign capital, reduces exchange rate volatility and provides credit to socially desired sectors. Countries such as the United States, Japan, as well as some members of European Union have, over the years, been vocal demanders of liberalization of different financial services, arguing that barriers to entry hinder economic progress and financial stability. They also have well-developed financial service industries that stand to benefit from access to international markets. However, the rapid flow of money out of developing countries in the aftermath of the Latin American crisis in 1980s and the East Asian crisis in 1997, demonstrated that liberalizing financial markets sans proper planning and management of investment is not a recipe of success. In fact, given their immense importance in overall stability of an economy, there is a broad disagreement among various

countries about further liberalization of financial services. These disagreements range from both liberalization in additional financial services sector as well deeper liberalization in a particular sector. The Indian banking industry is passing through a phase of customers market. The customers have more choices in choosing their banks. A competition has been established within the banks operating in India. With stiff competition and advancement of technology, the services provided by banks have become more easy and convenient. Financial sector reforms were initiated as part of overall economic reforms in the country and wide ranging reforms covering industry, trade, taxation, external sector, banking and financial markets have been carried out since mid 1991. A decade of economic and financial sector reforms has strengthened the fundamentals of the Indian economy and transformed the operating environment for banks and financial institutions in the country. The most significant achievement of the financial sector reforms has been the marked improvement in the financial health of commercial banks in terms of capital adequacy, profitability and asset quality as also greater attention to risk management. Further, deregulation has opened up new opportunities for banks to increase revenues by diversifying into investment banking, insurance, credit cards, depository services, mortgage financing, securitization, etc. At the same time, liberalization has brought greater competition among banks, both domestic and foreign, as well as competition from mutual funds, NBFCs, post office, etc. and the competition will only get stronger, as large global players emerge on the scene. Increasing competition is squeezing profitability for the banks and forcing them to work efficiently on shrinking areas. Increase of competition means greater choice available to consumers, and the increased level of sophistication and technology in banks. As banks benchmark themselves against global standards, there has been a marked increase in disclosures and transparency in bank balance sheets and greater focus on corporate governance. Foreign banks in India now have a share of only around 7 per cent of total banking assets. The RBI has released an ambitious road map for increasing the presence of foreign banks in India. As per the guidelines, the aggregate foreign investment from all sources will be allowed up to a maximum of 74 per cent of the paid up capital of the private bank. The roadmap is divided into two phases: First phase (Between March 2005 and March 2009): Foreign banks will be permitted to establish presence in the Indian economy by way of

setting up a wholly owned banking subsidiary (WOS) or conversion of the existing branches into a WOS. Permission for acquisition of shareholding in Indian private sector banks by eligible foreign banks will be limited to banks identified by the RBI for restructuring. Second phase (commencing in April 2009): The RBI may permit merger or acquisition of any private sector bank in India by a foreign bank.

4.2 Major reform initiatives in Indian banking sector
Some of the major reform initiatives in the last decade that have changed the face of the Indian banking and financial sector are: 1. Interest rate deregulation: Interest rates on deposits and lending have been deregulated with banks enjoying greater freedom to determine their rates. 2. Adoption of prudential norms in terms of capital adequacy, asset classification, income recognition, provisioning, exposure limits, investment fluctuation reserve, etc. 3. Reduction in pre-emption – lowering of reserve requirements (SLR and CRR), thus releasing more resources to lend which banks can deploy profitably. 4. Government equity in banks has been reduced and strong banks have been allowed to access the capital market for raising additional capital. 5. Banks now enjoy greater operational freedom in terms of opening and swapping of branches, and banks with a good track record of profitability have greater flexibility in recruitment. 6. New private sector banks have been set up and foreign banks permitted to expand their operations in India including through subsidiaries. Banks have also been allowed to set up Offshore Banking Units in Special Economic Zones.

7.New areas have been opened up for bank financing such as insurance, credit cards, infrastructure financing, leasing, gold banking, besides investment banking, asset management, factoring, etc. 8. Several new institutions have been set up including the National Securities Depositories Ltd., Central Depositories Services Ltd., Clearing Corporation of India Ltd., Credit Information Bureau India Ltd. 9. Limits for investment in overseas markets by banks, mutual fund companies i.e. Asset Management Companies (AMCs) and corporates have been liberalized. The overseas investment limit for corporates has been raised to 100% of net worth and the ceiling of $100 million on prepayment of external commercial borrowings has been removed. AMCs and corporates can now undertake FRAs (Forward Rate Agreements) with banks. Indians are allowed to maintain resident foreign currency (domestic) accounts and full convertibility for deposit schemes of NRIs has been introduced. 10. Universal Banking has also been introduced in the Indian banking sector. With banks permitted to diversify into long-term finance and DFIs (Direct Foreign Investments) into working capital, guidelines have been put in place for the evolution of universal banks. 11. Technology infrastructure for the payments and settlement system in the country has been strengthened with electronic funds transfer, Centralized Funds Management System, Structured Financial Messaging Solution, Negotiated Dealing System and move towards Real Time Gross Settlement. 12. Adoption of global standards: Prudential norms for capital adequacy, asset classification, income recognition and provisioning are now close to global standards. RBI has introduced Risk Based Supervision of banks (against the traditional transaction based approach). Best international practices in accounting systems, corporate governance, payment and settlement systems, etc. are being adopted. 13. Credit delivery mechanism has been reinforced to increase the flow of credit to priority sectors through focus on micro credit and Self Help Groups. The definition of priority sector has been widened to include food processing and cold storage, software upto Rs 1 crore, housing above Rs 10 lakh, selected lending through NBFCs, etc.

14. RBI guidelines have been issued for putting in place risk management systems in banks. Risk Management Committees in banks address credit risk, market risk and operational risk. Banks have specialized committees to measure and monitor various risks and have been upgrading their risk management skills and systems. 15. The limit for foreign direct investment in private banks has been increased from 49% to 74% and the 10% cap on voting rights has been removed. In addition, the limit for foreign institutional investment in private banks is 49%.

4.3 Foreign investments in capital of Indian banks
 PUBLIC SECTOR BANKS
Na No. of % to Paid N No. of % T o Paid Shares (a up C apital Shares (a Osup Ca as on 31.03. on capital .2 04) 31.03.2006) Andhra Bank 2,15,77,223 5.39 8,40,30,646 17.32 Bank of Baroda 4,75,40,615 16.14 73,33,56,892 20.13 Bank of India 2,37,64,900 4.86 6,44,68,034 13.19 Canara Bank 4,36,00,569 10.63 7,49,35,787 18.27 Corporation Bank 1,10,83,135 7.72 1,44,47,387 10.07 Indian Overseas Bank 11,31,795 0.20 9,49,49,445 17.42 Oriental Bank of 2,53,75,968 13.17 4,97,68,926 19.86 Commerce Punjab National Bank 2,96,25,795 11.16 6,32,47,778 20.00 State Bank of India 6,01,97,755 11.43 6,25,03,693 11.87 Syndicate Bank 36,83,407 0.78 6,37,89,100 13.51 UCO Bank 6,25,000 0.07 1,45,71,873 1.82 Union Bank 5,39,07,074 11.71 10,06,13,918 19.91 Vijaya Bank 2,19,71,273 5.06 6,94,62,629 16.02
Table 1: Foreign investment in public sector banks in the year 2004 and 2006.

Name of the Bank

 PRIVATE SECTOR BANKS

Name of the Bank

Centurian Bank Federal Bank HDFC Bank ICICI Bank Indusind Bank ING Vysya Bank Jammu & Kashmir Bank Karnataka Bank Karur Vysya Bank Kotak Mahindra Bank UTI Bank

No. of % to Paid No. of % to Paid Shares (as onup Capital Shares (as onup Capital 31.03.2004) 31.03.2006) 76,73,437 5.37 27,75,78,001 21.67 10,65,637 4.80 1,83,15,281 27.53 7,67,38,812 27.02 10,22,08,872 32.71 28,33,78,082 38.63 41,48,16,138 46.63 1,36,76,792 4.70 3,75,20,769 12.90 46,45,021 20.53 1,55,02,328 17.03 77,12,696 15.90 1,45,49,707 29.99 18,98,653 9.19,613 94,35,947 3,31,63,474 4.68 5.10 7.92 14.27 2,29,13,805 29,43,356 6,45,43,383 9,69,84,197 18.88 16.35 20.93 34.87

Table 2: Foreign investment in private sector banks in the year 2004 and 2006.

The above tables indicate that the foreign investment in the capital of Indian banks (Both public and private sector banks) has increased because of the liberalization policy of the government and WTO norms. This growth in investment by foreign countries will continue for long and it will also provide better opportunities for the Indian banks to utilize the foreign capital efficiently so as to compete strongly with the other banks. Encouraging foreign investment in the Indian banks will also develop friendly relations with the other countries. The financial subsidiaries of foreign banks have a big hand in these investments and at appropriate time they will make their presence felt in many Indian banks after 2009, whereafter under WTO rules these foreign banks could acquire 74 percent shares of Indian private banks. The Indian government has acted thoughtfully by permitting this cap already. In the same spirit the government intends to amend the Banking Regulation Act to do away with the restriction of voting rights to maximum 10 percent. These rules and regulations are protected and preserved in the developed countries. The foreign multinational banks’ objective is to acquire the local banks – private and public. The banking policy pursued by Indian government has encouraged the foreign banks to step up pressure. In the meanwhile, situations are created permitting the foreign banks and their financial subsidiaries to indulge in trading and services to increase their income and profits. They are exempted from social banking and agricultural credit. These burdens are put solely on the public sector banks, sapping their income and profits. If this adverse playing field continue, they will be rendered week and face the risk of being acquired by foreign banks.

This disturbing banking policy must be changed. Rules and regulations applicable to public sector banks must be applied to all the banks. Existing common regulations for payment of interest on savings account should be governed by common rules ensuring uniform implementation. In the same manner, common rules should govern service charges. Foreign banks should not be permitted to establish financial subsidiaries since such subsidiaries are being used as banking and trading companies. The globally prevalent regulation of capping on ownership of shares and voting rights as it exists now in India should not be disturbed. Disinvestment must be stopped once for all and alternate mechanism of issuing bonds and preference shares ought to be adopted to strengthen the capital base. Each Public Sector Bank should further expand by opening new branches since household savings are increasing significantly as can be seen from more than 32 percent increase in bank deposits and demand for credit is about 80 percent of deposits. These measures will go a long way in strengthening public sector banks and will help tremendously in the development of the overall Indian economy.

4.4 Mergers& Acquisitions in banking sector
Whether it is an Industrial Sector or Services Sector, mergers & acquisitions have become way forward in today’s world. In a free market economy, companies have to keep evolving to remain competitive. Adaptability to changes in the market becomes a crucial factor for survival. Banking system is the bloodline of any economy and banks are trustees of public money. The depositors therefore, have more stakes in the welfare of banks than the share holders. Failure of a bank has more systemic implications than say, the failure of a manufacturing company. Laws governing regulation and supervision of banks in all countries therefore focus on protecting the interests of depositors. Mergers and Acquisitions are not an unknown phenomenon in Indian Banking. The predecessor of State Bank of India, the Imperial Bank of India was born out of consolidation of three Presidency Banks way back in 1920. Merger of Times Bank with HDFC Bank was the first of such consolidations after financial sector reforms ushered in 1991. Merger of Bank of Madura with ICICI Bank, reverse merger of ICICI with ICICI bank, coming together of

Centurion Bank and Bank of Punjab to form Centurion Bank of Punjab and the merger of Lord Krishna Bank and Federal Bank are voluntary efforts by banks to consolidate and grow. Hong Kong allowed 100% FDI in banking sector and this facilitated take over of several banks by Singapore and Taiwanese banks. Indonesia witnessed large scale infusion of public funds into the banking system through a specialized restructuring agency. The banks which had Capital adequacy ratio reduced to below 25% were marked for immediate closure. Consolidation among banks was actively encouraged and FDI was allowed up to 99%. In Malaysia, the Central Bank implemented a well crafted financial master plan aimed at strengthening the domestic banks by creating a level playing field for foreign banks and open banking sector to global competition. In Singapore, there are 3 main banking groups and they have given boost to consolidation process not only within the country, but also in South Korea and Malaysia. Thailand has implemented a Financial Sector Master Plan aimed at removing obstructions to Mergers & Acquisitions and also allows FDI flow to strengthen the banking system. Consolidation or merger can be done with two basic motives: 1. Maximize value for shareholders or stakeholders: All the activities of any bank will be to earn huge profits to maximize stakeholders’ value and the value maximization can only be achieved through a reduction in ‘cost’ or an increase in ‘revenue’. 1.1 Achieving cost reduction a) Cost reduction through economy of Scale: Consolidation helps in scaling in up operations, there by reducing per unit cost. b) Cost reduction through economy of Scope: This is achieved through synergy involved in the ability to offer multiple products using the same infrastructure. Example: Banks can offer insurance and investment products using their branch network and thereby achieve economy of scope.

c) Cost reduction through rationalization of man power: The merged entity will be able to identify the right persons to manage critical functions from a larger pool of human resources. d) Reduction in risk: The merged entity will be able to reduce credit risk through spreading it across wider geographies or product range. e) Cost reduction through possible reduction in tax obligations. f) Cheaper sourcing of inputs with increased bargaining power with vendors and suppliers. g) Ability to enter new business areas with reduced initial cost as compared to a new set up.

1.2 Increasing Revenue A bigger entity will be able to serve a large customer base. By offering more services and taking bigger share in the business of the customer, the bank will be able to increase the .

2. Non-value maximizing motives: Non-value maximizing motives could very often be ego factors of personal ambitions of managers. It could even be to ward of take over by another company. Indian economy is growing at 8-10% and the growth rate is second only to that of China. Bank credit has been increasing at a rapid pace of over 30% in the past 2 to 3 years. The Indian economy is slowly and steadily integrating with the global economy. The recent report of Tarapore Committee on Fuller Capital Account Convertibility has laid a road map for total integration with global financial markets. Trade barriers are getting removed under WTO and the accord on services would eventually open up Indian banking system fully to global competition. The road map for presence of foreign banks in India announced by Reserve Bank of India envisages a regime after 2009 when foreign banks will be allowed to operate in India like any other private sector bank in the country.

4.5 WTO Requirements & Indian Banking

Since 1941 several nations of the world have attempted to evolve a system under which multilateral trade among nations is carried out smoothly without any hindrance. Since the first round in 1941 at Geneva with 23 participant nations, several rounds have been conducted again at Geneva between 1986 and 1993 with 117 member nations. At the end of these meetings, GATT (General Agreement on Tariffs and Trade) gave way to the establishment of a permanent organization to guide multilateral trade, namely World Trade Organization. Given the wide variance among member nations in the state of their economies, member nations were classified into three categories, namely, developed, developing and least developed nations. At the end of the Uruguay Round, all members including India agreed on the following:

• To countries; • To • To • To • To • To

offer the Most Favored Nation (MFN) treatment to all member offer reduced tariffs; remove all subsidies to domestic industries and agriculture; remove all quantitative restrictions on imports and exports; ensure intellectual property rights of member nations; and ensure that exports satisfy phytosanitary measures agree on.

Basically, the agreement signed during June 1995 in Geneva gives opportunity for banks in 140 member countries to offer their banking services to Indian consumers using all or any of the four modes of GATS. By the same token, Indian banks now have the freedom and opportunity to enter other member countries of WTO, to provide their services to the nationals of these countries using any of the four modes. Following this agreement, Government of India has liberalized shareholding of foreign banks in Indian banks. Foreign banks are now allowed to pick-up as much as 74%, of the equity shares of an Indian bank, against only 20% permitted earlier. As foreign Institutional Investors (FIIs) can hold upto 49%. Till recently, the RBI has been restricting branch expansion of foreign banks. All the above actions of Government of India, under the veil of economic reforms in the financial sector, will have far-reaching implications to Indian banks. The first implication is that Indian banks will be expected to take on international banks, some of whose sheer size is frightening. To succeed under WTO requirements, Indian banks need much higher levels of operational efficiency, increase operating income by providing a variety of new services, ensure efficient cost control, take speedy

commercial decisions and possess knowledge and ability to face uncertainties and emerging new challenges. After making these adjustments to retain and further gain in the domestic market, Indian banks need to aggressively enter other member countries and provide their services to enable marketing of Indian goods and professional services to these countries. The banking system in India, which helped transform the poor Indian economy of the 1950s to become one of the largest economies in the world, in terms of Purchasing Power Parity (PPP), will rise to the occasion and continue to contribute to India’s growth through its dynamism and expanded activities, not only within India, but in other member countries of the World Trade Organization.

4.6 Regulations for foreign banks in India
At present, there are 29 foreign banks operating in India with a network of 273 branches and 871 off-site ATMs. The major foreign banks in India are the Standard Chartered Bank, Citibank, Hong Kong & Shanghai Banking Corporation, ABN Amro Bank and the Deutsche Bank. The primary activity of most foreign banks in India had been corporate banking. However, since mid-1990s, foreign banks added consumer financing to their portfolio and today the foreign banks offer a wide-range of products such as automobile, home and household consumer loans as well as credit cards. Besides foreign banks, there are two large Indian private sector banks in which the non-resident ownership is very close to the 74 per cent permitted, which 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. Moreover, there are also about 10 large listed public sector banks (PSBs) in which the non-resident/FII (Foreign Institutional Investment) shareholding was close to the permitted ceiling of 20 per cent, as on March 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 Rs 0.33 crore (Rs 3.3 million) for PSBs.

For the year 2006-07, the Return on Assets (ROA) of foreign banks was 1.65 percent while the Return on Equity (ROE) was 14.02 percent, as against the corresponding figures of 0.82 percent and 13.62 percent for PSBs. India issues a single class of banking license to banks and hence does not place any undue restrictions on their operations merely on the ground that in some countries there are requirements of multiple licenses for dealing in local currency and foreign currencies with different categories of clientele. Banks in India, both Indian and foreign, enjoy full and equal access to the payments and settlement systems and are full members of the clearing houses and payments system. Before granting any license, RBI may require to satisfy that the Government or the law of the country in which it is incorporated does not discriminate in any way against banks from India. Unlike the restrictive practices of certain foreign countries, India is liberal in respect of the licensing and operation of the foreign bank branches as illustrated by the following:  All banks including foreign banks can carry on both retail and wholesale banking.  Deposit insurance cover is uniformly available to all foreign banks at a non-discriminatory rate of premium.  The norms for capital adequacy, income recognition and asset classification are by and large the same. Other prudential norms such as exposure limits are the same as those applicable to Indian banks. The branch authorization policy for Indian banks has been made applicable to foreign banks subject to the following:  Foreign banks are required to bring an assigned capital of US $25 million up front at the time of opening the first branch in India.  Existing foreign banks having only one branch would have to comply with the above requirement before their request for opening of second branch is considered.  Foreign banks may submit their branch expansion plan on an annual basis. In terms of India’s commitment to WTO, as a part of market access, India is committed to permit opening of 12 branches of foreign banks every year. As against these commitments, Reserve Bank of India has permitted upto 17- 18 branches in the past. The Bank follows a liberal policy where the branches are sought to be opened in unbanked/under-banked areas. Off-site ATMs are not counted in the above limit. Including off-site ATMs,

foreign banks are having (as on October 15, 2007) place of business at 933 locations (273 branches + 660 off site ATMs). The procedure regarding approval of proposals for opening branches of foreign banks in India has been simplified and streamlined for the sake of expeditious disposal. A license under the provisions of B.R. Act, 1949 enables the foreign banks to carry out any activity which is permissible to a bank in India. This is in contrast with practices adopted in many countries, where foreign banks can carry out only a limited menu of activities. As against the requirements of achieving 40 per cent of net bank credit as target for lending to priority sector in case of domestic banks, it has been made mandatory for the foreign banks to achieve the minimum target of 32% of net bank credit for priority sector lending. Within the target of 32%, two sub targets in respect of advances (a) to small scale sector (minimum of 10%), and (b) exports (minimum of 12%) have been fixed. The foreign banks are not mandated for targeted credit in respect of agricultural advances. There is no regulatory prescription in respect of foreign banks to open branches in rural and semi-urban centers.

4.7 WTO financial services agreement, 1997 – banking commitments
India ratified the agreement establishing the WTO in December 1994. Its original schedule in the Financial Services Agreement committed foreign bank presence only through branches at the rate of five licenses per year. It denied the entry of foreign banks if the market share of assets of foreign banks exceeds 15 per cent of the total assets of the banking system. It treated an ATM outside branch premises as a separate branch. India also invoked a MFN exemption in all areas of financial services meaning that its offers are based on reciprocity. India offered to improve upon some of its commitments provided its major trading partners were also prepared to make substantial improvements in their stance on the movement of natural persons. It was felt that India possessed a fair advantage in the availability of skilled manpower in several hi-tech areas such as computer software, engineering consultancy, etc. and it was in India’s interest that free movement of these personnel was allowed into the developed markets abroad. India’s improved negotiating brief included a liberalized policy on ATMs (i.e., an ATM will not

be treated as a separate branch) and increasing the number of new branches to eight. In the negotiations that took place in June 1995, India’s major trading partners made the following demands on India:  India should lift its MFN exemptions if other members do the same.  India should increase the number of licenses and provide a gradual increase in the market share on assets of the foreign banks.  Market share itself should be defined properly in terms of the fund-based assets or total assets on and off the balance sheet.  Subsidiaries and joint ventures should be allowed in banking.  Discrimination against foreign banks in terms of higher rate of taxation, and in placement of surplus funds by public sector units (i.e. national treatment) should be removed. Against these considerations, during the final round of negotiations that was held in December 1997, India made the following commitments:  It deleted MFN exemption in all areas of financial services.  India increased the limit on the number of bank licenses granted per year from eight to 12 but kept the market share unchanged at 15 per cent for foreign banks. But this share of assets is computed as a total of on- and off-balance sheet basis. Licenses issued for ATMs installed by foreign banks were not included in the ceiling of 12 licenses.  Foreign banks already operating in India can invest no more than 10 per cent of owned funds in other financial service companies or 30 per cent of the invested company’s capital, whichever is lower. While the entry of foreign banks brings with it benefits, it also carries certain risks for the host countries. Benefits are in the form of better quality banking services that are offered by foreign banks themselves and also through spurring competition and efficiency in the domestic markets. The arrival of foreign banks with better accounting and disclosure standards could lead to an improvement in prudential regulations in domestic markets. The presence of foreign banks with more sophisticated products could put pressure on domestic supervisory authorities to augment their quality and size of domestic supervisory staff.

The entry of foreign banks has also potential risks associated with it. Another concern relating to foreign entry is that of foreign banks quickly becoming dominant in the domestic banking system. This fear has led to Singapore authorities, while announcing a major liberalization programmed recently, to state explicitly that they wanted local banks to hold at least half of the market. Also, the Philippines has stipulated that the market share of foreign-majority owned banks should not exceed 30 per cent of banking industry. Mexico also restricted foreign ownership to 30 per cent with a cap of individual foreign bank at 5 per cent when it started selling state-owned commercial banks in the early 1990s, but later these restrictions were relaxed and finally removed.

4.8 Banking Services in United States
The United States was an original signatory to the GATT and a leading proponent of the GATT’s free-market principles. It continues to be among the countries urging further discussions on opening markets to trade. Although decisions in the WTO are by consensus, the United States has a highly influential role in the WTO, because it is the largest trader in the world. The U.S. banking sector is deep, competitive, and supported by a strong economy and prudent supervision. The banking industry serves a diverse market, providing wholesale and retail financial services to corporations, small and medium-sized enterprises (SMEs), and individuals. The banking sector includes deposit-taking commercial banks and thrifts. The U.S. banking sector has mirrored consolidation trends in other major economies but is still relatively unique in its significant number of regional and community banks. According to the World Bank the U.S. banking sector provided credit equal to 215 percent of GDP in 2004, more than for most OECD and developing countries. Globally, banking is one of the more mature industries, with global banking growth of 6 percent in 2004 (according to a June 2006 USITC report). The United States’ status as a leader in its domestic and international development of the banking sector, and the expected steady but slow growth of banking globally, suggests that room for revenue growth through new branches is only moderate. In the United States, however, most regional and large U.S. banks have successfully increased revenue growth through consolidation. From end of year 1998-2005 foreign banks’ assets in the U.S. market grew by 77 percent (versus 67 percent for all FDIC insured assets), with foreign

banks currently holding approximately 19 percent of total U.S. banking assets (U.S. Federal Reserve). Foreign banking investment largely reflects inflow from large multinational banks with appropriate experience, skills, capital and a customer-base, which enhances the desirability of expanding cross-border investments. The long-term demand for banking services in the U.S. market is likely to continue to increase at a relatively stable rate. Compared to other developed economies, the U.S. banking sector remains relatively fragmented, suggesting that that further consolidation of the industry through mergers and acquisitions is a real possibility. U.S. banks are standard-bearers in terms of both profitability and efficiency, and the U.S. banking market is highly competitive.

4.9 Banking services in India & United States
While 19 U.S. based banks had Indian branches approved between 2003 and October 2007, no Indian banks had received U.S. approval in the period. Indian banks had applied to set up three branches, two subsidiaries and nine representative offices in U.S. territory, with some requests pending for more than five years. The regulatory regime in India provided a level playing field for foreign and domestic banks. Prudential rules were the same as for local banks, and foreign banks even enjoyed a lower priority-sector lending requirement of 32 percent of adjusted bank credit against 40 percent for Indian banks. Foreign banks had 6.1 percent of deposits and 6.8 percent of advances in the commercial banking system as at the end of June, 2007. Foreign banks dominated the off-balance sheet business with a market share of as high as 72.7 percent, and they had 52 percent of total foreign exchange turnover in the first half of 200708 (April-March) from 41 percent in 2005-06. Foreign banks also recorded a higher rate of return than local banks from local operations. Net profit per branch for foreign banks in 2005-06 was 119.9 million rupees ($30.3 million) compared to 3.3 million rupees for local banks.

4.10 Banking services in China

As an important component to the country's overall economic system, the China’s banking industry has seen rapid growth in line with the economic development of the People’s Republic of China (PRC). Banks have historically been, and continue to be, a significant source of capital for the economy and the primary choice for domestic savings. The Chinese banking sector comprises broad categories of banking institutions, namely joint stock commercial banks, urban commercial banks, urban credit cooperatives, rural credit cooperatives, foreign-invested commercial banks and other financial institutions. As of the year 2006 end, the total assets of the China’s banking sector amounted to Yuan 43.95 Trillion (US$ 5.812 Trillion), an increase of Yuan 16.31 Trillion (US$ 2.16 Trillion) from 2003. During the same period, the total liabilities of the banking sector reached Yuan 41.71 Trillion (US$ 5.516 Trillion), an increase of Yuan 15.14 Trillion (US$ 2.0 Trillion). . China's banking sector has taken concrete steps already to meet the challenges brought about by the country's accession to the World Trade Organization (WTO). The Shanghai Bank welcomed three international shareholders in the year 2002, including the global banking giant Hong Kong and Shanghai Banking Corporation (HSBC) and the International Finance Corporation (IFC) under the World Bank, which hold 8 percent and 7 percent respectively of the Shanghai Bank's shares. According to China's WTO accession agreement in 2001, Beijing agreed to open its banking sector to full foreign competition from December 11, 2006. But Chinese authorities are formulating new regulations that could hamper the efforts of overseas banks to attract retail customers. The banking analysts speculated that Beijing has drafted the new rules in a bid to contain the influence of foreign banks in China, according to the International Herald Tribune. Chinese financial regulators planned to impose tighter restrictions on foreign banks trying to get a slice of the country's huge pile of local currency deposits, worth an estimated US$2 trillion. For the more than 70 foreign banks that operate about 230 branches in the country, the new regulations could limit future expansion plans into smaller second- and third-tier cities.

Foreign banks are eyeing entering the potentially lucrative consumer banking market where they could seek Yuan-denominated deposits, issue credit cards, and offer home loans. The proposed rules would call for foreign banks to incorporate in China with a minimum of RMB1 billion, or US$123.3 million, in capital before they could compete with domestic banks for retail customers. Foreigners are facing growing regulatory hurdles across the financial sector. In September 2006, international firms were denied the opportunity to acquire domestic brokerages. The China Securities Regulatory Commission announced it would stop issuing licenses to foreigners to open new branches in an effort to give domestic players more time to improve profitability. The ban appears to alter plans by Beijing to draw on foreign investors' capital and management expertise to help clean up a sector plagued for years by poor management and heavy losses. Under its WTO commitments, China must allow foreign investors to hold stakes of as much as 49 percent in local brokerages by December 2006. The current ceiling is 33 percent. Foreign banks usually set up their branches in China - initially from special economic zones to coastal areas and then to regional capital cities, as well as major economic cities in domestic areas. This kind of distribution is consistent with the country's opening-up initiatives. Currently, there are more than 30 cities that are permitted to establish operational foreign institutions, among which foreign financial institutions are concentrated in Beijing, Shanghai, Guangzhou, Dalian, Shenzhen, Tianjin and Xiamen. The Japanese Bank took the initial step by setting up the first representative office of foreign financial institutions in China in 1979. Since then, Chinese banks began taking advantage of foreign investment. In 1982 the Hongkong Nanyang Commercial Bank established its first foreign branch in Shenzhen. Xiamen International Bank, the first Sino-foreign joint venture (JV) bank was set up in 1985. With a rapid increase of foreign investment in China since the 1990s, more and more foreign financial institutions have entered the Chinese market. SMEs are becoming valuable clients to both the Chinese and foreign banks. In comparison with Chinese banks, foreign banks have more experience in market segmentation, better credit and risk control, good access to the international market and more simplified procedures for credit approvals, all of which serve to attract Chinese enterprises as clients. In 2003, a qualified foreign institutional investors (QFII) scheme was introduced to allow foreign institutional investors, such as UBS, Deutsche

Bank and Citigroup Global and others to engage in the securities sector on the Chinese mainland. At present there are 50 approved QFII entities. At the same time, a total of 17 foreign and Chinese banks have been approved to invest clients' assets overseas under the qualified domestic institutional investor (QDII) program. So far, they have launched nine QDII products, with sales of 2.3 billion Yuan (USD291 million) in RMBdenominated transactions and USD87 million in US dollar-based transactions.

BANKS’ PERFORMANCE IN INDIAN ECONOMY
(Amount in Rs. Crore) Indian Banks State Bank of India Canara Bank Punjab National Bank Net Worth Return % Net Worth Return % Net Worth Return % 566565.24 15.41 165961.04 18.78 162422.5 16.03 Foreign Banks Standard Chartered ABN Amro Bank HSBC Net Worth Return % Net Worth Return % Net Worth Return % 32077.67 21.63 58853.18 31.35 54987.15 17.6
Table 3: Return on Net Worth% of Indian and foreign banks in 2006 and 2007

The above table shows the total assets employed by few Indian and foreign banks in Indian banking sector and their return on net worth % for the year 2007. It is cleared from the table that the return on net worth % earned by the foreign banks is higher than the Indian banks. State Bank of India showed a return on net worth of 15.41% with the total assets of Rs. 566565.24 crore whereas ABN Amro showed a return on net worth of 21.63% with the total assets of Rs. 32077.67 crore in the Indian banking sector. In the same way, Standard Chartered and HSBC have also shown better returns comparative to the Indian banks. The reason for the better performance of foreign banks can be updated technology used, risk management tools, better operational efficiency, relaxation in the regulations of RBI, etc. Although the Indian banks have a high amount of investment in the Indian banking sector but the foreign banks have a competitive edge of better use of the capital as compared to foreign banks which is the main reason for their better efficiency. (Refer Annexure 1 & 2) (Amount in Rs. Crore) Indian Banks

State Bank of India Punjab National Bank 2006 2007 % change 2006 2007 % change 11299.23 9999.94 -11.5 2917.11 3230.65 10.75 Foreign Banks Citibank HSBC 2006 2007 % change 2006 2007 % change 1577.1 2180.45 38.26 1277.07 1922.39 50.53
Table 4: Operating Profit of Indian and foreign banks in 2006 and 2007

As shown in Table 2, State Bank of India showed a decline in its operating profit from Rs. 11299.23 crore in the year 2006 to Rs. 9999.94 crore in the year 2007 i.e. a decrease of 11.5% whereas Punjab National Bank showed an increase its operating profit from Rs. 2917.11 crore in the year 2006 to Rs. 3230.65 crore in the year 2007 i.e. an increase of 10.75%. These figures depict that the operational efficiency of PNB has increased in the year 2007 whereas the operational efficiency of SBI has decreased. Now if we compare the change in operating profit of Indian banks with foreign banks, it can be clearly identified that the foreign banks enjoy better operational efficiency as compared to Indian banks. Citibank showed an increase in its operating profit from Rs. 1577.1 crore in the year 2006 to Rs. 2180.45 crore in the year 2007 i.e. an increase of 38.26% and HSBC showed an increase in its operating profit from Rs. 1277.07 crore in the year 2006 to Rs. 1922.39 crore in the year 2007 i.e. an increase of 50.53%. Therefore, it is cleared from the above data that Indian banks are falling behind the foreign banks in its operational efficiency. Foreign banks’ operational efficiency is higher than the Indian banks which is the reason for a higher increase in the operating profits of foreign banks when compared with Indian banks. (Refer Annexure 3 & 4) (Amount in Rs. Crore) Indian Banks Punjab National State Bank of India Canara Bank Bank Total Assets ROA % Total Assets ROA % Total Assets ROA % 566565.24 0.84 165961.04 0.98 162422.5 1.03 Foreign Banks Standard Chartered ABN Amro Bank HSBC Total Assets ROA % Total Assets ROA % Total Assets ROA % 32077.67 1.37 58853.18 3.06 54987.15 1.82

Table 5: ROA% (Return on Assets) of Indian and foreign banks in 2006 and 2007

The above table shows the ROA (Return on Assets %) of different banks in Indian banking market. ROA indicates the ability of the entity to generate percentage return on the value of assets employed in the market. SBI had shown ROA of 0.84 in the year 2007 whereas Canara Bank and PNB have shown ROA of 0.98 and 1.03 respectively in the same year. Now if we have a look at the ROA of foreign banks operating in India, ABN Amro had shown ROA of 1.37 in the year 2007 whereas Standard Chartered Bank and HSBC had shown ROA of 3.06 and 1.82 in the same year. It is clear from the figures that ROA generated by the foreign banks in India is higher than the Indian banks operating in the same market. But the value of assets possessed by the Indian banks in the Indian banking system is higher than the value of assets possessed by the foreign banks. But still, foreign banks have been able to generate very high profits proportionate to the value of assets owned by them in the Indian market. This depicts that the foreign banks have used their assets in a better way as compared to Indian banks. One of the major reasons for their high efficiency in generating better returns proportionate to their assets is the regulations or benefits enjoyed by the foreign banks in the Indian banking segment. (Refer Annexure 5 & 6)

(Amount in Rs. Crore) Indian Banks State Bank of India Punjab National Bank 2006 2007 % change 2006 2007 % change 4406.67 4541.31 3.06 1439.31 1540.08 7.00 Foreign Banks Citibank JP Morgan Chase Bank 2006 2007 % change 2006 2007 % change 705.55 900.00 27.56 72.93 106.79 46.43
Table 6: Net Profit of Indian and foreign banks in 2006 and 2007

The table indicates the net profit earned by few Indian and foreign banks

in the years 2006 and 2007 in the Indian banking sector. SBI had reported the net profit of Rs. 4406.67 crore in the year 2006 which was increased to Rs. 4541.31 in the year 2007 i.e. an increase of 3.06%. PNB reported the net profit of Rs. 1439.31 crore and Rs. 1540.08 crore in the years 2006 and 2007 respectively i.e. an increase of 7%. Now if we talk about foreign banks, Citibank had reported an increase of 27.56% in the net profit from the year 2006 to 2007 and JP Morgan Chase bank reported an increase of 46.43% in the net profit during the same period. It clearly states that how fast the foreign banks are increasing their profitability in the Indian market which is leading to intense competition in the market. Due to increase in the competition because of the entry of the foreign banks in the Indian banking system, domestic or Indian banks are providing better service to the customers in order to retain their market share and to fight and survive in the competitive environment. This has given opportunity for Indian banks to achieve the global standards of operations in their working policies. (Refer Annexure 7 & 8)

(Amount in Rs. Crore) Indian Banks State Bank of India Punjab National Bank % 2006 2007 change 2006 2007 % change 35979.57 39491.03 9.76584.15 9 11537.48 20.38 Foreign Banks Citibank Bank of America % 2006 2007 change 2006 2007 % change 3064.394383.65 43.05347.55 430.11 23.75
Table 7: Interest Income of Indian and foreign banks in 2006 and 2007

The above table indicates the percentage increase in the interest income

earned from the year 2006 to 2007 by few Indian and foreign banks in the Indian economy. SBI has shown an increase of 9.76%, PNB has shown an increase of 20.38%, Citibank has shown an increase of 43.05% and Bank of America has shown an increase of 23.75% in the interest income from the year 2006 to the year 2007. The interest income earned by foreign banks is increasing at a higher pace than that of the Indian banks. The reason for this increase can be attributed to the better credit lending services being provided by the foreign banks to the nationals. This growth rate in the income of the foreign banks can create a tough situation for the Indian banks where Indian banks will be facing higher difficulties for their survival if they continued their operations in the traditional ways. Therefore, they need to improve upon their efficiency in providing better services to the customers. (Refer Annexure 9 & 10) (Amount in Rs. Crore) Indian Banks State Bank of India Canara Bank % % 2006 2007 change 2006 2007 change 43414.77 45260.27 4.25 10027.08 12815.51 27.81 Foreign Banks Deutsche Bank ABN Amro % % 2006 2007 change 2006 2007 change 1158.97 1625.37 40.24 1988.59 3027.26 52.23
Table 8: Total Income of Indian and foreign banks in 2006 and 2007

In the above table, SBI has shown an increase of 4.25% in the total income from the year 2006 to 2007. Canara bank has shown an increase of 27.81% in the total income in the same year whereas foreign banks like Deutsche bank and ABN Amro have shown an increase of 40.24% and 52.23% respectively. The data of the banks indicates that foreign banks are giving tough competition to the Indian banks on the one hand and on the other hand, they are also compelling them to improve their service standards to match with the standards adopted by the foreign banks. Because of the WTO negotiations and liberalization policy of the government, foreign banks are getting more and more opportunities to capture large market share in the Indian banking sector along with certain benefits to improve upon the growth rate of the overall economy. (Refer Annexure 11 & 12)

(Amount in Rs. Crore) Indian Banks State Bank of India Canara Bank Bank of Baroda 2006 2007 % change2006 2007% change2006 2007% change 24901.848940.27 2 16.22 291.26 354.39 6 7 16.90 977.45 802.04 6 7 11.82 Foreign Banks HSBC Citibank JP Morgan Chase Bank 2006 2007 % change2006 2007% change2006 2007% change 3634.415317.63 46.31 313.97 564.16 1 2 95.15540.81 194.12 1 120.8
Table 9: TIER I Capital of Indian and foreign banks in the year 2006 and 2007

The above table shows the TIER I capital (includes equity capital, and reserves and surplus) of different banks in the year 2006 and the year 2007. The TIER I capital of SBI in the year 2006 was Rs. 24901.84 crore which was increased to Rs. 28940.27 crore in the year i.e. an increase of 16.22%. Now if we compare this percentage change in TIER I capital with Canara bank, there is a marginal difference whereas the change in TIER I capital of Bank of Baroda from the year 2006 to the year 2007 is 11.82% which is quite lesser than that of SBI and Canara Bank. In foreign banks, JP Morgan Chase Bank’s Tier I capital increased from Rs. 540.81 crore to Rs. 1194.12 crore i.e. a change of 120.8% and HSBC’s and Citibank’s Tier I capital showed an increase of 46.31% and 95.15% respectively in the same period. The change in TIER I capital indicates an increase in the equity capital or reserves and surplus in foreign and Indian banks. It can be clearly identified from the table that the TIER I capital of foreign banks are increasing at a higher pace as compared to Indian banks indicating tough competition in the Indian banking market in the future due to more and more investment in the capital of foreign banks. (Refer Annexure 13 & 14)

4.11 Challenges against Indian banking sector
(i) Improving profitability: The most direct result of the changes in the financial sector is increasing competition and narrowing of spreads and its impact on the profitability of banks. The challenge for banks is how to

manage with fewer margins while at the same time working to improve productivity which remains low in relation to global standards. This is particularly important because with dilution in bank’s equity, analysts and shareholders now closely track their performance. Thus, with falling spreads, rising provision for NPAs and falling interest rates, greater attention will need to be paid to reducing transaction costs. This will require tremendous efforts in the area of technology and for banks to build capabilities to handle much bigger volumes. (ii) Reinforcing technology: Technology has thus become a strategic and integral part of banking, driving banks to acquire and implement world class systems that enable them to provide products and services in large volumes at a competitive cost with better risk management practices. The pressure to undertake extensive computerization is very real as banks that adopt the latest in technology have an edge over others. Customers have become very demanding and banks have to deliver customized products through multiple channels, allowing customers access to the bank round the clock. (iii) Risk management: The deregulated environment brings in its wake risks along with profitable opportunities, and technology plays a crucial role in managing these risks. In addition to being exposed to credit risk, market risk and operational risk, the business of banks would be susceptible to country risk, which will be heightened as controls on the movement of capital are eased. In this context, banks are upgrading their credit assessment and risk management skills and retraining staff, developing a cadre of specialists and introducing technology driven management information systems. (iv) Sharpening skills: The far-reaching changes in the banking and financial sector entail a fundamental shift in the set of skills required in banking. To meet increased competition and manage risks, the demand for specialized banking functions, using IT as a competitive tool is set to go up. Special skills in retail banking, treasury, risk management, foreign exchange, development banking, etc., will need to be carefully nurtured and built. Thus, the twin pillars of the banking sector i.e. human resources and IT will have to be strengthened. (v) Greater customer orientation: In today’s competitive environment, banks will have to strive to attract and retain customers by introducing innovative products, enhancing the quality of customer service and marketing a variety of products through diverse channels targeted at specific customer groups.

(vi) Corporate governance: Besides using their strengths and strategic initiatives for creating shareholder value, banks have to be conscious of their responsibilities towards corporate governance. Following financial liberalization, as the ownership of banks gets broad based, the importance of institutional and individual shareholders will increase. In such a scenario, banks will need to put in place a code for corporate governance for benefiting all stakeholders of a corporate entity. (vii) International standards: Introducing internationally followed best practices and observing universally acceptable standards and codes is necessary for strengthening the domestic financial architecture. This includes best practices in the area of corporate governance along with full transparency in disclosures. In today’s globalize world, focusing on the observance of standards will help smooth integration with world financial markets. The face of banking is changing rapidly. Competition is going to be tough and with financial liberalization under the WTO, banks in India will have to benchmark themselves against the best in the world. For a strong and flexible banking and financial system, therefore, banks need to tackle significant issues like improvements in profitability, efficiency and technology, while achieving economies of scale through consolidation/mergers and exploring available cost-effective solutions. These are some of the issues that need to be addressed if banks want to succeed and not just to survive in the dynamic environment. In India, Banking sector is emerging as a part of the new economic order arising out of globalization expansion of rural credit, poverty eradication, infrastructure and development of agriculture product has assumed high priority in the nation’s development agenda. Keeping in view this phase, an efficient financial service sector like banks can significantly promote growth and income. Liberalization of international trade in financial services is one of the important aspects of negotiations on trade in banking services as a part of the General Agreement on Trade in Services (GATS). Liberalization of financial services provides greater opportunities for mobilization and allocation of funds. WTO norms have opened up lot of opportunities for Indian banking system. With the help of WTO norms, FDI i.e. foreign direct investment is also permitted in the banking sector which has helped a lot for the Indian banks to grow at a pacer rate by utilizing the foreign capital to the best of its use. The financial sector liberalization spearheaded by

WTO under the garb of opening of financial services included privatization and disinvestment of government holdings. The WTO also imposes a whole lot of conditions like withdrawal of subsidies (soft-interest loans etc.) and even manpower limitations. WTO has facilitated a number of global banks taking large stake and control over banking entities in India. This had brought capital, technology and management skills. The globalization of financial sector has also gained importance with the technological advancements which has effectively reduced the barriers of trade in financial services. Today, the Indian financial system is rapidly changing. Some of the features of this change are: • Increasing sophistication of capital markets. • Emergence of global investments. • Industry consolidation. • Heightened focus on customer relations. • Proliferation of new players entering the market. The growth of trade in banking services is expected to lead to the following benefits: Economic performance: Presence of an efficient services infrastructure is required for the success of any economy. Banking Services supply vital inputs for all sectors in the form of borrowings and capital requirements.  Employment Opportunities: Growth in trade services promotes employment within the country. in banking

 Consumer Choice: Liberalization leads to lower prices, better quality and provides a wider choice for the consumers. Presence of banking services at a global level, the banks can provide better services to its customers at a cheaper rate.  Technology Transfer: Liberalization of financial services also encourages FDI which brings new IT and technologies which helps in the development of the financial sector of the economy.  Development: Access to the world economies help the banks in catering to the larger market segment and increasing the customer

base which in turn help in the development of the overall economy by capitalizing on their competitive strength.

5. SUGGESTIONS AND RECOMMENDATIONS
5.1 WTO & future of Indian Banking Sector
Increasing globalization of trade under the WTO has provided India with a new opportunity as well as a necessity to strengthen her efforts at reforming her domestic financial sector. The real issue before India is how to obtain the best deal for herself in the current round of negotiations while seeking to reform her financial sector. In this paper the authors have identified six major issues that will come up for consideration in this round of WTO negotiations and made recommendations for India’s response strategy by appropriately drawing lessons from the global experience in the opening up of the banking sector. It is observed that there is a divergence difference of interests and motivations of different countries participating in the financial services negotiations. Most of the developed countries look for market access and export gains for their large and technologically advanced financial firms. Developing countries, which normally do not enjoy international competitive advantage for their financial services, seek external capital flows for their capital-scarce economies on the one hand, and competitive efficiency for their domestic financial markets, on the other hand. India, no doubt, possesses superior management talent and is at the forefront of new technology. Still, our financial firms are far from competitive to be able to exploit opportunities abroad. Following area few considerations

which should guide the negotiators in determining India’s stance at the future rounds of financial services negotiations. An important consideration is that India stands to gain by joining the global financial markets as benefits far outweigh risks. Primarily, India needs large inflows of foreign capital for achieving and sustaining over 8 percent per annum of real GDP growth. Globalization also has a disciplinary role for future macroeconomic, structural and prudential policies. Foreign competition in insurance sector, which has started in a limited way and reforms in provident and pension funds, will enhance the savings rate and availability of long term funds for infrastructure development. It is now well recognized that India does have opportunities in foreign markets, unlike many other developing countries, through movement of natural persons abroad of skilled labor (software engineers, consultants, etc) and through export of services like financial data processing, back office work, customer services, etc. However, opening of Indian financial markets has to be done cautiously to avoid an East Asian type of crisis. In these countries, financial and structural weaknesses caused the crisis. The major lesson from the crisis is that deregulation and internationalization could trigger a crisis if undertaken without adequate safeguards. India, therefore, needs to strengthen the financial sector through reforms, particularly by institutional capacity-building. Reform of the financial sector, besides being in our own interest, is an important part of India’s response strategy to WTO negotiations. It must be remembered that the process of transition to a competitive environment cannot be achieved rapidly. Therefore, we need to negotiate for a longer transition period. There should be an element of reciprocity in our stance. That is, India should give in to foreign demands only to the extent that the country receives concessions. Areas can be identified in which India should seek benefits from the developed countries. There continues to be a variety of restrictions to the physical movement of India’s natural persons to developed countries. These barriers relate primarily to granting of visas and work permits such as wage parity requirements, requirements to pay social and security taxes and problems with recognition of qualifications and work experience. India should seek better market access for its enhancing skilled and semi-skilled labor and knowledge workers and thereby enhance the scope of export of services.

Foreign banks in India have outperformed other categories of banking firms (with exceptions in some years), in terms of both operating as well as net profit levels as a proportion of total assets. This is also reflected in the higher ‘spread’ enjoyed by the foreign banks in India than any other category of banks. In the next round of negotiations, developing countries like India, China should made demands to the developed economies like U.S. for the approvals of the pending requests. They should also pressurize the U.S. government to remove certain restrictions for the entry of the foreign players in the U.S. banking sector with a view to liberalize the trade in banking services so that the banks of the developing economies can improve their profitability by exploring the overseas market. India should think carefully before increasing the limit of granting branch licenses to U.S. so as to demand U.S. government to grant the approval of the pending requests made by India. Indian government should limit the liberalization of services to the present level because if the foreign banks are allowed to work freely as domestic banks with 100% FDI, foreign banks will dominate over domestic banks. The profits thus generated by the foreign banks would be repatriated to their home countries. Foreign banks also make use of upgraded technology which they bring in from the developed economies which will result into tougher competition for domestic banks. Domestic banks will incur more losses and it will adversely affect the financial sector of the Indian economy and GDP contribution by banking services. Entry of foreign banks is a good prospect of development for the developing economies but restriction free trade in banking by the foreign players may force Indian economy to depend on the foreign banks rather than domestic banks for the efficient working of the financial system. There are broadly four major issues that will come up for consideration in the next round of WTO negotiations. They are:  Should we retain restriction on foreign share of banking assets?  Should we retain the restriction on the number of branch licenses per year?  What about the investment limit by branches of foreign banks (in India) in finance companies?  Should we allow trading in banking through modes of supply other than commercial presence?

6. CONCLUSION
For the past three decades India's banking system has several outstanding achievements to its credit. The most striking is its extensive reach. It is no longer confined to only metropolitans or cosmopolitans in India. In fact, Indian banking system has reached even to the remote corners of the country. This is one of the main reasons of India's growth process. Another reason for the great success of Indian banks is that WTO has opened the gates of expansion for the banks of all the member countries to enjoy the benefits of liberalization of services and to establish them as stronger entities to enhance the productivity of the world economy by entering into the different markets in different economies by way of mergers or by way of establishing their own branches. This have given an ample opportunities to the banking sector to grow much faster and to facilitate or to increase the contribution into GDP by catering to large number of customers

located in different geographical areas in different countries. WTO has given the chance to the banks to use the foreign capital by way of FDIs or FIIs which would generate much higher profits than with the domestic capital because foreign capital brings with it the technological advancements to provide better products and services at a cheaper cost. It has also helped the banking sector to perform its functions at a global level and it has also acted as a supporter in setting the global standards for the banks which can be used as a benchmark by the Indian banks to expand their businesses to achieve or earn higher profits which in turn will help them in growing globally to aid to the development of the whole economy. With the help of entry of foreign banks in the Indian banking sector through mergers & acquisitions, the financial sector has become strong enough to facilitate the payment mechanism in the economy as per the set global standards. Foreign banks currently possess only a marginal portion of the banking market in India, Foreign presence in the banking sector is sure to increase in future because of both the expanding demand for banking services and the compliance with international standards set forth by WTO and Basel II agreements. The foreign banks in India operate quite differently from the domestic banks. The return on assets for foreign banks is double than that of the domestic banks. Foreign banks are more competitive than the domestic banks due to greater technology use and better risk management. Therefore, the foreign banks have a better scope of earning profits in Indian economy as compared to the domestic banks and this benefit of investment will attract a large number of foreign banks to invest more and more money in Indian banking sector.

India has agreed to provide a greater role for foreign banks as a part of the World Trade Organization (WTO) agreement. As a result the Indian banking industry is undergoing a rapid dismantling of long-standing regulations in preparation for the opening of the sector, which will be completed by 2009. The Government of India (GOI) has loosened many of the longstanding restrictions in the past two years. Increases in the presence of foreign banks, private banks, and foreign direct investment (FDI) have fostered a more competitive banking environment. The 2003 -04 annual budget increased the limit of FDI in private banks from 49 percent to 74 percent. This increase allows foreign owners greater management control over private banks. The private banks benefit from the increase in FDI because FDI provides much-needed capital at competitive prices and a higher Capital Adequacy Ratio (CAR) improves the overall health of the Indian banking system.

7.

ANNEXURE

Annexure 1: Graph showing Net Worth of Indian and foreign banks in the year 2007

600000 Net Worth (in Rs. crore) 500000 400000 300000 200000 100000 0 State Bank of India Canara Bank Punjab National Bank ABN Amro Standard Chartered Bank HSBC Net Worth

Banks

Annexure 2: Graph showing Return on Net Worth % of Indian and foreign banks in the year 2007.
35 Return on Net Worth % 30 25 20 15 10 5 0 State Bank of India Canara Bank Punjab National Bank ABN Amro Standard Chartered Bank HSBC Return on Net Worth %

Banks

Annexure 3: Graph showing Operating Profit earned by Indian and foreign banks in the year 2006 and 2007.

Operating Profit (in Rs. crore)

12000 10000 8000 6000 4000 2000 0 State Bank of India Punjab National Bank Banks Citibank HSBC 2006 2007

Annexure 4: Graph showing % change in operating profit of Indian and foreign banks from the year 2006 to 2007.
60 % change in operating profit 50 40 30 20 10 0 -10 -20 State Bank of India Punjab National Bank Citibank HSBC % change in operating profit

Banks

Annexure 5: Graph showing total assets of Indian and foreign banks in the year 2007.

Total Assets (in Rs. crore)

600000 500000 400000 300000 200000 100000 0 State Bank of India Canara Bank Punjab National Bank ABN Amro Standard Chartered Bank HSBC Total Assets

Banks

Annexure 6: Graph showing Return on Assets % of Indian and foreign banks in the year 2007.
3.5 Return on Assets % 3 2.5 2 1.5 1 0.5 0 State Bank of India Canara Bank Punjab National Bank ABN Amro Standard Chartered Bank ROA %

Banks

Annexure 7: Graph showing Net profit earned by Indian and foreign banks in the year 2006 and 2007.
5000 4500 4000 3500 3000 2500 2000 1500 1000 500 0 State Bank of India Punjab National Bank Banks Citibank JP Morgan Chase Bank

Net Profit (in Rs. crore)

2006 2007

Annexure 8: Graph showing % change in net profit of Indian and foreign banks from the year 2006 to 2007.
50 45 40 35 30 25 20 15 10 5 0 State Bank of Punjab India National Bank Banks Citibank JP Morgan Chase Bank

% change in Net Profit

% change in Net Profit

Annexure 9: Graph showing Interest Income earned by Indian and foreign banks in the year 2006 and 2007.

Interest Income (in Rs. crore)

45000 40000 35000 30000 25000 20000 15000 10000 5000 0 State Bank of India Punjab National Bank Banks Citibank Bank of America 2006 2007

Annexure 10: Graph showing % change in interest income of Indian and foreign banks from the year 2006 to 2007.

% change in Interest Income

50 45 40 35 30 25 20 15 10 5 0 State Bank of India Punjab National Bank Citibank Bank of America

% change in Interest Income

Banks

Annexure 11: Graph showing Total Income earned by Indian and foreign banks in the year 2006 and 2007.
50000 45000 40000 35000 30000 25000 20000 15000 10000 5000 0 State Bank of India Canara Bank Deutsche Bank ABN Amro

Total Income (in Rs. crore)

2006 2007

Banks

Annexure 12: Graph showing % change in total income of Indian and foreign banks from the year 2006 to 2007.
60 % change in Total Income 50 40 30 20 10 0 State Bank Canara Bank of India Deutsche Bank ABN Amro % change in Total Income

Banks

Annexure 13: Graph showing TIER I Capital of Indian and foreign banks in the year 2006 and 2007
TIER I Capital (in Rs. crore) 35000 30000 25000 20000 15000 10000 5000 0 State Bank of India Canara Bank Bank of Baroda HSBC Citibank JP Morgan Chase Bank 2006 2007

Banks

Annexure 14: Graph showing % change in tier I capital of Indian and foreign banks from the year 2006 to 2007.

% change in TIER I Capital

140 120 100 80 60 40 20 0 State Canara Bank of Bank of Bank Baroda India HSBC Citibank JP Morgan Chase Bank % change in TIER I Capital

Banks

8.
1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 12. 13. 14.

REFERENCES
Official website of WTO (www.wto.org) Online publication of “The Hindu Business Line” Online publication of “The Tribune” Online publication of “The Financial Express” Online publication of “Focus WTO – A news & views magazine” “World Trade Organization” by P K Vasudeva India Finance and Investment Guide on www.indiamart.com News information available on the website www.rediff.com www.theeconomictimes.com www.hindustantimes.com www.businessworld.in www.business-standard.com Indian Economic Survey 2005-06 & 2006-07

15. India and the WTO, The Development Agenda edited by Deepika M G