CHAPTER – 2

REVIEW OF LITERATURE

2.1 Introduction

2.2 Reviews on Foreign Investment and Banking Reforms

2.3 Reviews on Banking Sector Performance

2.4 Chapter Summary

2.5 Conclusion

40
2.1 Introduction

In this chapter we deal with the review of literature on the various studies related to the

Indian banking. The focus will be on the studies those deal with the reforms in Indian banking,

studies related to various issues, problems, challenges of Indian banking. The focus is also on

the studies dealing with performance evaluation of different banking groups in India. This

chapter will also focus on the relevant studies on banking from different parts of the world,

which will have relevance to Indian banking industry.

This chapter is divided into two parts of i.e. reviews related to literature on Foreign

Investment and Banking Reforms and the literature reviews on Banking Sector Performance as

following.

2.2 Reviews of Foreign Investment and Banking Reforms

Uppal and Rimpi Kaur (2006)1 from time to time, machinery requires servicing or

repairing to work efficiently, similarly the banking system requires some dose of improvement to

comply with the required standards. Hence, banking sector reforms were introduced to remove

the deficiencies in the banking sector. Since 1991, banking sector was facing problems such as

high regulation by the RBI; erosion in productivity and efficiency of public sector banks;

continuous losses borne by public sector banks year after year; increasing NPAs, deteriorating

portfolio quality, poor customer service; obsolete work technology; and inability to meet

competitive environment. The Narasimham Committee was appointed in 1991 and it submitted

its report within three months in November 1991, with detailed measures to improve the

situation of the banking industry. The main motive of the reforms was to improve the operational

efficiency of the banks so as to further enhance their productivity and profitability.

41
 Tapiawala Medha (2006)2 argues while reviewing the banking productivity in post

reform period that in spite of the optimistic views about the growth of banking industry in terms

of branch expansion, deposit mobilization, etc., several distortions had crept into the system,

some of which were - increasing competition, increasing NPAs, obsolete technology, etc.

Government of India appointed second Narasimham Committee under the chairmanship of Mr.

M. Narasimham in 1998 to review the first phase of banking reforms and chart out a program for

further reforms, necessary to strengthen India’s financial system so as to make it internationally

competitive. This situation arose mainly due to the global changes occurring in the world

economy, which has made each industry very competitive. In the second phase of the reforms in

banking, the diversification of the banking business was promoted. The capital adequacy norms

have improved the capitalization of the banks. Statutory Liquidity Ratio has been brought down

to 25% from 38 percent. Transparency with disclosure norms is brought in the balance sheet of

the banks. Legislative provisions, technology development, market infrastructure such as

settlement systems, trading systems, and the like, were all to be developed. The committee

reviewed the performance of the banks in the light of the first phase of reforms and submitted its

report with some repaired and some new recommendations. There were few new

recommendations except- merger of strong units of banks and adaptation of the ‘narrow banking’

concept to rehabilitate weaker banks. The second banking sector reform is going on since 1999

and while it has shown improvement in the performance of banks and on the other side, many

changes have occurred due to the entry of banks in the global market, on the other. Since more

than a decade of banking reforms have been completed, various issues of banking sector reforms,

especially its post reform impact on NPAs, interest income, non-interest income, capital

adequacy, priority sector advances and SLR and CRR etc. are reviewed by her. Overall, her

42
findings are that the banking sector reforms aimed at enhancing productivity, profitability,

efficiency and competitiveness of the banking industry.

Joseph and Nitsure (2000) 3 argued that increasing globalization of trade under the WTO

has provided India with a new opportunity as well as necessity to strengthen her efforts at

reforming her domestic financial sector. The real issue before India is to obtain the best deal in

the current round of negotiations while seeking to reform in financial sector. They 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. They argue that till recently India

had permitted minority foreign participation by foreign banking companies or finance companies

including multilateral financial institutions up to 20 per cent in private sector Indian banks as

technical collaborators or co-promoters, through the Foreign Investment Promotion Board

(FIPB) route. This limit was higher up to 40 per cent if investment by non-resident Indians

(NRIs) and associated overseas corporate bodies (OCBs) is included. The government raised this

limit further to 49 per cent from all sources on the RBI automatic route in May 2001 subject to

guidelines issued to RBI from time to time. The first such guidelines were issued in Feb 2002.

This has included even ADRs/GDRs, which normally come under portfolio investment, as part

of foreign direct investment in banks. Foreign banks have branches present in India were also

made eligible for FDI in the private sector banks subject to the overall cap of 49 per cent.

Foreign investment (both direct and portfolio) limit for public sector banks are, however, subject

to an overall ceiling of 20 percent. The union Budget 2002-03 announced that foreign banks will

be given an option to continue as branches of their parent banks or to set up subsidiaries.

However, currently the Banking Regulation Act, 1949 stipulated a maximum ceiling of voting

43
rights of 10 per cent for such subsidiaries and the budget has proposed amendments to relax this

restriction.

Chandrasekhar (2006)4 examined the policy manoeuvres on FII inflows was courting

risk. The expert group that was appointed to suggest ways of reducing the vulnerability of the

financial system to speculative capital flows has instead recommended further financial

liberalization and openness. The dissenting view of the Reserve Bank, advising caution, has been

virtually ignored by the finance ministry. In its own sober fashion it makes the following points:

(i) that the Expert Group's report does not address the macroeconomic implications of volatility

of capital flows and the fall out of excessive inflows and outflows for macro-economic

management and suggest appropriate measures to deal with the problem; (ii) that a special group

should be constituted on a priority basis to address these issues comprehensively; (iii) that in

view of the growing international concern regarding the origin and source of investment funds

flowing into the country, the issue of PN should not be permitted (since trading of these PN as

will lead to multi layering) hedge funds, which by their very nature cannot be subject to

regulation, registered with SEBI should be examined for de-registration;( iv) that the government

should continue with its policy of keeping separate FII and FDI limits; (v) that the requirement of

special resolutions to be passed by both the shareholders (in an EGM) and the board of a

company for enhancing the FII limit beyond 24 per cent, wherever applicable under the present

policy guidelines should continue, and in cases like retail trading, where FDI is not allowed and

the limit for FII investments is 24 per cent, that limit should not be increased; and (vi) that it

would not be appropriate to permit FIIs to treat debt securities (both government and corporate

debt) as an investment avenue and a ceiling on the total stock of FII investment in debt should be

retained. In sum, the RBI, conscious of the problems created by volatility and the surge in FII

44
inflows, has virtually disowned much of the report, which now reflects a finance ministry view.

The fact that the so-called expert group was loaded with members from the finance ministry

seems to explain its failure to accommodate the legitimate concerns of the central bank, which is

charged with managing the balance of payments and the exchange rate. The desire of the finance

ministry to continue to impose its views is also reflected in the recommendation which the

department of economic affairs should initiate a research program on "Capital Flows and India's

Financial Sector: Learning from Theory, International Experience, and Indian Evidence". Given

the circumstances, this seems to be nothing more than the launch of another effort to offer an

apology for international speculators operating in India's stock and debt markets, ignoring the

views of the central bank.

Figueira et al. (2006)5studied the ownership affected the efficiency of African banks and

he argued that in the last few years, there had been an extensive debate as to whether ownership

matters for bank performance in less developed countries. Their paper investigated whether

privately-owned banks outperform state-owned banks and whether foreign ownership enhances

bank performance. Based on a range of performance ratios as well as parametric and non-

parametric estimations, their results showed that in Africa, on average, privately-owned banks do

not appear to outperform state-owned banks. However, where private ownership involves foreign

ownership then this does seem to have a positive effect on bank performance. Both sets of results

are affected by high variance in the data suggesting that in state-owned and privately-owned

banks and in domestic and foreign-owned banks there are widely differing levels of efficiency.

In addition, they tested for the effects of ownership taking into account environmental, including

regulatory, variables. The study reported results for banking across Africa and in two separate

regions, North Africa and sub-Saharan Africa. They also test for country-level effects.

45
 Porta, et al. (2002)6 examined, government ownership of banks assembling data on

government ownership of banks around the world. The data show that such ownership is large

and pervasive, and higher in countries with low levels of per capita income, backward financial

systems, interventionist and inefficient governments, and poor protection of property rights.

Higher government ownership of banks in 1970 is associated with slower subsequent financial

development and lower growth of per capita income and productivity. This evidence supports

"political" theories of the effects of government ownership of firms. In this paper, we investigate

a neglected aspect of financial systems of many countries around the world: government

ownership of banks. The data shed light on four issues. First, government ownership of banks is

large and pervasive around the world even in the 1990s. Second, such ownership is larger in

countries with low levels of per capita income, underdeveloped financial systems, interventionist

and inefficient governments, and poor protection of property rights (is this in context of India).

Third, government ownership of banks in 1970 is associated with slower subsequent financial

development. Finally, government ownership of banks is associated with lower subsequent

growth of per capita income, and in particular with lower productivity growth rather than slower

factor accumulation. These negative associations are not weaker in the less developed countries.

Of course, as with most growth regressions, these results are not conclusive evidence of

causality. Some aspects of the empirical research are consistent with the 1960s development

economics view that government ownership of banks may arise as a response to institutional and

financial underdevelopment. However, the results are inconsistent with the optimistic assessment

inherent in this view of the beneficial consequences of such ownership for subsequent

development, advanced by Gerschenkron (1962), Myrdal (1968), and others. In contrast, the

results are consistent with the political view of government ownership of firms, including banks,

46
according to which such owner-ship politicizes the resource allocation process and reduces

efficiency. Ultimately, and in line with the latter theories, government ownership of banks is

associated with slower financial and economic development, including in poor countries.

Besley and Ghatak (2001)7 argued over government verses private ownership of public

goods and found there has been a dramatic change in the division of responsibility between the

state and the private sector for the delivery of public goods and services in recent years with an

increasing trend toward contracting out to the private sector and "public-private partnerships."

Their paper analyzes how ownership matters in public good provision. We show that if contracts

are incomplete then the ownership of a public good should lie with a party that values the

benefits generated by it relatively more. This is true regardless of whether this party is also the

key investor, or other aspects of the technology. The main principle of this model suggests that

the assets created in such projects should be owned by the party who cares most about the

outcome-presumably the victory of a particular candidate or a cause. Again, this is not

necessarily the party whose expertise is most crucial to the success of the campaign. Their paper

has set out a framework for thinking about the responsibilities of the state and the voluntary

sector in providing inputs/finance to public projects. Under the reasonable assumption that

contracts are incomplete and hence investments are subject to holdup have a theory of ownership

of public goods. The model developed here delivers the presumption that owner-ship should

reside with the party that cares most about the project. The main value of the framework

developed here is to provide a basis for thinking systematically about how the private sector can

be involved in the provision of public goods, a process that has proceeded apace in the real world

without any under-pinning model to understand it.

47
 Claessens and Luc Laeven (2003)8 studied the reasons that drives bank competition

some international evidence using bank-level data, they apply the Panzar and Rosse (1987)

methodology to estimate the extent to which changes in input prices are reflected in revenues

earned by specific banks in 50 countries' banking systems. They then relate this competitiveness

measure to indicators of countries' banking system structures and regulatory regimes. They found

systems with greater foreign bank entry and fewer entry and activity restrictions to be more

competitive. They find no evidence that our competitiveness measure negatively relates to

banking system concentration. Their findings confirm that contestability determines effective

competition especially by allowing (foreign) bank entry and reducing activity restrictions on

banks. Using a structural model, they estimate competitiveness indicators for a large cross-

section of countries. When they relate their competitiveness indicator to a number of country

characteristics, they find that greater foreign bank presence and fewer activity restrictions in the

banking sector can make for more competitive banking systems. They also find some evidence

that entry restrictions on commercial banks can reduce competition. This suggests that being

open to new entry is the most important competitive pressure. They find no evidence that

banking system concentration is negatively associated with competitiveness. To the contrary,

they find some evidence that more concentrated banking systems are more competitive.

Similarly, they have some, although never significant evidence that the competitiveness of

banking systems relates negatively to the number of banks in the country. They found that these

results remain using several robustness tests. While their results confirm much of the traditional

industrial organization theory that contestability rather than structure is the most important for

competition, the fact that structure matters so little, or even in ways contrary to expectations,

may surprise many involved with competition policy in the financial sector.

48
 Ram Mohan (2005)9 analyzed the foreign institutional investor inflows into the Indian

stock market have conferred several benefits - in terms of lower cost of equity, securities market

reforms and corporate governance. However, more receipts are unlikely to increase these

benefits, while the downside is the potential volatility in exchange rates arising from the fact that

participatory notes constitute a large component. They were not sure about the origins of funds

that go into participatory notes and do not know whether they are permanent in nature. It is

possible to derive the benefits of FII investment without having to put up with the uncertainties

created by PNs.

Ram Mohan (2006)10is taking the stock of foreign institutional investors and suggests that

there is no need to dread FII flows, but neither is there any need to be fixated about raising them.

A specter haunts some of the policy-making circles in the country, the specter of a massive

exodus of FII funds that might play havoc with the Indian economy. The 'Report of the Expert

Group on Encouraging FII Flows and Checking the Vulnerability of Capital Markets to

Speculative Flows', headed by Ashok Lahiri, attempted to lay the specter to rest. Its central

message, namely, FII flows have conferred several benefits and do not pose systemic risks, is

hard to quarrel with. However, the report does seem to overstate the importance of FII flows to

the Indian economy, particularly at the present juncture, while understating the problems they

pose. Net FII inflows have been increasing in recent years. In 2004-05, they amounted to $10.5

billion. This figure has already been exceeded in the current financial year. Cumulative FII

investments were $39 billion in October 2005, larger than FDI investment in the same period and

contributing nearly 28 per cent of the foreign exchange reserves at end- September 2005 is all to

the good. The expert group (EG) seems to think more is better and FII flows should be

"encouraged"- indeed finding ways to do so was part of the mandate of the EG. But the case for

49
actively enticing FII flows in the present situation is by no means persuasive. He begins by

examining the case for encouraging FII flows and examines the vulnerabilities that such flows

might create. He concludes stating the need to encourage FII flows. The EG outlines the

rationale for doing so in the following terms: (1) It can "supplement domestic savings and

augment domestic investment without increasing the foreign debt of the country". (2) "Capital

inflows into the equity market give higher stock prices, lower cost of equity capital, and

encourage investment by Indian firms." (3) "Foreign investors often help spur domestic reforms

aimed at improving the market design of the securities markets, and help strengthen corporate

governance." He suggested that FII- ‘Neither Dread Nor Encourage Them’

Vasudevan (2006)11 discussed the issues raised by the expert group on encouraging

foreign institutional investor inflows released in November 2005. The spiral nature of the co-

movement of inflows and stock prices warrants testing of the hypothesis that the surge in flows is

based only on economic fundamental or the strength of traded companies. The expert group did

not make such an analysis and instead discusses the beneficial aspects of speculation. It quietly

ignored the perception that sub-accounts and participatory notes provide the avenues through

which some speculative flows could have occurred. He argues that there is no standard

theoretical construct relating to portfolio flows. In the early literature, foreign investment was

viewed essentially in terms of foreign direct investment (FDI), a view that was given, as

economic historians would recall, policy relevance in the Leninist New Economic Policy for the

erstwhile Soviet Union in 1924. The rationale of FDI flows, it is well known, is that foreign

savings supplementing domestic savings would help augment investment that in turn would push

up growth, given the productivity of investment. However, productivity of investment would get

50
a boost either simultaneously or with a short lag, when FDI provides technological

improvements along with financial flows. Portfolio flows by definition are not the same as FDI.

Jayadev & Sensarma , R (2007)12 analyzed Mergers in Indian Banking and some critical

issues of consolidation in Indian banking with particular emphasis on the views of shareholders

and managers by the way of survey. An event study analysis of bank stock returns which reveals

that in the case of forced mergers, neither the bidder nor the target banks’ shareholders have

benefited. But in the case of voluntary mergers, the bidder banks’ shareholders have gained more

than those of the target banks. In spite of absence of any gains to shareholders of bidder banks, a

survey of bank managers strongly favours mergers and identifies the critical issues in a

successful merger as the valuation of loan portfolio, integration of IT platforms, and issues of

human resource management. Their study supports the view of the need for large banks by

arguing that imminent challenges to banks such as those posed by full convertibility, Basel-II

environment, financial inclusion, and need for large investment banks are the primary factors for

driving further consolidation in the banking sector in India.

Dasgupta and Thomas Paul (2007)13 gave an independent view on the banking and

financial policy, that the Independent Commission on Banking and Financial Policy has

produced an excellent report that puts the banking and financial policies of India under a

microscope. The analysis is not always on the mark but the report needs to be studied and

debated in detail. They conclude that the ICBFP has done excellent work in putting the financial

and banking policies of India under a microscope. It has brought in to sharp focus the emerging

issues in the financial sector, including FDI, consolidation of banks, fragility of the system, the

need for strengthening public sector banks, the basic functions of banks to lend to industry and

agriculture, and, above all, the social return in creating a growth strategy based on "financial

51
inclusion". They suggested not shutting door to innovations in the financial sector. More serious

academic studies in the banking policy issues need to be initiated to study the issues that have

been raised. They argue that the issue of foreign direct investment (FDI) in banking, the RBI

road map demarcates two phases for foreign bank presence. During the first phase between

March 2005 and March 2009, permission for acquisition of shareholding in India's private sector

banks by eligible foreign banks will be limited to banks identified by RBI for restructuring. The

RBI may permit such acquisition subject to the overall investment limit of 74 per cent of the paid

up capital of the private bank. The investments can be by setting up a wholly owned banking

subsidiary (WOS) or conversion of the existing branches into WOS. But every-body had

forgotten that the public sector banks had indeed played an important role in the financial and

economic development of the country, and, whatever are the shortcomings, they should continue

to play an important role. Even the training and research institutions were asked to generate

funds through commercial means. Unfortunately that was also a time when a lot of studies were

needed about the banking policies and the banking markets. Training in banking is a public good

in nature and therefore institutions of banking policy studies have to play an important role.

Raghbendra Jha (2003)14 analyzes the recent trends in FDI Flows and Prospects for India

and argues that conventional wisdom has it that foreign direct investment (FDI) flows to India

have not been commensurate with her economic potential and performance. India has only very

recently emerged as a destination for FDI since the pre-reform years were marked with a sharp

antipathy toward foreign capital unless under certain conditions. With FDI becoming a

significant component of investment only recently, accounting practices in India lagged behind

international norms. Recently several problems of comparability have been noted. Towards

rectifying some of these, the Government of India revised (starting November 2002) its

52
computation of FDI figures in line with the best international practices and pursuant to the

recommendations of a committee set up to examine this issue has led to a substantial

improvement in FDI figures; but below China. He identifies the quality of FDI (as manifest in

technological spillovers, export performance etc.) as more important than its quantity. It is

argued that high Chinese FDI might well be concealing difficulties and also raising investment is

more important than just raising the FDI component of such investment. He identifies measures

to raise such FDI and improve its effectiveness. As FDI is investment and has a net contribution

of its own there so no reason to distinguish from the general level of investment in the economy.

FDI becomes important in its own right if it makes contributions towards technology progress;

productivity spillovers and consolidating niche export markets. This latter variety of FDI needs a

certain type of domestic policy support in order to flourish. Some of these measures have been

discussed in this paper. This paper emphasizes the view that an enlightened FDI policy is to be

seen as part of a general policy of enhancing investment in this economy under conditions of

sustained production efficiency.

Ghosh et al. (2002)15 studied the effect of liberalization of Foreign Direct investment

(FDI) limits on domestic stocks through evidences from Indian banking sector and they argue

that Government of India relaxed foreign ownership limits in the banking sector in 2002.

Although the change made foreign control possible only in the private sector banks, a portfolio

of Indian banks posted hefty gains at the announcement. With two objectives, in contrast to

extant evidence, which focus on the aggregate stock price effect of FDI limits, they provided the

first evidence of valuation changes at the individual firm level. Second, they test the hypothesis

that the valuation gain of an individual firm reflects a takeover premium, and is a function of the

probability of takeover of the firm. The results demonstrated that valuation gains by private

53
sector banks are significantly higher than government owned banks. Further, valuation gain is a

function of an individual bank’s market value, investment opportunity and efficiency,

productivity, earnings quality, and asset quality. Inefficient, poorly managed, banks with lower

relative market valuation, and excess non-performing assets are likely to benefit most from a

potential takeover, and post the largest gains. They conclude that their evidence was consistent

with the notion that investors welcome the removal of protective barriers and the ultimate

takeover of inefficient firms following the liberalization. As such, their study has important

policy implications for third world countries where foreign ownership of domestic companies is

still restricted to a level where takeover and control is too costly, and often, impossible.

Charvaka (1993)16 argued that foreign banks are India are the new drain and that the

phenomenal profits of foreign banks operating in India have come not from genuine banking, but

from treasury operations, from so-called portfolio management and from lending in the money

market non-deposit resources garnered essentially from other banks, financial institutions and

public sector undertakings. He argues that the policy-planners have thus provided the foreign

banks with a conducive environment to appropriate unreasonably high levels of profits in India.

There is almost connivance in allowing the foreign banks to get round deposit rate regulations by

undertaking portfolio management, including on behalf of public sector undertakings. The

foreign banks are also allowed to conduct operations in the' volatile call money market totally

disproportionate to the size of their deposits. Even the modest 15 per cent target for priority

sector lending to be achieved by the foreign banks by March 1992 has been allowed to be

breached; as the IBA data indicate, they had achieved less than 8 per cent. Is it necessary, either

for attracting foreign direct investment or for improving the country's credit rating in the

international financial markets, that such an unrestrained environment be provided to the foreign

54
bank to rake in phenomenally large profits from this poor society and transfer them abroad?

Apart from the fact that Indian banks functioning abroad have by contrast nursed huge losses, is

there any part of the world-certainly not in the foreign banks' home countries-where the banking

industry enjoys such scope for profit-making? The extraordinarily high profits of the foreign

banks in India and, more important, the direct contribution of government policy to the making

of such profits naturally evoke a parallel with the much discussed 'drain' during the colonial

period.

Joshi (1999)17 analyzed other side of coin of banking sector reforms argue that the flip-

side of banking sector reforms has been the overemphasis on profits and virtual neglect of the

distributive role of the banks. Only strong and high net worth companies within the organized

sector are capable of raising funds at a considerable lower rate of interest, while the credit

disbursal to small borrowers has sharply declined. He argues that still another impact of the

banking sector reform, which has escaped attention, is the substantial expansion of foreign banks

in the country. At the end of June 1991there were 24 foreign banks operating in India with a

branch network of 140. At the end of June 1998, the number of foreign banks has substantially

increased to 42 and their branch network also has gone up to 182. During 1997-98 alone, the

total assets of foreign banks in India have increased by more than Rs 10,000 crore. It is learnt

under the World Trade Organization (WTO) Agreement a minimum of 12 licenses every year

have to be issued to foreign banks or their branches. This will ensure fast spread of foreign

banks' operations in the country. Gradually, these banks are spreading their tentacles to the

suburbs of the 'metros', and to the commercially significant semi-urban centres. The long-term

implications of this aspect of reforms need to be studied in depth. In China, which is quoted as a

fast liberalizing Asian giant, there are severe limitations on the operations of foreign banks in the

55
country. In a number of areas in China, foreign banks' operations are limited to funds acquired

from abroad. Perhaps, a review of our policy has become imminent. He argues that it is

undeniably true that the introduction of reforms process has paved the way for building a strong

and efficient banking system. Its importance against the backdrop of recent happenings in the

south-east Asian countries cannot be overemphasized. There can be no two opinions on the

continuation of the reforms. And yet, the 'other side' of banking sector reform narrated above

partly explains the predicament faced by the Indian banking system. Their low profitability is not

merely due to the visible deficiencies in terms of low productivity, over-staffing, structural

rigidities, etc. They, no doubt, have impinged on the profitability of the banks. But the issues

narrated above have in a disguised manner reduced the financial muscle considerably. Their

competitiveness is at stake because of the delicate financial health. Aims and the larger

objectives of commercial banking in India appear to have gone haywire. These issues have gone

unnoticed andhe warns that it is time for India to wake up.

Joshi (2005)18 argued the need for a national banking policy. He argues the UPA

government, which proclaims to be the champion of the poor with a focus on rural areas, should

pause and ponders before pushing the bill for 74 per cent foreign equity in private sector banks,

as this will certainly lead to a flocking of banking services to the urban and metropolitan centres.

Evolving a National Banking Policy should get precedence over liberal permission to FDI in

banking. The Union Government's dogged insistence on allowing 74 per cent equity participation

by foreign financial institutions in Indian private sec-tor banks is incomprehensible. The

proposed removal of ceiling of 10 per cent on voting rights will clear the decks for FDI flow into

private banks on a large scale. Apparently, strengthening the capital base of private sector banks

appears to be the overriding objective. Thus, eventually, these old private sec-tor banks which

56
have been functioning to provide banking services to the local people, including the weaker

sections on an informal basis for more than six decades, will become extinct. The locals will not

have their own bank, which they could enter confidently, and converse in the local language. The

UPA government, which proclaims to be the champion of the poor with a focus on rural areas,

should pause and ponder before pushing the bill for 74 per cent foreign equity in private sector

banks, as this will certainly lead to a flocking of banking services to the urban and metropolitan

centres. Evolving a National Banking Policy should get precedence over liberal permission to

FDI in banking.

Prasanna (2008)19 studied the Foreign Institutional Investors (FII) and their Investment

Preferences in India. FII have gained a significant role in Indian capital markets. Availability of

foreign capital depends on many firm specific factors other than economic development of the

country. Their paper empirically observed that the foreign investment is more in companies with

higher volume of publicly held shares. The promoters’ holdings and the foreign investments are

inversely related. As has been observed in the governance literature the foreign Investors choose

the companies where family shareholding of promoters is not substantial. Among the financial

performance variables the share returns and Earning per share are more influencing variables on

their investment decision. This provides a pointer for further research that market performance is

the strong basis for attracting more foreign investment for the individual companies. The foreign

institutional investors with draw their money when the stock market performance starts sliding

down.

Nagesh Kumar (1998)20 examined liberalization and changing patterns of Foreign Direct

Investment (FDI) and if India’s relative attractiveness as host of FDI has improved. He examines

the emerging trends and patterns in FDI inflows to India. A major objective is to evaluate the

57
role that policy liberalization has played in shaping these patterns. This is attempted with an

analysis of changes in India's shares in FDI outflows from European and other triad sources of

FDI as well as by analyzing the changes in the shares of major source countries with policy

liberalization. The author concludes with a few remarks for policy.

Laura Alfaro et al.(2004)21examined the various links among foreign direct investment,

financial markets and growth. They model an economy with a continuum of agents indexed by

their level of ability. Agents have two choices: they can work for the foreign company in the FDI

sector and use their wealth to earn a return or they can choose to undertake entrepreneurial

activities, which are subject to a fixed cost. Better financial markets allow agents in the economy

to take advantage of knowledge spillovers from FDI. They argue that the rationale for such

increased efforts to attract more FDI stems from the belief that FDI has several positive effects

which include productivity gains, technology transfers, the introduction of new processes to the

domestic market, managerial skills and know-how, employee training, international production

networks, and access to markets. In addition to these real benefits, its relative stability has also

increased the emphasis on FDI among all capital flows. Either by learning-by-observing or

learning-by-doing, foreign production may increase domestic productivity and the overall

economic growth in the domestic economy. They argue that the domestic firms may benefit from

accelerated diffusion of new technology if foreign firms introduce new products or processes to

the domestic market. In some cases, domestic firms might benefit just from observing these

foreign firms (Blomstrom and Kokko, 1997). In other cases, technology diffusion might occur

from labor turnover as domestic employees move from foreign to domestic firms. These benefits

together with the direct capital financing it provides, suggest that FDI can play an important role

in modernizing the national economy and promote growth.

58
 Sabi Manijeh(1988)22 discussed an application of the theory of FDI to (Multi National

Banks) MNBs' in LDCs. He constructed a model that incorporates both supply and demand

factors assessing the determinants of MNBs' expansion into LDCs, A reduced form of the model

is tested by using pooled data over the period 1975-1982 for a sample of twenty-three LDCs. The

results of the study indicate that market size, the presence of multinational corporations from the

home country, the extent of economic development, and the balance of payments are all

significant determinants of the growth of MNBs in LDCs. Despite the burgeoning literature on

the determinants and impact of Multinational Corporations (MNCs) in LDCs, the studies

concerning Multinational Banks (MNBs) in LDCs as a subset of the literature on Foreign Direct

Investment (FDI), have been scanty. There are only a few studies dealing with MNBs in LDCs

per se. The works of Odle [1981], UNCTC [1981], and Germidis and Michalet [1984] are mostly

descriptive. To a limited extent, these studies have documented factors contributing to the

growth of MNBs in the developing countries. However, statistical analysis of various aspects of

FDI in banking as applied to LDCs is almost nonexistent. Indeed, lack of empirical studies on

multinational banking was also highlighted by Aliber [1984] in the only survey of literature on

this subject.

Dunning (1980)23 attempts to first sets out the main features of the eclectic theory of

international production and then seeks to evaluate its significance of ownership and location

specific variables in explaining the industrial pattern and geographical distribution of the sales of

U.S. affiliates in fourteen manufacturing industries in seven countries in 1970.

Dunning (1998)24 first traces the changing world economic scenario for international

business over the past two decades, and then goes on to examine its implications for the location

of foreign direct investment and multinational enterprise activity. It suggests that many of the

59
explanations of the 1970s and early 1980s need to be modified as firm-specific assets have

become mobile across natural boundaries. A final section of the article examines the dynamic

interface between the value-added activities of multinational enterprises in different location. He

argues that traditionally, the FDI has moved from developed to other developed or developing

countries preferably in sectors like mining, tea, coffee, rubber, cocoa plantation, oil extraction

and refining, manufacturing for home production and exports, etc. Gradually their operations

have also included services such as banking, insurance, shipping, hotels, etc. As regards location

choice, the Multi National Enterprises (MNEs) tend to set up their plants in big cities in the

developing countries, where infrastructure facilities are easily available. Therefore, in order to

attract FDI flows, the recipients countries/regions were required to provide basic facilities like

land, power and other public utilities, concessions in the form of tax holiday, development

rebate, rebate on undistributed profits, additional depreciation allowance and subsidized inputs,

etc.

Dunning (2000)25 updates some of his thinking on the eclectic paradigm of international

production, and relates it to a number of mainstreams, but context-specific economic and

business theories. It suggests that by dynamizing the paradigm, and widening it to embrace asset-

augmenting foreign direct investment and MNE, activity it may still claim to be the dominant

paradigm explaining the extent and pattern of the foreign value added activities of firms in a

globalizing, knowledge intensive and alliance based market economy. Concludes that, then an

add-on dynamic component to the eclectic paradigm, and an extension of its constituent parts to

embrace both asset augmenting and alliance related cross-border ventures can do much to uphold

its position as the dominant analytical framework for examining the determinants of international

production. They believed that recent economic events and the emergence of new explanations

60
of MNE activity have added to, rather than subtracted from, the robustness of the paradigm.

While accepting that, in spite of its eclecticism (sic), there may be some kinds of foreign owned

value added activities which do not fit comfortably into its construction, it was believed that it

continues to meet most of the criteria of a good paradigm; and that it is not yet approaching its

own ‘creative destruction’.

Dunning (2004)26 addressed the role of institutions and institutional reform as a country

specific competitive enhancing advantage affecting the location of inbound foreign direct

investment (FDI). The focus of interest was on European transition economies. Their thesis

(backed up by a limited amount of econometric and field research) was that the extent and

quality of a nation’s institutions and its institutional infrastructure (II) was becoming a more

important component of both (a) its overall productivity and (b) its drawing power to attract

inbound FDI. This, in turn, reflects the belief by private corporations (both foreign and home

based) that the role played by location bound institutions and organizations in 21st century

society is becoming an increasingly critical determinant of the successful deployment of their

own ownership specific, but often mobile, assets.

RBI (2002)27 informs on the performance of FDI companies using balance sheet data

after compilation of over 300 companies to assess their financial performance is put to

understand the performance of FDI companies with non-FDI companies on their relative

efficiency. During 1992-93 to 1999-2000, sales growth of public limited companies was lower

than non-FDI companies in four years. However, in case of private limited FDI companies, the

sales growth was higher in all the years, except in 1999-2000. The insight derived from the

theoretical understandings, empirical literature and performance of FDI companies in India give

mixed picture. It is observed that Return on Equity (ROE), which essentially decides the

61
investment was higher in case of FDI companies than the non-FDI companies, irrespective of

whether they are public limited or private limited companies. In general performance of FDI

companies in terms of sales growth and return on equity was better than that of non-FDI

companies. A comparative analysis of FDI companies revealed that former is performing well in

terms of sales growth, return on equity than later. However, the trends in export-intensity of sales

and import-intensity of exports of FDI companies are not very encouraging. It implies that FDI

companies are concentrating more on the domestic market for sales and their import

requirements are relatively high.

Jeromi (2002)28 identifies two distinct phases in the growth of FDI in India during the

nineties. The first phase consists of four years from 1994-1997 characterized by high growth of

approvals and low inflows. The subsequent four years from 1998-2001 forms the second phase

which is marked by low growth in approvals and higher actual inflows. Though there as an

increase in FDI inflows in the nineties, the same as per cent of India’s gross capital formation

and FDI was very low when competitor China. An undesirable development in FDI approval in

recent times was the decline in the number technical collaborations. As nearly 40 percent of FDI

inflows are utilized for mergers and acquisitions, there is a need to encourage FDI in the

Greenfield projects. In its impact analysis, based on company data, the paper finds that the

performance of FDI companies is better than non-FDI companies. However, FDI companies

could not contribute significantly for India’s exports and their import intensity is relatively high.

The paper observes that real sector reforms, development of infrastructure and privatization are

the three major pre-requisites for the larger flow of FDI to India. The paper notes that given the

deficiencies in markets and existing institutions, in a liberalized environment, market signals and

its direction need to be made more explicit so as to direct FDI inflows in the desired directions.

62
2.3 Reviews on the performance of Indian Banking Sector

Debasish (2006)29 has used Data Envelopment Analysis to measure efficiency

performance of Indian banking. He argued that Data Envelopment Analysis (DEA) has become

increasingly popular in measuring efficiency in different national banking industries for it allows

comparison of relative efficiency of individual banks and also peer group performance. The most

traditional method to benchmark efficiency in the banking sector is the ratio analysis of different

financial parameters (like ROA or ROI). However, these ratios give a one dimensional,

incomplete picture of the process and fail to account for the interaction and trade off between the

various parameters. Apart from the traditional analysis of financial statements of banks, a most

common way to tackle the issue is to use an econometric approach to measure various aspects of

bank efficiency in a multi-bank environment. DEA has been widely used to measure efficiency

performance of different financial institutions like banks, insurance and mutual funds.

Particularly in the banking sector, it has been applied to benchmark the performance of different

banks or to study the efficiency estimates of different branches of a particular bank. The post-

liberalization era in Indian banking has witnessed a host of financial reforms leading to stiff

competition among banking units. In recent times, the question of relative comparison of banks

by size, type of ownership or date of appearance has been a pertinent issue to reckon with. The

analysis uses nine input variables and seven output variables. Segmentation of the banking sector

in India was done along the following basis: bank assets size, ownership status and years of

operation. Overall, his analysis supports the conclusion that foreign owned banks were on

average most efficient and that new banks are more efficient that old ones, which are often

burdened with old debts. In terms of size, the smaller banks are globally efficient, but large

63
banks are locally efficient. Moreover, his study finds evidence of concentration of efficiency

parameters among peer bank groups.

Sunil Kumar (2008)30analyzes efficiency–profitability relationship in Indian Public sector

banks and argued that the experience of the Asian financial crisis of 1997–98 has confirmed the

fact that a sound and well-regulated financial system, of which the banking system is the most

crucial part, is a sine qua non for macroeconomic stability and sustainable economic growth. The

presence of a crisis in the banking system in terms of its insolvency has the potential to push the

economy into a slump, in what is the most extreme form of credit driven macroeconomic cycle

(Caprioand Honohan 2002). In a dynamic and competitive banking system, only robust banks in

terms of high levels of both technical efficiency and profitability can ensure a reasonable return

to stakeholders and minimize the risk of bankruptcy since they possess the ability to withstand

any sort of financial crisis. In fact, the growing number of distressed (weak) banks in the banking

sector leads to misallocation of resources, reduction in overall return on capital and high

transaction costs. This, in turn, dampens the growth of the banking sector in particular and the

economy in general. Given the aforementioned considerations, it has become significant to

identify robust and distressed banks in the banking sector. This may help to evolve an

appropriate strategy to restructure the distressed banks in the banking system.

Urjit R. Patel (1997)31discussed emerging reforms in Indian banking in the international

perspectives and stressed the need of some important reforms to be implemented to put Indian

banking on a sound footing for increasing global integration of the Indian economy, both real

and financial terms. The policies objectives drawn from international experience are i.) to

enhance the flexibility of banks to respond effectively to changing circumstances (volatility); and

ii.) to ensure the sustainability of the restitution of public sector banks. He discussed measures

64
such as maintaining a higher capital adequacy ratio; facilitating restructuring of the sector by

formulating an exit and privatization policy; implementing stricter and more transparent

accounting and disclosures norms; and enhancing rule-based supervision. He argues that the

benefit from having a healthy domestic banking system is undoubtedly considerable in terms of

efficient domestic financial intermediation. However it is ignored that banks will eventually have

to compete internationally. Even without full capital account convertibility competition has

increased considerably. Many Indian blue-chip corporations are already accessing almost their

entire requirement of long terms funds from overseas.

Mathur (2004)32 examined the role of state in regulation of Indian financial sector. It

attempted to find the rationale for the role of state in a regulatory system develops a framework

for a regulatory mechanism and reviews state policy as well as the existing regulatory structure

in India. An assessment based on standard parameters indicates that all regulatory agencies have

the state's presence. Also, an assessment made on tie basis of international codes and standards

shows a high degree of compliance of supervisory standards in the banking segment. In

obtaining and maintaining these standards the state has played a significant role through

legislative, consultative and supportive measures. His paper assessed the role of state in

regulating the financial sector in India. The rationale for the state to have a specified role in

regulating the financial sector is well established. In India, as in other countries, separate

regulatory agencies exist for different segments of the financial sector. An assessment based on

standard parameters indicates that all the regulatory agencies have a presence of the state on their

management and the state retains the statutory powers of appointments, removal and superseding

the management with minor conditionality’s. Also, an assessment made on the basis of

international codes and standards (Basle Core Principles of Supervision) shows a high degree of

65
compliance of supervisory standards in the banking segment. In obtaining and maintaining these

standards the state has played a significant role through legislative, consultative and supportive

measures. Finally, there remains an overriding responsibility of the different administrative units

of the state in ensuring the smooth functioning of the regulatory agencies.

Mathur (2005) 33 reviewed the role of state as a facilitator for market orientation through

i. legislative changes ii. Competition enhancing measures, iii. Institution building iv. Dispute

resolution systems and v. Market deepening action. An analysis of legislative measure

undertaken by the government of India shows that out of the 43 legislative acts/subordinate laws

administered by the banking division of facilitating the development of the financial sector. For

providing a market orientation to the financial sector the states in India played a historical role

earlier and are facilitating restructuring as well as consolidation. Providing functional autonomy

and operational flexibility to public sector banks has been the main contribution of the state in

facilitating market orientation of banks. His paper is limited to the banking segment of financial

sector and insurance sector is not covered. He stressed that on the move towards globalization,

the financial sector has to achieve a high degree of compliance in international codes and

standards. Even though the regulatory and supervisory institutions have to ensure these standards

are achieved, the state is required to play a proactive role through legislative, consultative and

supportive measures.

Mathur (2006)34examined the mythology of banking ownership and he described the

success story of the Indian banking system and also challenges some conclusions on the issue of

state ownership of banks. Contrary to the conclusions arrived at by several cross-country studies,

the Indian banking system, despite maintaining significant state ownership, has increased bank

productivity and efficiency, and enhanced credit access.

66
 Mathur (2007)35 examined convergence and divergence of Indian banking. He argues

that the Reserve Bank of India's report Trend and Progress of Banking in India 2006-07' states

that the Indian commercial banking system has achieved remarkable soundness, dynamism and

resilience. There is also a convergence in the levels of soundness of public sector banks and new

private banks. However, the RBI's claim that the indicators of soundness for Indian banks

compare well with international standards is not convincing.

Kumbharkaret. al.(2003)36 analyzed ownership and productivity growth in Indian

banking industry as a relationship between deregulation and total factor productivity (TFP)

growth in the Indian banking industry using a generalized shadow cost function approach. TFP

growth is decomposed into a technological change, a scale, and a miscellaneous component. A

disaggregated panel data analysis, using the population of public and private banks over 1985-96

that covers both pre and post-deregulation periods, indicates that a significant decline in

regulatory distortions and the anticipated increase in TFP growth have not yet materialized

following deregulation. While private sector banks have improved their performance mainly due

to the freedom to expand output, public sector banks have not responded well to the deregulation

measures. Their paper analyses the relationship between deregulation and productivity growth

using data from the Indian banking industry over a 12 year period from 1985-1996. The

empirical framework is based on a generalized shadow cost function that allowed to test whether

regulation has led to distortions in input uses in Indian banking and whether such distortions

declined over time. Their analysis for both publicly and privately owned banks, to examine

whether productivity growth and the effects of regulation varied between ownership groups.

Their results show that a significant decline in regulatory distortions and the anticipated

increases in TFP growth have not yet materialized in the Indian banking system following

67
deregulation. This finding of limited response of public sector banks to deregulation is not

peculiar to India but has also been found in the study by Denizer (1997) on the Austrian banking

system. The fact that public sector banks in these economies have become too dominant to feel

the impact of a new environment could be one reason behind this limited response. Finally, their

result indicate the presence of weak ownership effect in Indian banking and no evidence of

performance differentials narrowing due to competition following deregulation. They analyses

the relationship between deregulation and productivity growth using data from the Indian

banking industry over a 12 year period from 1985-1996. The analysis is done for both publicly

and privately owned banks, which enabled to examine whether productivity growth and the

effects of regulation varied between ownership groups.

Ram Mohan (2002) 37 examines the deregulation and performance of public sector banks

and focused on the performance of India's public sector banks (PSBs) performed in the years

since bank deregulation was set in motion in 1992-93.The banking system has not collapsed nor

have there been a banking crisis and the efficiency of the system as a whole measured by

declining spreads has improved. His paper documents and evaluates the performance of PSBs

since deregulation in absolute and relative terms and attempts to understand the factors

underlying their improved performance. The performance of India's PSBs improved since the

onset of financial deregulation in 1992-93. It is important to know whether the central objective

of financial deregulation - improved efficiency - has been furthered. It is important also because

improved efficiency is, to some extent, co-terminus with stability in the financial system, for

hugely inefficient banks pose threats to the system. He assumes importance in the context of the

crying need for recapitalization of PSBs.

68
 Ram Mohan (2003)38 attempted a comparative analysis of public and private sector banks

by revenue maximization approach. A comparison of performance among three categories of

banks - public, private and foreign - using physical quantities of inputs and outputs, and

comparing the revenue maximization efficiency of banks during 1992-2000. The findings show

that PSBs performed significantly better than private sector banks but no differently from foreign

banks. The conclusion points to a convergence in performance between public and private sector

banks in the post-reform era, using financial measures of performance. They have attempted a

comparison of performance among three categories of banks-public, private and foreign-using

physical quantities of inputs and outputs and comparing the revenue maximization efficiency of

banks during 1992-2000. He finds that public sector banks performed significantly better than

private sector banks but no differently from foreign banks on this measure. The superior

performance of public sector banks is to be ascribed to higher technical efficiency rather than

higher allocative efficiency.

Ram Mohan (2004)39 argued that a ‘misplaced priorities’ is a clear case for consolidation

among India's larger public sector banks. These banks have been improving their performance

consequent to deregulation, thanks to an enhanced commercial orientation, greater autonomy and

injection of market discipline. Focused on human resource development issues, risk management

and technological up gradation. A preoccupation with mergers at this stage is not only a

distraction; it could derail the steady improvement in performance in the banking system over the

past decade. Judging by the barrage of news on the subject, one could be forgiven for supposing

that the banking sector was in the grip of merger fever. The time for consolidation in banking has

come. He enquires whether the move towards eventual privatization, including transfer of control

69
to foreign banks, is the right prescription for a banking system that has shown an improving

trend in efficiency while remaining stable, needs to be vigorously debated.

Ram Mohan (2005)40 analyzed the issues and evidences of bank consolidation. He argues

that India's public sector banks lack a compelling rationale for consolidation. Contrary to the

experience elsewhere, spreads at PSBs did not decline consequent to deregulation and

profitability has improved sharply, making the Indian banking system the second most profitable

in the world. The performance of PSBs, measured by the appreciation in stock values, has also

been very impressive. He argues that the banking the world over has been in the throes of

consolidation among firms from early two decades now. Consolidation is premised on gains to

shareholders that could result from greater efficiency, diversification, market power or the

perception that the merged entity would be 'too big to fail'. However, consolidation could also be

driven by non-value maximizing motives, such as empire building by corporate executives, or by

government's objective to make the banking system more stable. Consolidation has been driven

by a variety of forces: deregulation, technology, globalization and financial distress. The US

banking system accounts for the highest proportion of mergers, deregulation has been an

important force. There is an optimal size beyond which scale does not confer benefits and this

optimal point seems to be around $10 bn for US firms. However, it is not possible to generalize

this finding to other economies.

Ram Mohan (2005)41 evaluated foreign institutional investors as stock taking. He argued

that the institutional investors have grown in importance in the mature economies in recent years

and come to supplant banks as the primary custodians of people's savings. Flows of private

capital through FIIs have in recent years augmented forex reserves in emerging markets. In India,

over the past decade, FIIS have displaced domestic mutual funds in importance in the equity

70
market. Their shareholding in the Sensex companies is large enough for them to be able to move

the market. The volatility in portfolio inflows to India has been modest compared to other

emerging markets. As domestic funds grow in size and pension funds enter the equity market

that would provide a measure of self-insurance against volatility occasioned by FIIs flows. The

real problem caused by variations in FII inflows from year to year is not stock market volatility

but difficulties posed in management of money supply and the exchange rate. He finds that there

has been an improvement in efficiency, competitiveness and health of all the segments of the

Indian financial sector. Appropriate sequencing and repack-aging of reform measures with

changed emphasis and relative speed of reforms at various sectoral levels would ultimately

determine whether India would be able to leapfrog into the new growth trajectory.

Ram Mohan (2006)42 argued that not to shoot regulator while commenting on RBI

Guidelines on Foreign Ownership in Banks. The RBI's draft guidelines on foreign ownership in

Indian banks are actuated by an assessment of the relevance of foreign banks to the primary

objectives of stability and efficiency in the domestic banking system. They reflect an

appreciation of the improvement on these counts achieved by the Indian banking system in the

post-reform era. Thus, an enlarged presence of foreign banks clearly appears to be undesirable at

present. He argues that the committee on financial sector reforms highlights several concerns on

the Indian banking sector about financial deepening, inadequate competition, lack of scale, high

spreads banking, the low usage of new technologies, the decline in market share of public sector

banks, etc. These concerns are either valid only up to a point or are misplaced when viewed

against the totality of the Indian banking situation. Concern is also expressed about social

obligations, delinking the government from banks and greater freedom to private banks - these

71
too are not valid concerns. Indian banking is in a reasonably healthy state and is evolving in the

right direction. It needs incremental, not sweeping, changes.

Ram Mohan (2008)43 argued if it is a time to open up to foreign banks in India and

questioned that what are the benefits and costs to India of an enlarged foreign bank presence?

Going by the three important criteria of access to financial services, efficiency and provision of

credit, it is unlikely that foreign banks can do more than what the Indian banking system can

provide. Add to that the risks posed by larger operations by foreign banks and there is a case for

revisiting the 2005 road map of the Reserve Bank of India which indicated that these banks may

be able to expand their presence after 2009.

Ram Mohan (2008)44 argues that the committee on financial sector reforms highlights

several concerns on the Indian banking sector - about financial deepening, inadequate

competition, lack of scale, high spreads banking, the low usage of new technologies, the decline

in market share of public sector banks, etc. These concerns are either valid only up to a point or

are misplaced when viewed against the totality of the Indian banking situation. Concern is also

expressed about social obligations, delinking the government from banks and greater freedom to

private banks - these too are not valid concerns. Indian banking is in a reasonably healthy state

and is evolving in the right direction. It needs incremental, not sweeping, changes.

Bhideet. al. (2002)45 critically overviewed banking sector reforms and argued that the

traditional face of banking is undergoing change - from one of mere inter-mediator to that of

provider of quick cost effective and efficient services. In most emerging economies, the banking

sector has to face difficult challenges. A discussion on these challenges and issues arising as a

result of the ongoing financial sector reforms is important. They studied the weaknesses in the

system and that cope with the critical issues, which arise as a result of the reform process. The

72
corporate governance is last, but not the least of the problem areas is the weak corporate

governance practices in banks in general, and PSBs, in particular. It must be appreciated that the

reform process is only an enabling mechanism; leveraging it fully is possible only if the

institutional players in the system are receptive to good governance. Good governance practices

are a 'coping mechanism' for an institution. Lack of such mechanism can prove to be a major

source of weakness among financial institutions and banks, in India. Another area, which has

received little operational importance, is corporate governance. Good governance enables an

organization to reap full benefits of the reform and acts as a coping mechanism in containing the

risks. Many of the problems in the banking sector in India can be fundamentally traced t o the

lack of sound corporate governance practices. The rights of private shareholders of

SBI/nationalized banks are very considerably a bridged. At present, they do not enjoy the basic

rights of adoption of annual accounts or approving dividends. There is also a lack of equality

among different group of shareholders. In the private sector, voting rights of individual

shareholders are restricted to no more than 10 per cent of the bank's equity, even though they

may own more than 10 per cent of the equity. The composition, functioning and lack of

autonomy of the boards call for a major reform. The manifestation of the relationship between

the government as owner and banks also needs to be reviewed and restated.

Nachane (1999)46 examined problems and prospects of capital adequacy gaps for banks.

He argued that the main purpose of bank regulation is the maintenance of a sound banking

system, which is usually narrowly interpreted to mean 'prevention of bank failure'. To this end,

regulators examine the riskiness of assets and the adequacy of capital. But do rigid capital

adequacy ratios ensure adequate bank capitalization in reality? Alternatives such as Value-at-

Risk and Pre-Commitment models have been used in some developed countries. India needs

73
theoretical analysis of these models and empirical data before it can consider a shift from the

current capital regulatory arrangements. While adequate bank capitalization is desirable and even

necessary do capital adequacy ratios ensure it? A perusal of the theoretical literature and the

available (admittedly limited) evidence pertaining to advanced countries (mainly the US)

reinforce these misgivings. Alternate arrangements such as Value-at-Risk models and Pre-

Commitment models are then taken up for examination. But a headlong rush along the Basle

path of inflexible CARs, which the Narasimham II Committee seems to advocate, is equally

inadvisable. After all the chairman of the Basle Committee, W P Cooke, had himself said, "There

is no objective basis for ex-cathedra statements about levels of capital. There can be no certainty,

no dogma about capital adequacy" [Cooke 1981].

Nachaneet. al. (2005)47 studied a micro economic evidence of the corporate performance

and Bank nominee directors. Their argument is ‘that the banks and financial institutions play a

major role in governance of non-financial companies in India through the mechanism of nominee

directors. Their paper probes two allied issues: firstly, the isolation of the firm specific factors

which determine the presence of bank nominee directors on boards and secondly, whether

companies, with bank nominee directors exhibit better performance/governance than companies

with no banker representation on their boards. A Probit model estimated over a cross-section of

Indian manufacturing firms for 2003, indicates that bankers on boards seem to exert a healthy

impact on the companies. In fact, large public limited companies are likely to exhibit banker

representation, primarily in their role as expertise providers. The evidence from Tobit model

reconfirms these results. They attempted to identify the factors influencing the inclusion of

bankers on (non-financial and listed) company boards as well as exploring the implications of

their presence. This is expected to shed light on the role that bankers play on lenders and other

74
bankers as having fixed roles. It would be of interest to separate the role of bankers on a board in

an executive capacity from that of bankers in a non-executive capacity.

Das and SaibalGhosh (2004)48 empirically investigated issue of corporate governance in

banking system using data on banking systems for the period 1996-2003, the findings reveal that

CEOs of poorly performing banks are likely to face higher turnover than CEOs of well

performing ones. The paper studies corporate governance in emerging markets by examining

Indian banking systems in India. In a sample of 27 public sector banks in India, CEOs of poorly

performing banks are likely to face higher turnover than CEOs of well-performing ones. Along

this dimension, corporate governance is effective. Measures of performance based on return on

assets have the strongest association with CEO turnover, while listed firms have a weaker

association. Similar results are obtained when the sample is extended to encompass the entire

banking system, include a sample of foreign/new private and old private banks. It is important to

keep in mind that these findings do not imply that corporate governance in Indian banks is

perfect. Indeed, the results presented may contain seeds of concern for the future of emerging

market corporate governance. The importance of earning-based measures of corporate

governance is broadly in consonance with what Kaplan (1997) observed for Japanese banks. As

emerging markets like India continue to grow and become more integrated with the global

economy, more research will be needed to examine if their corporate governance systems also

mature.

Das and SaibalGhosh (2006)49 carried out an empirical analysis of Indian banks during

the post reform period. They investigated the performance of Indian commercial banking sector

during the post reform period 1992–2002. Several efficiency estimates of individual banks are

evaluated using nonparametric Data Envelopment Analysis (DEA). Three different approaches

75
viz., intermediation approach, value-added approach and operating approach have been

employed to differentiate how efficiency scores vary with changes in inputs and outputs. The

analysis links the variation in calculated efficiencies to a set of variables, i.e., bank size,

ownership, capital adequacy ratio, non-performing loans and management quality. The findings

suggest that medium-sized public sector banks performed reasonably well and are more likely to

operate at higher levels of technical efficiency. A close relationship is observed between

efficiency and soundness as determined by bank's capital adequacy ratio. The empirical results

also show that technically more efficient banks are those that have, on an average, less non-

performing loans. The patterns of efficiency and technological change reflected in the analysis

are consistent with what one might expect of an industry undergoing rapid change in response to

the forces of deregulation. In response to new instruments or market opportunities, a few

pioneering banks might adapt quickly to seize the emerging opportunities, while others respond

cautiously and fall behind. Competitive or regulatory changes might also have different uneven

effects on different-sized banks. The relaxation of barriers to branching or increased competition

seems to favor small/medium banks and/or banks with lower manpower deployment and higher

technology intensity. As deregulation gathers momentum, Indian commercial banks would need

to explore avenues to diversify into fee-based activities and rationalize their branch network in

order to augment their efficiency levels.

Das and Saibal Ghosh (2009)50 performed a nonparametric analysis of Indian banks with

deregulation and profit efficiency. They investigate the performance of Indian commercial

banking sector during the post reform period 1992-2004. Their results indicate high levels of

efficiency in costs and lower levels in profits, reflecting the importance of inefficiencies on the

revenue side of banking activity. The decomposition of profit efficiency shows that a large

76
portion of outlay lost is due to allocative inefficiency. The proximate determinants of profit

efficiency appear to suggest that big state-owned banks performed reasonably well and are more

likely to operate at higher levels of profit efficiency. A close relationship is observed between

efficiency and soundness as determined by bank’s capital adequacy ratio. The empirical results

also show that the profit efficient banks are those that have, on an average, less non-performing

loans. They argue that the evidence indicates that, large, listed banks with a bigger loan portfolio

exhibit greater profit efficiency. Furthermore, well-capitalized and well-managed banks are able

to generate higher profits. And finally, state-owned banks have been able to successfully

withstand the competitive pressures from their private and foreign counterparts and in fact, their

profit efficiency was observed to be higher than the private players. Financial sector reforms in

India, initiated about one and a half decades ago, have strengthened the health of financial

intermediaries, deepened financial markets and enhanced the instruments available in the

financial system. Notwithstanding these salutary developments, there is enough scope for further

improvements of the performance of banks. In comparison with international standards, Indian

banks would need to improve their technological orientation and expand the possibilities for

augmenting their financial activities in order to improve their profit efficiency in the near future.

Mukherjee et al. (2003)51 presented the development of a theoretical framework for

measuring the efficiency of banking services taking into account physical and human resources,

service quality and performance. Expenditures on quality improvement efforts and the impact of

service quality o n financial outcomes have long intrigued researchers. Banks have traditionally

focused on how to transform their physical resources to generate financial performance, and they

inadvertently ignored the mediating in tangible factor of service quality. A theoretical framework

on the optimization triad of resource, service quality and performance is proposed, there by

77
linking the marketing variables to the financial metrics. They developed measurement of term

quality as ratio of the potential improvements in financial performance by enhancement of

service quality to the observed performance figures. Empirical results obtained from a study of

27 Indian public sector banks and their customers allowed them to measure the impact of service

quality on financial performance, optimal level of service quality that can be generated using

existing resources and the opportunity cost for sub-optimal service delivery. Banks delivering

better service are shown to have better transformation of resource to performance using superior

service delivery as the medium. Their results confirm the linkage between resource, service

quality and performance for services. Their main findings provide diagnosis for the banking

sector as a whole as well as for individual banks. From the first stage of our analysis, they see

that almost 70% of the Indian public sector banks are inefficient in utilizing their infrastructure,

human resource and other capabilities for optimal service delivery. The service quality gaps in

the dimensions of responsiveness, reliability and empathy are significant while they also are the

high-priority items in the customers' list. Investing in tangible features alone cannot solve

customer dissatisfaction. Their findings empirically support the notion of positive impact of

service quality on the performance of banks. Their framework on the R-SQ-P linkage applied to

retail banking services can help the policy makers formulate an effective performance

enhancement system by treating their role not only from the financial intermediation viewpoint,

but also from a more realistic service providers' perspective.

Ahluwalia (2002)52 argued that if gradualism in economic reform in India since

1991could have worked. He argues that India was a latecomer to economic reforms, embarking

on the process in earnest only in 1991, in the wake of an exceptionally severe balance of

payments crisis. The need for a policy shift had become evident much earlier, as many countries

78
in east. Asia achieved high growth and poverty reduction through policies that emphasized

greater export orientation and encouragement of the private sector. India took some steps in this

direction in the 1980s, but it was not until 1991 that the government signaled a systemic shift to a

more open economy with greater reliance upon market forces, a larger role for the private sector

including foreign investment, and a restructuring of the role of government. He reviews policy

changes in several major areas covered by the reform program: fiscal deficit reduction, industrial

and trade policy, agricultural policy, infrastructure development, financial development,

privatization and social sector development. Based on this review, we consider the cumulative

outcome of ten years of gradualism to assess whether the reforms have created an environment

that can support 8 percent GDP growth, which is now the government target.

Claessens and Laeven (2003)53 study that drives bank competition and check some

international evidences bank-level data, they applied the Panzar and Rosse (1987) methodology

to estimate the extent to which changes in input prices are reflected in revenues earned by

specific banks in 50 countries' banking systems. Then they related this competitiveness measure

to indicators of countries' banking system structures and regulatory regimes. They found systems

with greater foreign bank entry and fewer entry and activity restrictions to be more competitive.

They found no evidence that the competitiveness measure negatively relates to banking system

concentration. Their findings confirmed that contestability determines effective competition

especially by allowing (foreign) bank entry and reducing activity restrictions on banks.

Competition in the financial sector matters for a number of reasons. As in other industries, the

degree of competition in the financial sector can matter for the efficiency financial services, the

quality of financial products, and the degree of innovation in the sector. Specific to the financial

sector is the link between competition and stability, long recognized in theoretical and empirical

79
research and, most importantly, in the actual conduct of prudential policy towards banks (Vives

2001). It has also been shown, theoretically as well as empirically, that the degree of competition

in the financial sector can matter for the access of firms and households to financial services and

external financing, in turn affecting overall economic growth, although not all relationships are

clear. They used a structural model; they estimate competitiveness indicators for a large cross-

section of countries. When they relate their competitiveness indicator to a number of country

characteristics, they found that greater foreign bank presence and fewer activity restrictions in

the banking sector can make for more competitive banking systems. They also found some

evidence that entry restrictions on commercial banks can reduce competition. This suggests that

being open to new entry is the most important competitive pressure. They found no evidence that

banking system concentration is negatively associated with competitiveness.

Kapur, et al.(2001)54 examined an executive commentary on India’s emerging

competitive advantage in services. They examined the business opportunities created by the

economic and political changes underway in India. Despite short-term political volatility, they

believe India's deep-rooted democratic institutions give it systemic resilience and stable

economic growth, at rates that will reach 8 to 10 percent within a decade. The early evidence

following economic liberalization suggests that India's emerging international competitive

advantage-and the corresponding opportunities for multinational corporations-lies not in natural

resource industries or low-skill, labour-intensive manufacturing (as in much of Asia), but in

skill-intensive tradable services, as exemplified by software. They analyze India's virtual

diamond in software and argue that this success will generalize to other knowledge-based

services. As a result, India is likely to emerge in the short to medium term as the back office of

global corporations and in the medium to long term as a leading provider of knowledge-based

80
tradable services. They also explore the contribution of overseas Indians to India's skill-intensive

service exports, contrasting it with the contributions of overseas Chinese to China's

manufactured goods exports. They recommend that foreign firms enter India sooner rather than

later to seize the emerging opportunities, and that in doing so they pay attention to the

considerable differences in business environments among Indian states, rather than focus simply

on the policies of the central government.

Morris (1987)55 analyzed the trends in Foreign Direct Investment (FDI) in India from

1950-82, and argues that the Foreign direct investment from India is not a marginal phenomenon.

It is quite sizeable relative to foreign direct investment into India and private corporate

investment in India. It was also quite comparable with the magnitudes of foreign direct

investment of the newly industrializing countries and some small-developed capitalist countries.

Foreign direct investment from India has grown steadily since the mid-sixties. However, there

has been a distinct slackening of the rate of growth since 1979-81. He is of the view that

transnationalisation of the Indian private corporate sector is not too insubstantial. The Indian

capitalist class has 'come of age' and is undertaking industrial ventures abroad in its drive

towards capital accumulation.

Morris (1990)56 examined outward foreign direct investment from India and the

ownership and control of joint ventures abroad. He argued that the phenomenon of foreign direct

investments (FDI) from India is substantial and systematic enough to warrant attention. In this

empirical study, the pattern and nature of control exercised by the Indian parents, local parties,

and possible transnational capital and local-government equity participants is estimated and

analyzed. Indian control over the 'joint ventures' is quite large, larger than what the average 30

per cent Indian participation may seem to indicate. There is little portfolio investment from

81
Indian firms. Transnational capital based in India has hardly ventured abroad, yet indigenous

capital when it had the entrepreneurial initiative has extensively collaborated with transnational

corporations, chiefly in the larger ventures abroad. Collaborations with local governments have

also helped the Indian parents to exercise control over large enterprises with much less financial

commitment and with little interference from the governments. While the larger business houses

dominate the phenomenon, there is significant FDI from 'independent' private businesses.

Raju (2005)57 examined the issues of debates in banking. He argued that the richness of

data and analysis presented in the banking industry issue (March 19) throws up several issues

that deserve further study. Rakesh Mohan (pp 1106-21) delivers some left-handed compliments

to 'social control and nationalization'. The urban-bias and marked preference to lend to the

industrial sector was contained in the 'post-nationalization and pre-liberalization'(phase).

However, data on credit in the post-liberalization period and the phenomenon of migration

reveals that this urban-bias resurfaced during 1996-2003. The 'increasingly competitive'

framework in which banks functioned in the post-liberalization regime resulted in more treasury

investments; credit flows were thus limited from branches to sectors that needed it more, that is,

the farm and the SSI sector. The period 1994-2004 attuned branches, thus, to look more at non-

performing than performing assets. A welcome advance made by the new generation private

banks has been in the area of technology; it was hoped that banks would take advantage of newly

emerging technologies to secure a rural clientele. The failure of ATMs and fear of computer

frauds, however, indicate the fragility of security systems currently in place. As regards

corporate governance in public sector banks, the role of minority shareholders, of independent

directors, the issue of dual investment of chairpersonship and managing director, the function of

the board's audit and risk management committees and instances of CEOs dealing with several

82
issues of the board with a broad brush, etc, offer scope for debate. Also, the Narasimham

Committee recommendation to wind up the department of banking in the finance ministry

remains unimplemented.

Ahuja (1999)58 analyzed the efficiency and market demand of Indian and foreign

corporate in India. He argues that as the India economy is opened to entry of foreign firms, the

question of Indian firms' competitiveness becomes important. This article examines the

importance of firm-specific factors to competitiveness and the parameters for assessing

competitive advantage. A comparison of performances of Indian and foreign private sector firms

operating in India shows that foreign firms are more efficient, especially in resource use. A

comparison of the performance of the foreign corporate sector with its domestic counterpart

suggests that foreign firms, in general, display greater efficiency of resource use and score higher

on the efficiency criteria. But this advantage for the foreign firms has proved to be unequal to

secure a competitive advantage in the market in terms of market share and profit margin. Perhaps

the low level of foreign presence and the limited or negligible presence in some of the high

growth areas has inhibited the foreign firms from realizing their full potential. Recent changes in

the business environment suggest that competitiveness has become one of the major pre-

requisites for commercial success. Hence a clear understanding of the determinants of

competitiveness is vital for ensuring greater marketability of our pro-duct mix. In an era of

increasing competition, survival would depend upon pursuit of internal or firm specific strategies

for product development, constant innovation, and technology up gradation, design flexibility

and adoption of customer-friendly approach. On the external front, identification of niche market

segments, catering to demand specifications, adhering to delivery schedules and the like would

be important ingredients for ensuring the competitive advantage of firms. In such a scenario what

83
is needed is a proactive approach to develop a framework for healthy domestic competition

wherein a foreign company is able to compete with its Indian counterpart only on equal terms.

Once such a frame-work is conceived and a supporting infra-structure created, Indian industry

should be on a firm footing to leverage its manufacturing strengths to compete on equal terms

with foreign counterparts on the basis of internal efficiency and external advantage.

Kurup (1993)59 examined foreign banks in Indian banking system. He argues that ‘the

CHARVAKA's analysis 'Foreign Banks in India: The New Drain' (EPW, January 30) was

interesting and he agrees with the author's conclusion that the extraordinarily high profits of

foreign banks in India and, even more important, the direct contribution of government policy to

the making of such profits naturally evoke a parallel with the 'drain' during the colonial period.

But it is unnecessary to direct one's righteous anger against the foreign banks or shed tears for

the unfortunate public sector banks most of which are in a precarious-financial position. The

latter have been 'drained' of their financial and professional strengths for purposes, which cannot

be said to be legitimate. If the one evokes memories of the colonial period, the other evokes

memories of medieval kings plundering their people for their own survival and glorification.

Making profits is a legitimate objective of banks, foreign or Indian. It is for the state to ensure

that banks achieve the objective by legitimate means.

Kurup (1994)60 examined the muddle of partial privatization of banks and argued that the

banks which are eager to go to the market to raise capital are mostly those which have already

achieved the prescribed capital adequacy ratio. Further, though legislation has been enacted to

enable banks to issue shares to the public, many practical difficulties have cropped up.

Kurup (1996)61 examined the banking sector reforms and transparency. He argued that

though the reforms in the banking sector have not seriously derailed the system, but have

84
undermined the sector's social commitments. The acceptance of such reforms by, the people,

especially in the rural areas, remains to be tested. This article draws attention to the need for

meaningful data in the context of the reforms. On examining the reform-initiated data onto non-

performing assets, provisioning and write off, the author suggests that a study group be

appointed on banking statistics to establish the credibility of the capital base as a prelude to

further transparency.

Banik, et al. (2004)62 examined the FDI inflows to India, China and Caribbean as an

extended neighbour approach. They argue that the FDI flows are generally believed to be

influenced by economic indicators like market size, export intensity, institutions, etc, irrespective

of the source and the destination countries. Their paper looks at FDI inflows in an alternative

approach based on the concepts of neighbourhood and extended neighbourhood. Their study

shows that the neighbourhood concepts are widely applicable in different contexts - particularly

for China and India, and partly in the case of the Caribbean. There are significant common

factors in explaining FDI inflows in select regions. While a substantial fraction of FDI inflows

may be explained by select economic variables, country-specific factors and the idiosyncratic

component account for more of the investment inflows in Europe, China and India.

Bhaumik (2005)63 argued while examining the banking sector he argues that the cost

efficiency and profitability of the public sector banks have improved significantly, recent

research suggests that financial deepening involving banks may have suffered on account of the

risk aversion of public sector banks, and their inability to effectively allocate credit in the face of

credit risk. Their article argues that was time to bite the bullet and privatize the public sector

banks and, in the interim, to reduce the risk associated with creation of bank assets by facilitating

greater securitization of credit. He argued that the Indian banking sector has come a long way

85
since the publication of the report of the first Narasimham Committee. Incremental changes in

the industry continue to occur, mostly in the form of liberalization of FDI regulations. However,

further financial deepening perhaps requires a context in which major structural changes are

required not only at the margin, among the private sector banks that account for about 15 per

cent of the banking sector's assets, but also among the public sector banks that continue to

control about 80 per cent of the deposits and assets of the industry. He finds that the competition

has had an impact on the performance and behavior of these banks, but it is perhaps time to bite

the political bullet, and strategies for change of their ownership. In the interim, while the

government proposes and the unions and the left dispose, an effort should be made to invigorate

the market for corporate securities to reduce liquidity risk, and thereby facilitate greater financial

inter-mediation, and financial deepening.

Satyanarayana (1994)64 analyzed the capital adequacy position of all the public sector

banks and a sample of 14 private sector banks. Both the apparent and real financial positions of

these banks are brought out with the help of a few visible ratios. He also estimates the capital

adequacy gap for each of the banks in terms of the time schedule prescribed by the RBI for 1994

and 1996 and analyses the possible options available to them

Kohli Renu (2003)65attempts preliminary analysis of the impact of capital flows upon the

domestic financial sector. They find that an inflow of foreign capital has a significant impact on

domestic money supply and stock market growth, liquidity and volatility. The banking sector,

however, remains relatively insulated due to policy responses of the central bank and barriers to

direct capital inflows into the banking system. Their paper concludes with a discussion on the

costs of these policies in the event of a heavy inflow of foreign capital into India. The last to last

decade had witnessed a tremendous increase in international capital mobility. Cross-country

86
trends in capital flows reveal that private capital flows now dominate with official capital flows

reduced to a trickle. Simultaneously, a rise in portfolio capital has tilted the composition of

international capital flows towards short-term investments, exposing individual countries to

enhanced volatility and sudden withdrawal risks. These trends have been driven by globalization,

which has enabled pursuit of higher returns and portfolio diversification, as well as market-

oriented reforms in many countries, which have liberalized access to financial markets.

Concurrent with these trends has been the rising incidence of financial crises, raising questions

about linkages between the two. Concern has also been expressed as to whether the costs of

increased vulnerability to financial fragility might not out-weigh the gains from financial

integration. Notwithstanding these doubts, most countries continue to progress in dismantling

capital controls to integrate their financial markets with the rest of the world, albeit more

cautiously.

Mazumdar (2005)66 examined implication of capital flows in India and its implication for

economic growth. He argued that it was hoped that with the partial liberalization of the capital

account in the- early 1990s, capital inflows would contribute towards India's economic growth.

This paper reviews the role of capital flows into India and examines if such flows have in any

way contributed to economic growth. The model developed by this paper suggests that capital

inflows have not contributed towards either industrial production or economic growth. Either the

amount of capital inflows has not been enough or the amounts flowing in have not been properly

utilized. At the same time, studies also indicate that capital inflows have not had much impact on

India's export growth or productivity.

Sensarma (2005)67 performed a stochastic frontier analysis for period of 1986-2003 to

examine the cost and profit efficiency of Indian banks. He employed the technique of stochastic

87
frontier analysis to estimate bank-specific cost and profit efficiency. He found that while cost

efficiency of the banking industry increased during the period, profit efficiency underwent a

decline. This result is expected in an emerging economy undergoing a process of deregulation. In

terms of bank groups, domestic banks appear to be more efficient than foreign banks. The

financial sector in India, as well as the world over, continues to be one of the primary engines of

economic growth. The deregulation of the banking sector since the early 1990s together with the

presence of a variety of ownership groups makes it imperative that performance measurement be

taken up as an important area of research. While there have been a number of studies in this

context, none so far have looked at Indian banking from the cost and profit efficiency aspects.

Their paper justified and then applied the method of stochastic frontier analysis to estimate cost

and profit efficiencies in Indian banking over a long time horizon of 18 years. The results may be

summarized as follows. Public banks have shown higher cost efficiency than private banks,

whereas it has been the other way round in the case of profit efficiency. New private and foreign

banks exhibit the least efficiency in term of both measures. Moreover, cost efficiency improved

during the sample period while profit efficiency underwent a decline. This is however an

expected result in an economy undergoing transition and deregulation.

Datar (1999)68 analyzes developing capital markets in era of direct financial institutions

(DFIs). DFIs were set up because banks were unable to meet the requirements of industry for

long-term finance. Capital markets have since developed, offering industry an alternative source

of funds. DFIs' own source of funds has changed. His article assessed the debate on universal

banking and examines the future role of DFIs.

Podpiera (2006)69 examines that if the compliance with Basel core principles can bring

any measurable benefits. He argued that regulation and supervision as measured by compliance

88
with the Basel Core Principles for Effective Banking Supervision (BCP). Using BCP assessment

results for 65 countries and 1998-2002 panel data for other variables, they find a significant

positive impact of higher compliance with BCP on banking sector performance, as measured by

nonperforming loans and net interest margin, after con- trolling for the level of development of

the economy and the financial system and macroeconomic and structural factors.

Nitsure (2004)70 examined the challenges and opportunities of E banking. She argued that

E-banking has the potential to transform the banking business as it significantly lowers

transaction and delivery costs. Her paper discusses some of the problems developing countries,

which have a low penetration of information and telecommunication technology, face in

realizing the advantages of e-banking initiatives. Major concerns such as the 'digital divide'

between the rich and poor, the different operational environments for public and private sector

banks, problems of security and authentication, management and regulation, and inadequate

financing of small and medium scale enterprises (SMEs) are highlighted.

Rege Nitsure (2007)71 argued towards the corrective steps towards sound banking. She

argues that Indian economy is facing some serious macroeconomic problems due to rapidly

rising inflation and interest rates, a growing trade deficit and certain global environment, which

involves risks of sudden adjustments in the currency value and correction is in financial markets.

In this situation, questions about the banking sector's ability to respond effectively to the

unwinding of macro economic imbalances remain. This paper suggests some necessary short-

and medium term corrective measures to stabilize and improve the soundness of the Indian

banking sector to face these challenges. She suggested some necessary corrective measures (with

short-term and medium-term perspectives) to stabilize and improve the soundness of the Indian

banking sector and to prepare it to face the challenges created by rapid economic growth and the

89
accompanying economic imbalances. A serious commitment to this would come only if policy-

makers and banks look beyond the short-term gains and realistically assess the long-term risks- a

precondition for the viability and stability of any banking system.

Karunagaran (2006)72 examined the historical perspective of foreign banks. He viewed

the operations of foreign banks in historical perspective, and taking a cue there from, provides an

analysis of contemporary policy that has promoted their aggressive expansion.

Nagaraj (2003)73 examined the trends and issues of Foreign Direct Investment in India in

the 1990s. He documented the trends in foreign direct investment in India in the 1990s, and

compares them with those in China. Noting the data limitations, the study raises some issues on

the effects of the recent investments on the domestic economy. Based on the analytical

discussion and comparative experience, the study concludes by suggesting a realistic foreign

investment policy. Ending its long held restrictive foreign investment policy in 1991, India

sought to compete with the successful Asian economies to get a greater share of the world's FDI.

Mukhopadhyay (2002)74 examined the globalization and Indian services sector. He

argued that in view of the growing importance of services in the economy and the significance of

the multilateral framework for enhancing India's trade prospects in the sector, liberalization of

trade and investment in the services sector is especially important.

D'Souza (2002)75 examined how well have public sector banks done and argued that the

efficiency of the public sector banks has declined during the 1990s when measured by the

spread/working fund ratio. Though the turnover/employee ratio of the public sector banks

improved, the ratio for the private and foreign banks doubled relative to that of the public sector

banks. The profitability of the public sector banks did improve relative to the private and foreign

banks, but they have lost ground in their ability to attract deposits at favourable interest rates, in

90
their slow technological up gradation, and in their staffing and employment practices, which has

implications for their longer-term profitability. They can examine the efficiency of the banking

system using two measures - the spread/working funds ratio and the turn-over/employee ratio.

With reference to the spread/working funds ratio the efficiency of the commercial banks as a

whole has declined. The public sector banks have been responsible for this decline in efficiency

as the efficiency of the private and foreign banks has improved over the course of the 1990s.

Though the turnover/ employee ratio has raised in the public sector banks, the turnover per

employee in the private and foreign banks doubled relative to the ratio for the public sector banks

during this decade.

Chaganti and Damanpour (1991)76 examined institutional ownership, capital structure and

firm performance. They argue that in most studies of ownership and firm performance,

researchers have assumed different forms of ownership do not interact in their effect on firm

strategy or performance. Focusing on the role of institutional owners, this study poses two

related questions: (1) what are the relationships between outside institutional shareholdings, on

the one hand, and a firm's capital structure and performance, on the other? and; (2) Does the size

of stockholdings by corporate executives, family owners, and insider-institutions modify those

relationships? The data, collected from 40 pairs of manufacturing firms selected from as many

industries over a 3-year period, shows that the size of outside institutional stockholdings has a

significant effect on the firm's capital structure. They have also found that family and inside

institutional owners' shareholdings moderate the relationship between outside institutional

shareholdings and capital structure. Likewise, corporate executives' shareholdings supplement

the relationship between outside institutional shareholdings and firms' performance. These

91
findings suggest that internal and external coalitions interact with each other to influence the

firm's conduct.

Miller and Parkhe (2002)77 empirically tested banks’ X-efficiency; if there is a liability of

foreignness in global banking. They argue that when a company operates outside of its home

country, it may suffer a 'liability of foreignness.' Does this a priori theoretical expectation hold in

the global banking industry? Banks increasingly compete outside of their home countries, and

operating environments often differ sharply across countries, both in terms of financial markets

and credit risk. Their paper reports the results of an empirical test of the liability of foreignness

in the global banking industry, using Fitch-IBCA Bank Scope data for the period 1989-96. Their

findings strongly support the liability of foreignness hypothesis. Further, the data show some

evidence that the X-efficiency of a foreign-owned bank is strongly influenced by the

competitiveness of its home country and the host country in which it operates. Lastly, they find

that in some environments U.S.-owned banks is more X-efficient than other foreign-owned

banks in some environments, but less X-efficient in others. The objective of this study is to

answer the basic question, 'Is there a liability of foreignness in global banking?' In addition, we

addressed the follow-up question, 'If yes, to what extent does the host country environment and a

firm's home country environment influence liability of foreignness?'

Bardhan (2005)78 evaluated the nature of opposition to economic reforms in India. He

argued that many economists and columnists in the financial press are unaware how unpopular

economic reforms are with the public. The supporters of reform and their critics take extreme

positions on issues that are sufficiently important to engage our respective intelligent opposition

in serious conversation. The Left claims the reforms are "anti-people", when in essence it is

defending the interests of the small strata of the salaried. The supporters of reforms, on their part,

92
offer less than reasoned arguments in support of privatization and labour reform, and work

themselves into frenzy about wastage in anti-poverty programs. Discussion on reform is

preoccupied with issues of trade and fiscal policy and financial markets. Reform would have

been more popular if it were equally concerned about the appalling governance structure in the

delivery of basic social services for the poor.

Rajaramanet et al. (1999)79 examined NPA variations across Indian commercial banks

that is characterized by both a high average non-performing share in total bank advances and a

high dispersion between banks. This paper presents the findings of a formal attempt to explain

inter-bank variations in NPAs for the year 1996-97. The specification tests for the impact of

region of operation on domestically-owned banks, as measured by percentage branches in each

of a set of state clusters. One cluster of three eastern and seven north-eastern states carries a

robust and statistically significant positive coefficient; another cluster of the southern and some

of the northern states carries a significantly negative coefficient. These findings bear out those of

Demirguc-Kunt and Huizinga on the significance of the operating environment for bank

efficiency. No sustainable improvement in the performing efficiency of domestic banks is

possible without prior improvement in the enforcement environment in difficult regions of the

country. Another finding of some importance is that it is not foreign ownership in and of itself so

much as the banking efficiency and technology correlates of the country of origin of the foreign

bank which determine NPA performance in the Indian environment.

Rajaraman and Vasishtha (2002)80 examined non performing loans of PSUs Banks with

panel results. Their paper performs a panel regression on the definitionally uniform data now

available for a five-year period ending in 1999-2000, on non-performing loans of commercial

banks. The exercise is confined to 27 public sector banks, so as to investigate variations within a

93
class that is homogeneous on the ownership dimension. The exercise groups banks with higher

than average NPAs into those explained by poor operating efficiency, and those where the

operating indicator does not suffice to explain the high level of NPAs, and leaves an unexplained

intercept shift. Two of the three weak banks identified by the Varma Committee, Indian Bank

and United Bank of India, fall in this category. Recapitalization of these banks with operational

restructuring may therefore not be the solution, since there is clearly a residual problem even

after controlling for operating efficiency.

Roy (2008)81 examines organization structure and risk taking in banking. He stated that

the organization structure plays an important influence on the elicitation of the desired risk-

taking behaviour in banks. Risk taking can be viewed as the susceptibility to problems such as

moral hazard, conflict of interest and adverse selection that are precipitated due to the decision

context and availability of information. Different structural forms have different informational

properties and, therefore, the capacity to facilitate transparency and risk control. This study

reviews the organization structure and risk types in banking and explores the possible links

between the structural contingency and incidence of risk. Their findings can assist decisions

regarding organization structure of banks.

Bartel and Harrison (2005)82 evaluated ownership versus environment as disentangling

the Sources of Public-Sector Inefficiency. They argued that an unanswered question in the debate

on public-sector inefficiency is whether reforms other than government divestiture can

effectively substitute for privatization. Using a 1981-1995 panel data set of all public and private

manufacturing establishments in Indonesia, they analyze that whether public-sector inefficiency

is primarily due to agency-type problems or to the environment in which public-sector

enterprises (PSEs) operate, as measured by the soft budget constraint and the degree of internal

94
and external competition. The results, obtained from fixed-effects specifications, provide support

for both models. Ownership matters because, for a given level of government financing or

competition, PSEs perform worse than their private-sector counterparts. The environment

matters because only PSEs which received government financing or those shielded from import

competition or foreign ownership performed worse than private enterprises. The results suggest

that the efficiency of PSEs can be increased through privatization, through manipulation of the

environment or combination of both the approaches. They argued that an unanswered question in

the debate on public-sector inefficiency is whether reforms other than government divestiture can

effectively substitute for privatization. Their paper tackles this question using a 1981-1995 panel

data set of all public and private manufacturing establishments in Indonesia. We consider two

leading hypotheses: (1) the ownership hypothesis, which postulates that PSEs are inefficient

because of monitoring problems, and (2) the environment hypothesis, which postulates that PSEs

are inefficient because of the environment in which they operate, as measured by the soft budget

constraint or barriers to competition. The results also demonstrate that an alternative way to

achieve efficiency gains is to manipulate the environment, specifically to reduce or eliminate

government financing for public enterprises or to increase import competition or foreign

ownership for these firms. Because many privatizations are partial and the government typically

retains some ownership, a third policy option that combines privatization and environmental

reform also exists. Our results indicate that environmental reforms combined with privatization

will yield the biggest improvements in efficiency.

Chandrasekhar (2007)83 examines private equity as new role of finance. He argued that

India's experience with private equity is illustrative of the rush of this form of finance to the

developing world. The acquisition of shares through the foreign institutional investor route today

95
paves the way for the sale of those shares to foreign players interested in acquiring companies as

and when the demand arises and/or FDI norms are relaxed. This trend of transfer of ownership

from Indian to foreign hands would now be aggravated by the private equity boom. Private

equity firms can seek out appropriate investment targets and persuade domestic firms to part with

a significant share of equity using valuations that would be substantial by domestic wealth

standards.

Reddy (2006)84 examines productivity growth in Regional Rural Banks (RRBs). His

paper examines total factor productivity technical and scale efficiency changes in regional rural

banks by using data from 192 banks for the period 1996 to 2002. Rural banks showed significant

economies of scale in terms of assets and number of branches under each bank. Total factor

productivity growth of rural banks was higher in profitability than in service provision during

liberalization. Banks located in economically developed as well as low banking density regions

exhibited significantly higher productivity growth. Overall there is a convergence of efficiency

of rural banks during the study period. Parent public sector banks have no influence on the

efficiency and productivity growth of rural banks. There is a justification for opening new banks

in low banking density regions as efficiency and productivity growth of rural banks in these

areas are high. There is also a case for mergers and enlargement of the asset base and the number

of branches under each rural bank.

Keshari and Paul (1994)85 empirically examined relative efficiency of foreign and

domestic banks. They examined empirically whether foreign banks on an average operate with

greater efficiency and so attain higher levels of productivity and profitability. For this purpose,

first, a stochastic frontier production function for the banking industry is estimated and bank-

wise technical efficiency is computed. In the second stage, the authors compare the mean

96
efficiency level of foreign banks with that of domestic banks. In addition, foreign and domestic

banks are also compared with respect to the other measures of performance, namely, productivity

and profitability.

Chaudhuri (2002)86 addresses some issues of growth and profitability in Indian public

sector banks. He argued that the public sector banks face a triple jeopardy. First, they are losing

market share; second, their profitability is being seriously squeezed; and, third, their balance

sheets are not strong and their sovereign support, which had buttressed them so far, is becoming

open to question. The reasons for this less-than-enviable condition of the public sector banks are

many, but a principal operative factor derives from the nature of their ownership and what that

translates into in terms of goals and priorities.

Rajwade A. V. (2001)87 addressed some issues of universal banking proposed conversion

of development finance institutions into universal banks will be a major event in Indian banking

and raises several important issues. It will be wise to ponder some of these issues right at this

stage. They state the relationship between ownership and diversification has been the focus of

renewed debate between financial economists and strategic management scholars. While

financial economists hold that manager-controlled firms tend to reflect higher levels of

diversification, strategy researchers argue that ownership and diversification are not

systematically related. In throwing light on this debate, this study uses a fine-grained definition

of ownership groups to explore how the different objectives and monitoring predispositions of

distinct ownership groups might influence diversification strategy. The empirical examination is

set in India to offer a striking contrast from the predominantly U.S.-based studies that have

shaped the ongoing debate. Findings show that diverse ownership groups adopt different

postures in monitoring and/or influencing organizational diversification. While some ownership

97
groups are closely associated with focused strategies, and some encourage diversification, others

are quite indifferent. These results suggest that the context-specific variation among ownership

groups is germane to our understanding of diversification strategy.

Ghosh (1999)88 evaluates Verma Committee Report on weak Public Sector Banks and

argued that state must develop an approach to the commercial banking sector that is minimalist

in intervention - one that maximizes the role of the existing markets and market players and then

leaves the banking system to find its own solutions in regard to organization. Whether to merge

or de-merge, to enter into strategic relationships, to sell off parts of their businesses piecemeal or

to close unviable operations - these objectives are ill-served by decisions taken by fiat.It marks a

process of maturation in 'the policy outlook on banking sector reform - from the broad

schematics of the two Narasimham Committee reports to the nitty-gritty of detail and process. In

all fairness, notwithstanding the many failings of the country's commercial banking system, the

often-criticized 'gradualist' approach has undeniably produced results.

Ghosh (2000)89 suggested a strategy for self-renewal for weak banks with the two

approaches to 'weak' public sector banks, represented by the reports of the Verma Committee and

the Task Force of the CII, have provoked high-pitched reactions. What is important, however, is

that the different stake holders - the government and the Reserve Bank, the managements of the

banks and the unionized employees - agree on a framework within which the banks could be

attempted to be rehabilitated. Three ground rules are suggested here for the purpose.

SabiManijeh (1988)90 applies various theories of FDI that have been developed for

manufacturing industries to banking. His analysis focuses on determining the factors, which have

contributed to the growth of U.S. banks in developing areas. Existing theoretical works on

MNBs have concentrated on the application of the general theories of FDI, which were

98
developed for manufacturing firms. The literature suggests that studies concerning MNBs can be

compared to FDI in manufacturing [Aliber 1976; Grubel 1977; Gray and Gray1981]. Regulation

of banking, the presence of MNCs from the home country, cost differentials, and potential

reductions in earnings variability are hypothesized as important factors in determining the

presence and growth of MNBs in other countries.

2.4 Chapter Summary

There are several studies reviewed in this chapter those review and deal with Banking

Reforms, Foreign Investment in Indian Banking and other in the world. Also many studies are

reviewed pertaining to the performance of Indian banking industry. The studies mention that

banking reforms have shown significant impact on the performance of Indian banking industry

and also various banking groups in India. The studies pertaining to foreign investment suggest

importance of foreign investment Indian banking and suggest that it has an impact on the Indian

banking industry. However, it is observed that such studies are limited in number and extent and

also show mixed results.

2.5 Conclusion

It can be concluded that, indeed, it is interesting to survey literature on Indian banking

and knowing that there are ample of studies pertaining to the Indian banking under different

phases of growth and reforms. However, it is interesting to note that literature pertaining to FDI

in banking in general and in particular to Indian banking is scanty. Moreover, performance of

Indian banking under the light of FDI is quite under researched area. Hence, sincere and modest

attempt is made to magnify this aspect to know/study the performance of Indian banks after the

advent of FDI and reforms in Indian banking industry.

99
 REFERENCES

Reviews on Foreign Investment and Banking Reforms

1. Uppal R.K., RimpiKaur, (2006), ‘Banking Sector Reforms in India- A review of post

1991developments’, New Century Publication, New Delhi, ISBN: 81-7708-119-5. Pages: 3-6

2. Tapiawala Medha (2006) “Banking Productivity”, PhD Thesis submitted to Dept of

Economics, University of Mumbai. Pages- 10-13

3. Joseph Mathew and Rupa Rege Nitsure,(2000) “ WTO and Indian Banking Sector: The

Road Ahead”, Economic Political Weekly, Vol.37. No.24 (June 15-21, 2002) pp.2315-2322,

http://www.jstor.org/stable/4412242, Accessed 19/03/2012, 04:18.

4. Chandrasekhar C. P. (2006), ‘Courting Risk: Policy Manoeuvres on FII Inflows’,

Economic and Political Weekly, Vol. 41, No. 2 (Jan. 14-20, 2006), pp. 92-95Published by:

Economic and Political Weekly Stable URL: http://www.jstor.org/stable/4417660 .Accessed:

21/03/2012 06:43

5. Figueira Catarina, Joseph Nellis, David Parker (2006), ‘Does Ownership Affect the

Efficiency of African Banks?’, The Journal of Developing Areas, Vol. 40, No. 1 (Autumn, 2006),

pp. 38-63Published by: College of Business, Tennessee State University Stable URL:

http://www.jstor.org/stable/4193015 . Accessed: 21/03/2012 07:05

6. Porta, Lopez-de-Silanes and Shleifer (2002),‘Government Ownership of Banks’,The

Journal of Finance, Vol. 57, No.1 (Feb.,2002), pp.265-301Published by:Blackwell Publishing for

the American Finance Association Stable URL: http://www.jstor.org/stable/2697840.Accessed:

21/03/2012 05:12

7. Timothy Besley and MaitreeshGhatak (2001), ‘Government versus Private Ownership of

Public Goods’, The Quarterly Journal of Economics, Vol. 116, No. 4 (Nov., 2001), pp. 1343-

100
 1372Published by: Oxford University Press Stable URL: http://www.jstor.org/stable/2696461

.Accessed: 21/03/2012 05:04

8. Claessens Stijn and Luc Laeven (2003), ‘What Drives Bank Competition? Some

International Evidence’, Journal of Money, Credit and Banking, Vol. 36, No. 3, Part 2: Bank

Concentration and Competition: An Evolution in the Making A Conference Sponsored by the

Federal Reserve Bank of Cleveland May 21-23, 2003 (Jun., 2004), pp. 563-583Published by:

Ohio State University Press Stable URL: http://www.jstor.org/stable/3838954 .Accessed:

21/03/2012 0

9. Ram Mohan T. T. (2005), ‘Taking Stock of Foreign Institutional Investors’, Economic

and Political Weekly, Vol. 40, No. 24 (Jun. 11-17, 2005), pp. 2395-2399 Published by: Economic

and Political Weekly Stable URL: http://www.jstor.org/stable/4416741. Accessed: 21/03/2012

06:38

10. Ram Mohan T T (2006),’Neither Dread Nor Encourage Them’, Economic and Political

Weekly, Vol. 41, No. 2 (Jan. 14-20, 2006), pp. 92-95Published by: Economic and Political

Weekly Stable URL: http://www.jstor.org/stable/4417660. Accessed: 21/03/2012 06:43

11. Vasudevan A. (2006), ‘A Note of Portfolio Flows into India’, Economic Political Weekly,

Vol.41, No.2 (Jan 14-20, 2006) pp. 90-92, URL: http://www.jestor.org/stable/4417659, accessed

on 21/03/2012, 06:41 pm.

12. Jayadev , M & Sensarma , R (2007) , ' Mergers in Indian Banking: An Analysis ' , South

Asian Journal of Management , vol 14 , no. 4 , pp. 20-49 .

13. Dasgupta Rajaram and M. Thomas Paul (2007), ‘Banking and Financial Policy: An

Independent View’, Economic and Political Weekly, Vol. 42, No. 13, Money, Banking and

101
Finance (Mar. 31- Apr. 6, 2007), pp. 1196-1200Published by: Economic and Political Weekly

Stable URL: http://www.jstor.org/stable/4419420. Accessed: 21/03/2012 04:38

14. Jha, Raghbendra (2003), Recent Trends in FDI Flows and Prospects for India (August

2003). Australian National University Working Paper. Available at SSRN:

http://ssrn.com/abstract=431927 or http://dx.doi.org/10.2139/ssrn.431927

15. Ghosh, Chinmoy and Phani, B.V.(2002), “The Effect of Liberalization of Foreign Direct

Investment (FDI) Limits on Domestic Stocks: Evidence from the Indian Banking Sector”,.

Available at SSRN: http://ssrn.com/abstract=546422 or http://dx.doi.org/10.2139/ssrn.546422

16. Charvaka (1993), ‘Foreign Banks in India: The New 'Drain'’, Economic and Political

Weekly, Vol. 28, No. 5 (Jan. 30, 1993), pp. 155+157Published by: Economic and Political

Weekly Stable URL: http://www.jstor.org/stable/4399332. Accessed: 19/03/2012 06:56

17. Joshi P. N. (1999), ‘Banking Sector Reforms: The Other Side of the Coin’, Economic and

Political Weekly, Vol. 34, No. 14 (Apr. 3-9, 1999), pp. 797-798Published by: Economic and

Political Weekly Stable URL: http://www.jstor.org/stable/4407813 .Accessed: 19/03/2012 06:54

18. Joshi P. N. (2005), ‘Needed: A National Banking Policy’, Economic and Political

Weekly, Vol. 40, No. 28 (Jul. 9-15, 2005), pp. 2996-2998Published by: Economic and Political

Weekly Stable URL: http://www.jstor.org/stable/4416864.Accessed: 19/03/2012 04:36

19. Prasanna, P. K. (2008),"Foreign Institutional Investors: Investment Preferences in

India", JOAAG, Vol. 3. No. 2 Foreign Institutional Investors: Investment Preferences in India,

Investors: Investment Preferences in India, JOAAG, ICFAI B School, Vol. 3. No. 2

20. Kumar Nagesh (1998), ‘Liberalisation and Changing Patterns of Foreign Direct

Investments: Has India's Relative Attractiveness as a Host of FDI Improved?’ Economic and

Political Weekly, Vol. 33, No. 22 (May 30 - Jun. 5, 1998), pp. 1321-1323+1325-

102
1327+1329Published by: Economic and Political Weekly Stable URL:

http://www.jstor.org/stable/4406834 .Accessed: 21/03/2012 03:28

21. Alfaro Laura, Areendam Chanda, Sebnem Kalemli-Ozcan, Selin Sayek (2004), ‘FDI and

Economic Growth: The Role of Local Financial Markets", FDI and economic growth: the role of

local financial markets," Journal of International Economics, Elsevier, vol. 64(1), pages 89-112,

October.

22. Sabi Manijeh (1988), ‘An Application of the Theory of Foreign Direct Investment to

Multinational Banking in LDCS’, Journal of International Business Studies, Vol. 19, No. 3

(Autumn, 1988), pp. 433-447Published by: Palgrave Macmillan Journals Stable URL:

http://www.jstor.org/stable/155134 .Accessed: 21/03/2012 04:31

23. Dunning, John H. (1980), “Towards an Eclectic Theory of International Production”,

Journal of International Business Studies, Vol. 11.

24. Dunning, John H. (1998), “Location and the Multinational Enterprise: A Neglected

Factor?” Journal of International Business Studies, 29(1).

25. Dunning, J. H. (2000), “The Eclectic Paradigm as an Envelope for Economic and

Business Theories of MNE Activity.” International Business Review 9(1):163–90.

26. Dunning, J. H. (2004),” Institutional Reforms, FDI and European Transition

Economies”, International Business and Governments in the 21st Century, (Ed.) R. Grosse,

Cambridge University Press.

27. Reserve Bank of India's article (2002) "Finances of Foreign Direct Investment

Companies", Reserve Bank of India Bulletin, Various Issues, Reserve Bank of India, Mumbai

28. Jeromi P.D., (2002), "Foreign Direct Investment in India- Policy, Trends and Impact",

Economic Development of India, Vol. 62, Pages- 17-66.

103
 Reviews on Banking Sector Performance

29. Debasish, SathyaSwaroop (2006), ‘Efficiency Performance in Indian Banking--Use of

Data Envelopment Analysis’, Global Business Review 2006 7: 325, The online version of this

article can be found at: DOI: 10.1177/097215090600700209,

http://gbr.sagepub.com/content/7/2/325.refs.html,

30. Kumar, Sunil (2008), ‘An Analysis of Efficiency–Profitability Relationship in Indian

Public Sector Banks’, Published by: http://www.sagepublications.com,

http://gbr.sagepub.com/content/9/1/115.refs.html

31. Patel Urjit R. (1997), Emerging Reforms in Indian Banking: International Perspectives,

Economic and Political Weekly, Vol. 32. No.42 (Oct. 18-24, 1997).pp. 2655-2657+2659-2660,

http;//wwww.jestor.org/stable/4405975, accessed 21/03/2012, 06.22

32. Mathur K. B. L. (2004), ‘Regulation of India's Financial Sector: The State's Role’,

Economic and Political Weekly, Vol. 39, No. 12, Money, Banking and Finance (Mar. 20-26,

2004), pp. 1253-1254+1256-1258Published by: Economic and Political Weekly Stable URL:

http://www.jstor.org/stable/4414803 .Accessed: 19/03/2012 06:59

33. Mathur K.B.L., (2005), ‘Market Orientation of Financial Sector: State as Facilitator’,

Economic and Political Weekly, Vol.40 No.12, Money, Banking and Finance (Mar 19-25, 2005)

pp. 1136-1138 + 1140-1141, URL: http://www/jestor.org/stable/4416361. Accessed 21/03/2012

04.38

34. Mathur K. B. L. (2006), ‘Mythology of Banking Ownership’, Economic and Political

Weekly, Vol. 41, No. 49 (Dec. 9-15, 2006), pp. 5039-5040Published by: Economic and Political

Weekly Stable URL: http://www.jstor.org/stable/4418999. Accessed: 21/03/2012 06:28

104
35. Mathur K. B. L. (2007), ‘Convergence and Divergence of Indian Banking’, Economic

and Political Weekly, Vol. 42, No. 51 (Dec. 22 - 28, 2007), pp. 14-16Published by: Economic

and Political Weekly Stable URL: http://www.jstor.org/stable/40276870. Accessed: 21/03/2012

06:33

36. Kumbharkar Subal C. and Subrata Sarkar, (2003) “Deregulations, Ownership and

Productivity Growth in the Banking Industry: Evidence from India’, Journal of Money, Credit

and Banking, Vol. 35, No.3 (June, 2003), pp.403-424, Published by Ohio State University Press,

http://www.jestor.org/stable/3649838 , accessed 14/03/2012, 03.51

37. Ram Mohan T. T. (2002),‘Deregulation and Performance of Public Sector Banks’,

Economic and Political Weekly, Vol. 37, No. 5, Money, Banking and Finance (Feb. 2-8,2002),

pp. 393-397Published by: Economic and Political Weekly Stable URL:

http://www.jstor.org/stable/4411684 .Accessed: 21/03/2012 04:28

38. Ram Mohan T. T. (2003), ‘Long-Run Performance of Public and Private Sector Bank

Stocks’, Economic and Political Weekly, Vol. 38, No. 8, Money, Banking and Finance (Feb. 22-

28, 2003), pp. 785-788Published by: Economic and Political Weekly Stable URL:

http://www.jstor.org/stable/4413249 .Accessed: 21/03/2012 05:00

39. Ram Mohan T. T. (2004), ‘Misplaced Priorities’, Economic and Political Weekly, Vol.

39, No. 50 (Dec. 11-17, 2004), pp. 5283-5287Published by: Economic and Political Weekly

Stable URL: http://www.jstor.org/stable/4415888 .Accessed: 21/03/2012 04:40

40. Ram Mohan T. T. (2005), ‘Bank Consolidation: Issues and Evidence’, Economic and

Political Weekly, Vol. 40, No. 12, Money, Banking and Finance (Mar. 19-25, 2005), pp. 1151-

1152+1155-1161Published by: Economic and Political Weekly Stable URL:

http://www.jstor.org/stable/4416363 .Accessed: 21/03/2012 06:31

105
41. Ram Mohan T. T. (2005), ‘Taking Stock of Foreign Institutional Investors’, Economic

and Political Weekly, Vol. 40, No. 24 (Jun. 11-17, 2005), pp. 2395-2399 Published by: Economic

and Political Weekly Stable URL: http://www.jstor.org/stable/4416741. Accessed: 21/03/2012

06:38

42. Ram Mohan T T (2006),’Neither Dread Nor Encourage Them’, Economic and Political

Weekly, Vol. 41, No. 2 (Jan. 14-20, 2006), pp. 92-95Published by: Economic and Political

Weekly Stable URL: http://www.jstor.org/stable/4417660 . Accessed: 21/03/2012 06:43

43. Ram Mohan T. T. (2008), ‘Is It Time to Open up to Foreign Banks?’, Economic and

Political Weekly, Vol. 43, No. 28 (Jul. 12 - 18, 2008), pp. 12-14Published by: Economic and

Political Weekly Stable URL: http://www.jstor.org/stable/40277709. Accessed: 21/03/2012

06:3383

44. Ram Mohan T. T. (2008), ‘Reforming the Banking Sector’, Economic and Political

Weekly, Vol. 43, No. 32 (Aug. 9 - 15, 2008), pp. 28-31Published by: Economic and Political

Weekly Stable URL:http://www.jstor.org/stable/40277821. Accessed: 21/03/2012 07:35

45. M. G. Bhide, A. Prasad, Saibal Ghosh (2002), ‘Banking Sector Reforms: A Critical

Overview’, Economic and Political Weekly, Vol. 37, No. 5, Money, Banking and Finance (Feb.

2-8, 2002), pp. 399-401+403-408Published by: Economic and Political Weekly Stable

URL:http://www.jstor.org/stable/4411685. Accessed: 19/03/2012 04:42

46. Nachane D. M. (1999),‘Capital Adequacy Ratios: An Agnostic Viewpoint’, , Economic

and Political Weekly, Vol. 34, No. 3/4, Money, Banking and Finance (Jan.16-29, 1999), pp. 155-

160Published by: Economic and Political Weekly Stable URL:

http://www.jstor.org/stable/4407576 .Accessed: 21/03/2012 04:42

106
47. Nachane D. M., Saibal Ghosh, Partha Ray (2005), ‘Bank Nominee Directors and

Corporate Performance: Micro-Evidence for India’, Economic and Political Weekly, Vol. 40,

No. 12, Money, Banking and Finance (Mar. 19-25, 2005), pp. 1216-1223Published by:

Economic and Political Weekly Stable URL: http://www.jstor.org/stable/4416370 . Accessed:

21/03/2012 03:37

48. Das Abhiman and Saibal Ghosh (2004), ‘Corporate Governance in Banking System: An

Empirical Investigation’, Economic and Political Weekly, Vol. 39, No. 12, Money, Banking and

Finance (Mar. 20-26, 2004), pp. 1263-1266Published by: Economic and Political Weekly Stable

URL: http://www.jstor.org/stable/4414805. Accessed: 21/03/2012 07:47

49. Das Abhiman and Saibal Ghosh (2006), ‘Financial deregulation and efficiency: An

empirical analysis of Indian banks during the post reform period ‘,Review of Financial

Economics Volume 15, Issue 3, 2006, Pages 193–221

50. Das Abhiman and Saibal Ghosh, (2009) ‘Financial Deregulation and Profit Efficiency: A

Non-parametric Analysis of Indian Banks’, Journal of Economics and Business 61, 2009, pages

509-528

51. Mukherjee A., P. Nath, M. Pal (2003), ‘Resource, Service Quality and Performance

Triad: A Framework for Measuring Efficiency of Banking Services’, The Journal of the

Operational Research Society, Vol. 54, No. 7 (Jul., 2003), pp. 723-735Published by: Palgrave

Macmillan Journals on behalf of the Operational Research Society, Stable URL:

http://www.jstor.org/stable/4101721 .Accessed: 19/03/2012 04:20

52. Ahluwalia Montek S., (2002), ‘Economic Reforms in India since 1991: Has Gradualism

Worked?’ The Journal of Economic Perspectives, Vol. 16, No. 3 (Summer, 2002), pp. 67-

107
88Published by: American Economic Association Stable URL:

http://www.jstor.org/stable/3216951 .Accessed: 21/03/2012 05:232

53. Claessens Stijn and Luc Laeven (2003), ‘What Drives Bank Competition? Some

International Evidence’ , Journal of Money, Credit and Banking, Vol. 36, No. 3, Part 2: Bank

Concentration and Competition: An Evolution in the Making A Conference Sponsored by the

Federal Reserve Bank of Cleveland May 21-23, 2003 (Jun., 2004), pp. 563-583Published by:

Ohio State University Press Stable URL: http://www.jstor.org/stable/3838954 .Accessed:

19/03/2012 04:20

54. Kapur Devesh, Ravi Ramamurti, Deependra Moitra (2001),‘India's Emerging

Competitive Advantage in Services [and Executive Commentary]’, The Academy of

Management Executive (1993-2005), Vol. 15, No. 2, Theme: Positioning Organizations and

People for Competitive Advantage (May, 2001), pp. 20-33Published by: Academy of

Management Stable URL: http://www.jstor.org/stable/4165732 .Accessed: 21/03/2012 07:39

55. Morris Sebastian (1987),‘Trends in Foreign Direct Investment from India (1950-1982)’,

Economic and Political Weekly, Vol. 22, No. 45 (Nov. 7, 1987), pp. 1909-1918Published by:

Economic and Political Weekly Stable URL: http://www.jstor.org/stable/4377702 . Accessed:

19/03/2012 07:11

56. Sebastian Morris (1990) , ‘Foreign Direct Investments from India: 1964-83 ‘ Indian

Institute of Management Calcutta, 1990† morris@iimahd.ernet.in

57. Raju B. Yerram (2005) ‘Banking: Issues for Debate’, Economic and Political Weekly,

Vol. 40, No. 15 (Apr. 9-15, 2005), pp. 1478+1564Published by: Economic and Political Weekly

Stable URL: http://www.jstor.org/stable/4416441. Accessed: 21/03/2012 03:25

108
58. Ahuja Shobha (1999),‘Efficiency and Market Demand: Indian and Foreign Corporate

Sector in India’, Economic and Political Weekly, Vol. 34, No. 28 (Jul. 10-16, 1999), pp. 1948-

1954Published by: Economic and Political Weekly Stable URL:

http://www.jstor.org/stable/4408186 .Accessed: 21/03/2012 03:27

59. Kurup N. P. (1993), ‘Foreign Banks and Indian Banking System’, Economic and Political

Weekly, Vol. 28, No. 12/13 (Mar. 20-27, 1993), pp. 539-540Published by: Economic and

Political Weekly Stable URL: http://www.jstor.org/stable/4399532 .Accessed: 21/03/2012 03:30

60. Kurup N. P. (1994), ‘Muddle of Partial Privatisation of Banks’, Economic and Political

Weekly, Vol. 29, No. 37 (Sep. 10, 1994), p. 2402Published by: Economic and Political Weekly

Stable URL: http://www.jstor.org/stable/4401748 .Accessed: 21/03/2012 05:14

61. Kurup N. P. (1996), ‘Banking Sector Reforms and Transparency’, Economic and

Political Weekly, Vol. 31, No. 12 (Mar. 23, 1996), pp. 745+747-749Published by: Economic and

Political Weekly Stable URL: http://www.jstor.org/stable/4403940 . Accessed: 21/03/2012 05:25

62. Banik Arindam, Pradip K. Bhaumik, Sunday O.Iyare (2004), ‘Explaining FDI Inflows to

India, China and the Caribbean: An Extended Neighbourhood Approach’, Economic and

Political Weekly, Vol. 39, No. 30 (Jul. 24-30, 2004), pp. 3398-3407Published by: Economic and

Political Weekly Stable URL: http://www.jstor.org/stable/4415321. Accessed: 21/03/2012 03:30

63. Bhaumik Sumon Kumar (2005), ‘Banking Sector: Looking Ahead’, Economic and

Political Weekly, Vol. 40, No. 2 (Jan. 8-14, 2005), pp. 91-92Published by: Economic and

Political Weekly Stable URL:http://www.jstor.org/stable/4416031 . Accessed: 21/03/2012 03:39

64. Satyanarayana K. (1994), ‘Capital Adequacy Gaps for Banks: Problems and Prospects’,

Economic and Political Weekly, Vol. 29, No. 9 (Feb. 26, 1994), pp. M37-M44Published by:

109
Economic and Political Weekly Stable URL: http://www.jstor.org/stable/4400861. Accessed:

21/03/2012 05:12

65. Kohli Renu (2003), ‘Capital Flows and Domestic Financial Sector in India’, Source:

Economic and Political Weekly, Vol. 38, No. 8, Money, Banking and Finance (Feb. 22-28,

2003), pp. 761-762+764-768Published by: Economic and Political Weekly Stable URL:

http://www.jstor.org/stable/4413246 .Accessed: 21/03/2012 06:37

66. Mazumdar Tanushree (2005), ‘Capital Flows into India: Implications for Its Economic

Growth’, Economic and Political Weekly, Vol. 40, No. 21 (May 21-27, 2005), pp. 2183-

2189Published by: Economic and Political Weekly Stable URL:

http://www.jstor.org/stable/4416675. Accessed: 21/03/2012 06:02

67. Sensarma Rudra (2005), ‘Cost and Profit Efficiency of Indian Banks during 1986-2003:

A Stochastic Frontier Analysis’, Economic and Political Weekly, Vol. 40, No. 12, Money,

Banking and Finance (Mar. 19-25, 2005), pp. 1198-1200+1202-1209Published by: Economic

and Political Weekly Stable URL: http://www.jstor.org/stable/4416368. Accessed: 21/03/2012

06:17

68. Datar M. K. (1999), ‘DFIs in an Era of Developing Capital Markets’. Economic and

Political Weekly, Vol. 34, No. 25 (Jun. 19-25, 1999), pp. 1640-1644Published by: Economic and

Political Weekly Stable URL: http://www.jstor.org/stable/4408106 .Accessed: 21/03/2012 04:53

69. Podpiera Richard (2006), ‘Does Compliance with Basel Core Principles Bring Any

Measurable Benefits?’, Richard Podpiera (2006), IMF Staff Papers, Vol. 53, No. 2 (2006), pp.

306-325Published by: Palgrave Macmillan Journals on behalf of the International Monetary

Fund Stable URL: http://www.jstor.org/stable/30036015. Accessed: 21/03/2012 07:54

110
70. Rege Nitsure Rupa (2004), ‘E-Banking: Challenges and Opportunities’, Economic and

Political Weekly, Vol. 38, No. 51/52 (Dec. 27, 2003 - Jan. 2, 2004), pp.5377-5381Published by:

Economic and Political Weekly Stable URL: http://www.jstor.org/stable/4414436. Accessed:

21/03/2012 07:34

71. Rege Nitsure Rupa (2007), ‘Corrective Steps towards Sound Banking’, Economic and

Political Weekly, Vol. 42, No. 13, Money, Banking and Finance (Mar. 31- Apr. 6, 2007), pp.

1219-1223Published by: Economic and Political Weekly Stable URL:

http://www.jstor.org/stable/4419423 .Accessed: 21/03/2012 04:44

72. Karunagaran A. (2006), ‘Foreign Banks in Historical Perspective’, Economic and

Political Weekly, Vol. 41, No. 11, Money, Banking and Finance (Mar. 18-24, 2006), pp. 1087-

1094Published by: Economic and Political Weekly Stable URL:

http://www.jstor.org/stable/4417974 .Accessed: 21/03/2012 06:32

73. Nagaraj R. (2003), ‘Foreign Direct Investment in India in the 1990s: Trends and Issues’,

Economic and Political Weekly, Vol. 38, No. 17 (Apr. 26 - May 2, 2003), pp. 1701-

1712Published by: Economic and Political Weekly Stable URL:

http://www.jstor.org/stable/4413497. Accessed: 21/03/2012 05:08

74. Mukhopadhyay Sukumar (2002), ‘Globalization and Indian Services Sector’, Economic

and Political Weekly, Vol. 37, No. 40 (Oct. 5-11, 2002), pp. 4097-4098Published by: Economic

and Political Weekly Stable URL: http://www.jstor.org/stable/4412685. Accessed: 21/03/2012

07:32

75. D’Souza Errol (2002), ‘How Well Have Public Sector Banks Done? A Note’, Economic

and Political Weekly, Vol. 37, No. 9 (Mar. 2-8, 2002), pp. 867-870Published by: Economic and

Political Weekly Stable URL: http://www.jstor.org/stable/4411813 .Accessed: 21/03/2012 04:59

111
76. Chaganti Rajeswararao and Fariborz Damanpour(1991), ‘Institutional Ownership,

Capital Structure, and Firm Performance’, Strategic Management Journal, Vol. 12, No. 7 (Oct.,

1991), pp. 479-491Published by: John Wiley & Sons Stable URL:

http://www.jstor.org/stable/2486521 .Accessed: 21/03/2012 07:16

77. Miller Stewart R. and Arvind Parkhe (2002), ‘Is There a Liability of Foreignness in

Global Banking? An Empirical Test of Banks' X-Efficiency’, Strategic Management Journal, Vol.

23, No. 1 (Jan., 2002), pp. 55-75Published by: John Wiley & Sons Stable URL:

http://www.jstor.org/stable/3094274 .Accessed: 21/03/2012 07:42

78. Bardhan Pranab (2005), ‘Nature of Opposition to Economic Reforms in India’,

Economic and Political Weekly, Vol. 40, No. 48 (Nov. 26 - Dec. 2, 2005), pp. 4995-

4998Published by: Economic and Political Weekly Stable URL:

http://www.jstor.org/stable/4417450. Accessed: 21/03/2012 04:47

79. Rajaraman Indira, Sumon Bhaumik, Namita Bhatia(1999), ‘NPA Variations across

Indian Commercial Banks: Some Findings’, Economic and Political Weekly, Vol. 34, No. 3/4,

Money, Banking and Finance (Jan.16-29, 1999), pp. 161-163+165-168Published by: Economic

and Political Weekly Stable URL: http://www.jstor.org/stable/4407577 . Accessed: 21/03/2012

06:07

80. Rajaraman Indira and Garima Vasishtha (2002), ‘Non-Performing Loans of PSU Banks:

Some Panel Results’, Economic and Political Weekly, Vol. 37, No. 5, Money, Banking and

Finance (Feb. 2-8,2002), pp. 429-431+434-435Published by: Economic and Political Weekly

Stable URL: http://www.jstor.org/stable/4411688 . Accessed: 21/03/2012 06:11

112
81. Roy Anjan (2008), ‘Organization Structure and Risk Taking in Banking’, Risk

Management, Vol. 10, No. 2 (Apr., 2008), pp. 122-134Published by: Palgrave Macmillan

Journals Stable URL: http://www.jstor.org/stable/27669996. Accessed: 21/03/2012 04:54

82. Ann P. Bartel and Ann E. Harrison (2005), ‘Ownership versus Environment:

Disentangling the Sources of Public-Sector Inefficiency’, The Review of Economics and

Statistics, Vol. 87, No. 1 (Feb., 2005), pp. 135-147Published by: The MIT Press Stable URL:

http://www.jstor.org/stable/40042928 .Accessed: 21/03/2012 05:08

83. Chandrasekhar C. P. (2007), ‘Private Equity: A New Role for Finance?’, Economic and

Political Weekly, Vol. 42, No. 13, Money, Banking and Finance (Mar. 31- Apr. 6, 2007), pp.

1136-1137+1139+1141-1143+1145Published by: Economic and Political Weekly Stable URL:

http://www.jstor.org/stable/4419412 . Accessed: 21/03/2012 06:46

84. Reddy A. Amarender (2006), ‘Productivity Growth in Regional Rural Banks’, Economic

and Political Weekly, Vol. 41, No. 11, Money, Banking and Finance (Mar. 18-24, 2006), pp.

1079-1086Published by: Economic and Political Weekly Stable URL:

http://www.jstor.org/stable/4417973. Accessed: 21/03/2012 06:31

85. Keshari Pradeep K. and M. Thomas Paul (1994), ‘Relative Efficiency of Foreign and

Domestic Banks’, Economic and Political Weekly, Vol. 29, No. 9 (Feb. 26, 1994), pp. M31-

M36Published by: Economic and Political Weekly Stable URL:

http://www.jstor.org/stable/4400860 .Accessed: 21/03/2012 07:29

86. Chaudhuri Saumitra (2002), ‘Some Issues of Growth and Profitability in Indian Public

Sector Banks’, Economic and Political Weekly, Vol. 37, No. 22 (Jun. 1-7, 2002), pp. 2155-

2162Published by: Economic and Political Weekly Stable URL:

http://www.jstor.org/stable/4412194 .Accessed: 21/03/2012 07:29

113
87. A. V. Rajwade (2001), ‘Universal Banking: Some Issues’, Economic and Political

Weekly, Vol. 36, No. 45 (Nov. 10-16, 2001), pp. 4245+4247-4248Published by: Economic and

Political WeeklyStable URL: http://www.jstor.org/stable/4411344 .Accessed: 21/03/2012 07:50

88. Ghosh D. N. (1999), ‘ Verma Committee Report on Weak Public Sector Banks’,

Economic and Political Weekly, Vol. 34, No. 48 (Nov. 27 - Dec. 3, 1999), pp. 3356-

3359Published by: Economic and Political Weekly Stable URL:

http://www.jstor.org/stable/4408652 . Accessed: 21/03/2012 04:44

89. Ghosh D. N. (2000), ‘Weak Banks: A Strategy for Self-Renewal’, Economic and Political

Weekly, Vol. 35, No. 5, Money, Banking and Finance (Jan. 29 -Feb. 4, 2000), pp. 243-

244Published by: Economic and Political WeeklyStable URL:

http://www.jstor.org/stable/4408865 .Accessed: 21/03/2012 06:11

90. Sabi Manijeh (1988), ‘An Application of the Theory of Foreign Direct Investment to

Multinational Banking in LDCS’, Journal of International Business Studies, Vol. 19, No. 3

(Autumn, 1988), pp. 433-447Published by: Palgrave Macmillan Journals Stable URL:

http://www.jstor.org/stable/155134 .Accessed: 21/03/2012 04:31

114