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The impact of FDI on banking

The global banking industry weathered turbulent times in 2007 and 2008. The impact of the economic slowdown on the banking and insurance services sector in India has so far been moderate. The Indian financial system has very little exposure to foreign assets and their derivative products and it is this feature that is likely to prove an antidote to the financial sector ills that have plagued many other emerging economies. Owing to at least a decade of reforms, the banking sector in India has seen remarkable improvement in financial health and in providing jobs. Even in the wake of a severe economic downturn, the banking sector continues to be a very dominant sector of the financial system. The aggregate foreign investment in a private bank from all sources is allowed to reach as much as 74% under Indian regulations. The insurance sector has also been fast developing with substantial revenue growth in the non-life insurance market. However, despite its enormous population, India only accounts for 3.4% of the Asia- Pacific general insurance market’s value. The cap on foreign companies’ equity stakes in insurance joint ventures is 26%, but is expected to rise to 49%. The third quarter of 2008 saw the beginning of negative net capital inflows into the country. Notwithstanding this bleak scenario, the investment pattern with regard to foreign direct investment (FDI) and inflows from non-resident Indians remains resilient and FDI inflows into the country grew by an impressive 145% between fiscal 2006 and 2007 and by a respectable 46.6% between fiscal 2007 and 2008. However, owing to the economic downturn, the growth in FDI inflows in fiscal 2009 slowed to 18.6% from the previous fiscal. Despite the surge in investments, the stringent regulatory framework governing FDI has proved to be a significant hindrance. However, FDI norms have been relaxed to a considerable extent with respect to certain sectors. Private banks, for instance. Foreign investment, in addition to technological innovation and expertise, brings with it a plethora of risks. An unwarranted increase in the size of foreign holding in the banking and insurance sector will inevitably expose the country to risks not commensurate with those that an emerging market economy such as ours is equipped to grapple with. At the same time, it is important to recognize that FDI in banking can address several issues pertaining to the sector such as encouraging development of innovative financial products, improving the efficiency of the banking sector, better capitalization of banks and better ability to adapt to changing financial market conditions.

Single policy for FDI in banking, insurance soon

I

ndia will unveil a single policy for foreign direct investment, including in sectors such as financial services, insurance and banking by

March 31, Commerce and Industry Minister Anand Sharma has disclosed.

After 3 days of discussions with senior Obama [ Images ] administration officials, Sharma acknowledged that "it's true that we were slow off the block when we started the process of economic reforms and liberalization," but asserted in the past few years, "it would be appreciated that India [ Images ] has moved much faster." "India works on a very small negative list and the FDI which comes into India - the majority of the sectors - are in the automatic route," he said. Sharma argued that for all of the criticism and whining, "When you look at the pace at which some of these sectors - financial services, insurance and banking - have been opened, then India has done far better than many of the countries, including in Europe and here, in these sectors."

He pointed out that "you have more US bank branches in India. You have more British bank branches in India, or for what matter, of the other countries, and there are partnerships of the major insurance companies with the premier insurance companies in India." "So, it is, I'd say, an incremental movement. Whatever decisions India has taken have been after careful consideration and evolutionary… building a consensus and these policy decisions are enduring ones." by Sharma said however that come March 31, there would be a crystallization of certain steps his ministry had initiated to open out to more flows of FDI with more relaxed limits that would be attractive to investors. "Our last FDI policy on the upper limit of FDI in these sectors, which are not in the automatic mode, where the Foreign Investment Promotion Board approval was required since 1996 was Rs 600 crore (Rs 6 billion). Now, we have through a cabinet decision on the initiative of my ministry, doubled the cap from Rs 600 crore to Rs 1,200 crore (Rs 12 billion), and what is even more significant was that earlier, Rs 600 crore used to be the cost of the project, but now it is not the cost of the project but net FDI inflows." Sharma also said that "we will also in the next few days come out with a single FDI policy document," and pointed out that "when we started the opening up of the Indian economy and inviting FDI, all policy decisions were communicated through what we call the press notes and every year had its series of press notes." "We had 177 press notes detailing the FDI policy. It was clear that we needed greater clarity, predictability and a policy document, which is easy to comprehend. We had started this process - a draft was put out in the last week of December 2009 for stakeholders consultations inviting responses, for inputs from industry, globally from investors throughout the world and by the stakeholders in India, the chambers of commerce and industry." Sharma said that this consultative process was now completed and on March 31, "we will come out with a single FDI policy document, which has subsumed all 177 press notes." He said that in order to make this operational, "We have also set up - with government and industry in partnership - through a cabinet decision, an entity, a non-profit company called Invest India and FICCI is the partner with the Indian government and we also intend to give some equity at the appropriate time to all the states of the Indian union to bring them on board." Sharma said that "we are in the process of rationalizing and bringing a greater degree of uniformity when it comes to various mandated approvals for investors."

Guidelines for FDI in Banking
This article provides a preview on the Guidelines for FDI in Banking. Limits to FDI in the banking sector have been increased to 74%. FDI in the banking sector is allowed under the automatic route in India.

Guidelines for FDI in Banking at a Glance-

In the private banking sector of India, FDI is allowed up to a maximum limit of 74 % of the paid-up capital of the bank. On the other hand, Foreign Direct Investment and Portfolio Investment in the public or nationalized banks in India are subjected to a limit of 20 % in totality. This ceiling is also applicable to the investments in the State Bank of India and its associate banks. FDI limits in the banking sector of India were increased with the aim to bring in more FDI inflows in the country along with the incorporation of advanced technology and management practices. The objective was to make the Indian banking sector more competitive. The Reserve Bank of India governs the investment matters in the banking

Problems Faced by the Indian Banking Sector- FDI in Indian banking sector resolves the following problems often faced by various banks in the country:        Inefficiency in management Instability in financial matters Innovativeness in financial products or schemes Technical developments happening across various foreign markets Non-performing areas or properties Poor marketing strategies Changing financial market conditions Benefits of FDI in Banking Sector in India-     Transfer of technology from overseas countries to the domestic market Ensure better and improved risk management in the banking sector Assures better capitalization Offers financial stability in the banking sector in India Non-Banking Financial Companies (NBFC) 49% FDI is allowed from all sources on the automatic route subject to guidelines issued from RBI from time to time. Indian operations by foreign banks can be executed by any one of the following three channels -    Branches in India Wholly owned subsidiaries.sector. Other subsidiaries. iii. In case of wholly owned subsidiaries (WOS). the guidelines for FDI in the banking sector specified that the WOS must involve a capital of minimum ` 300 crores and should ensure proper corporate governance. FDI/NRI/OCB investments allowed in the following 19 NBFC activities shall be as per levels indicated below: Merchant banking Underwriting Portfolio Management Services Investment Advisory Services i. According to the guidelines for FDI in the banking sector. . a. ii. iv.

India has sought to increase inflows of FDI with a much liberal policy since 1991 after decade's cautious attitude. xii. x. b.US $ 5 million to be brought upfront iii) For FDI above 75% and up to 100% . f. xvii. subject to bringing in US$ 50 million as at b) (iii) above (without any restriction on number of operating subsidiaries without bringing in additional capital) e. Financial Consultancy Stock Broking Asset Management Venture Capital Custodial Services Factoring Credit Reference Agencies Credit rating Agencies Leasing & Finance Housing Finance Foreign Exchange Brokering Credit card business Money changing Business Micro Credit Rural Credit Minimum Capitalization Norms for fund based NBFCs: i) For FDI up to 51% . Joint Venture operating NBFC's that have 75% or less than 75% foreign investment will also be allowed to set up subsidiaries for undertaking other NBFC activities.US $ 50 million out of which US $ 7. opening of the economy after 1991 does not live much choice but to .5 million to be brought upfront ii) For FDI above 51% and up to 75% . RBI would issue appropriate guidelines in this regard.A Boon in Disguise Foreign Direct Investment as seen as an important source of non-debt inflows.US$ 0. vii. vi. xviii. and is increasing being sought as a vehicle for technology flows and as a means of attaining competitive efficiency by creating a meaningful network of global interconnections. Foreign investors can set up 100% operating subsidiaries without the condition to disinvest a minimum of 25% of its equity to Indian entities.5 million to be brought upfront and the balance in 24 months c. xv. FDI in the NBFC sector is put on automatic route subject to compliance with guidelines of the Reserve Bank of India. viii. ix. Foreign Direct Investment in Banking Sector . (b)(i) and (b)(ii) above. d. FDI plays a vital role in the economy because it does not only provide opportunities to host countries to enhance their economic development but also opens new vistas to home countries to optimize their earnings by employing their ideal resources.e. xiii. subject to the subsidiaries also complying with the applicable minimum capital inflow i. xiv. xi. xix.5 million is applicable in respect of all permitted non-fund based NBFCs with foreign investment. The 1990's have witnessed a sustained rise in annual inflows to India. Minimum capitalization norms for non-fund based activities: Minimum capitalization norm of US $ 0. xvi. Basically.v.

The government wants to fulfill a pledge to allow companies like New York Life Insurance. In a nutshell. the concern expressed by the left communist parties are opposing the finance minister move to raise overseas investment limits in the insurance business.attract the foreign investment. Met Life Insurance to raise investment in local companies to 49 per cent from 26 per cent. Limits for FDI FDI in the banking sector has been liberalized by raising FDI limit in private sector banks to 74 per cent under automatic root including investment by foreign investment in India. It needs . The Present Banking Scenario In recent times economy is been pushing to increase the role of multi-national banks in the banking and insurance sector. Left do not want foreign investors to have greater voting rights in private banks and oppose the privatization of state run pension fund. Privatization and Globalization. it creates potential problems not only of excursive concentration in the banking sector but also can expose the economy to more intensive financial crises at the slightest hint of panic. Along with that it entails the following benefits such as – Technology Transfer As due to the globalization local banks are competing in the global market. where innovative financial products of multinational banks is the key limiting factor in the development of local bank. despite. The same ceiling also applies in respect of such investment in State Bank of India and its associate banks. FDI and Portfolio investment in nationalized banks are subject to overall statutory limit of 20 per cent. But it is opposed on the front that it will lead to state run insurers loosing business and workers their job. the reason is low-capital base and all the problems is the outcome of the transactions carried over in a bank without a substantial capital base. as the FDI is a non-debt inflow. we can say that. as an engine of dynamic growth especially in view of fast paced movement of the world forward Liberalization. The aggregate foreign investment in a private bank from all sources will be 74 per cent of paid-up capital of the bank. Such as – i) Innovative Financial Products ii) Technical Developments in the Foreign Markets iii) Problem of Inefficient Management iv) Non-performing Assets v) Financial Instability vi) Poor Capitalization vii) Changing Financial Market Conditions If we consider the root cause of these problems. Now a days banks have been prominent and prudent in the rapid expansion of consumer lending in domestic as well as in foreign markets. which will directly solve the problem of capital base. Opposition is not considering the need of present situation. When domestic or foreign investors acquire a large share holding in any bank and exercise proportionate voting rights. There are several reasons why such move is fraught with dangers. They are trying to keep pace with the technological development in the banks. FDI in banking sector can solve various problems of the overall banking sector.

The best example is Basel II. Through FDI. Most of the banks are opting Basel II for making their financial system more safer. Better Risk Management As the banks are expanding their area of operation. may reduce the sensitivity of the host country banking system and lead towards financial stability. FDI's tech transfers. the host countries will know efficient management technique. including local lending practices as the whole banking sector is crying for a strategic policy for risk management. In general. training programs and other forms of technical assistance may help meet this need. if the foreign bank recapitalize a struggling local institution. there is a need to change their strategies exert competitive pressures and demonstration effect on local institutions. From foreign entry. RBI Annual Report 2005-06. Financial Stability and Better Capitalization Host countries may benefit immediately.appropriate tools to assess (how such credit is managed) credit management of the banks and authorities in charge of financial stability. In the process also provides needed balance of payment finance. It may need additional information and techniques to monitor for financial vulnerabilities. Source : "Economic Review". more efficient allocation of credit in the financial sector. So due to the aforesaid benefits economy has consistent flow of FDI over the past few . better capitalization and wider diversification of foreign banks along with the access of local operations to parent funding. often including them to reassess business practices. information sharing.

nearly $ 12 bn in 2005. civil aviation) FDI up to 100% through the Reserve Bank's automatic route was permitted for a no. As a proportion to FDI flows to emerging market and developing countries. Cumulative foreign investment flows have amounted to US & 106 billion since 1990-91 and almost evenly balanced between direct invest flows (US & 49 bn) and portfolio flows (US & 57 bn). RBI Annual Report 2005-06. of new sectors in 2005-06 such as Greenfield airport projects.7% in 2005'1. FDI flows have exceeded portfolio flows in the 5 years while portfolio flows have exceeded FDI in the remaining 8 years. India slated to be the second largest demand driver in the region.6% in 1998 to 3. India's FDI growth of above 30% during past 2 years is encouraging. India has improved its rank from fifteenth (in 2002) to become the second most likely FDI destination after China in 2005'1. Looking forward. Even though above discussed factors are fair enough for the development of economy. * India contributed nearly one fifth of Asian domestic demand growth over 2000-05. 'FDI & FII have risen sharply during the 1990s reflecting the policies to attract non-debt creating flows. the govt. FDI flows to India have shown a consistent rise from 1. Source : "Economic Review". The IMF Study Report The IMF's study is in supportive to the above-discussed features of FDI. . after China. * India is the world's leading recipient of remittances. their size is growing on the back of growing interest by many of the world's leading multinationals. has also taken step to enhance the FDI (eg. * India accounts for almost one quarter of the global portfolio flows to emerging market economies.years. Although the FDI inflows into India are small as compared to other emerging markets. Telecom. accounting for about 20% of the global flows. This overall FDI is evident from the above graph. In addition to that. Since 1993-94. export trading. All these measures have been contributing towards increasing direct investment. This study talks about the optimism over India emanates from a contribution of following factors.

So. It is evident from the diagram. FDI in Financial Sector is not getting a wholesome environment. economy drivers are reluctant towards more liberalization for FDI in the banking sector. foreign commercial and investment banks have quietly begun picking up public sector bank's bond issues.Business Line 6) RBI guidelines for FDI in Banking Sector . P.But it is a noted fact that. Shrivastava .K.22" 3) FDI in Financial Sector . (As it is considered as hot money) The present scenario looks more closely at the paradigm of exponential growth and laments that India's role as an engine for global growth has been limited by the still relatively closed nature of its economy. therefore from last 2 years FIIs have exceeded the FDI and in portfolio investment into India since 2003-04 reflects both domestic and global factors. Now a days. But the foreign investment is finding its own way to come in the economy. some of the foreign banks were also using the banks' bonds as an arbitrage opportunity in view of the increasing liquidity.Business Line 5) Insurance FDI : Left to oppose like . Compared with FII always FDI has a greater and long-term effect on the Indian market due to the whimsical nature of FII. May be the way of FII. References 1) "Economic Review" Foreign Invest flows to India – RBI Annual report 2005-06 (September) 2) Foreign Direct Invert in the Financial Sector of emerging market economics "CGFS publication No.Dr.CGFS publication No. Bankers said that the funds were coming into these bonds.25 4) IMF's study on India . As the ceiling rates are not increased.

68 /21. Limit for FDI in public sector banks FDI and Portfolio Investment in nationalised banks are subject to overall statutory limits of 20 per cent as provided under Section 3 (2D) of the Banking Companies (Acquisition & Transfer of Undertakings) Acts. followed by “in principle” approval by Exchange Control Department (ECD). The same ceiling would also apply in respect of such investments in State Bank of India and its associate banks. and (iv) Acquisition of shares from existing shareholders [subject to (d) below]. the maximum foreign investment in an insurance company has been fixed at 26%. RBI for obtaining final permission for transfer of shares. The position has been reviewed in the light of Government policy announced from time to time as well as guidelines laid down by RBI under various statutory provisions. 2 f) Foreign banks having branch presence in India. 2. RBI. broadly on the basis of SEBI guidelines for listed shares and erstwhile CCI guidelines for unlisted shares. issue of fresh shares under automatic route is not available to those foreign investors who have a financial or technical collaboration in the same or allied field. Government of India. This category of investors require FIPB approval. c) It may be clarified that as per Government of India guidelines. b) For the purpose of determining the above-mentioned ceiling of 49 per cent FDI under the “automatic route” in respect of private sector banks. Application for foreign investment in banks which have joint venture / subsidiary in insurance sector should be made to RBI. (iii) ADRs/ GDRs.BP. d) It may be further clarified that. as per Government of India guidelines. subject to conformity with the guidelines issued by RBI from time to time.No. 2002 DBOD.BC. the resident seller can receive funds and apply to ECD. the following category of shares will be included: (i) IPOs. automatic route is not applicable to transfer of existing shares in a banking company from residents to non-residents. 2001 issued by Ministry of Commerce & Industry. The present position in this respect is clarified as under in a consolidated form.4 (2001 Series) dated May 21.Foreign Direct Investment (FDI) in the Banking Sector February 16. After receipt of “in principle” approval. FDI upto 49 per cent from all sources will be permitted in private sector banks on the automatic route.055/2001-02 All Scheduled Commercial Banks Dear Sir. Such applications will be considered by RBI in consultation with Insurance Regulatory and Development Authority (IRDA). (ii) Private Placements. The “fair price” for transfer of existing shares is determined by RBI. Limit for FDI under automatic route in private sector banks a) In terms of the Press Note No. This category of investors require approval of FIPB. are eligible for FDI in the private sector banks subject to the overall cap of 49% mentioned above with the approval of RBI. Voting rights of foreign investors .01. e) Under the Insurance Act. Foreign Direct Investment (FDI) in the Banking Sector The Reserve Bank of India (RBI) has received some enquiries regarding regulations pertaining to Foreign Direct Investment (FDI) in the Banking Sector. 1. 1970/80. 3.

For FDI of 5 per cent and more of the paid-up capital.In terms of the statutory provisions under the various banking acts. in consultation with RBI can raise the above voting right to more than ten percent). (ii) Under the provisions of FEMA 1999. other than SBI. shall exercise voting rights on poll in excess of ten percent of the total voting rights of all the shareholders. Approval of RBI and reporting requirements (i) Under extant instructions. does not require further approval of Exchange Control Department (ECD) of RBI from the exchange 3 control angle. other than the Central Government. either through the automatic route or with the specific approval of FIPB. requires prior acknowledgement of RBI. Nationalised Banks – [Section 3(2E) of Banking Companies (Acquisition and Transfer of Undertakings) Acts. The Indian banking company is only required to undertake 2-stage reporting to the ECD as follows: (a) In the first stage. 1970/80] No shareholder. State Bank of India (SBI) (Section 11 of State Bank of India Act. have been stipulated which are indicated as under: Private Sector Banks – [Section 12(2) of Banking Regulation Act. transfer of shares of 5 per cent and more of the paid-up capital of a private sector banking company. the voting rights. SBI Associates . shall be entitled to exercise voting rights in excess of one percent of the issued capital of the subsidiary bank concerned. the private sector banking company has to apply in the prescribed form (Annexure I to this circular) to the Department of Banking Operations & Development in the Regional Office of RBI. shall be entitled to exercise voting rights in respect of any shares held by him in excess of one percent of the total voting rights of all the shareholders of the nationalised bank. the Indian company has to submit a report within 30 days of the date of receipt of amount of consideration indicating the name and address of foreign . when exercised.[Section 19(1) and (2) of SBI (Subsidiary Bank) Act. shall be entitled to exercise voting rights in excess of ten percent of the issued capital. 1959] No person shall be registered as a shareholder in respect of any shares held by him in excess of two hundred shares. (Government. any fresh issue of shares of a banking company. where the bank’s Head Office is located. 4. other than RBI. No shareholder.1955) No shareholder.1949] No person holding shares. in respect of any share held by him.

disinvestments by foreign investors would be governed by the following: (i) Sale of shares by non-residents on a stock exchange and remittance of the proceeds thereof through an authorized dealer does not require RBI approval. Yours faithfully. This circular supercedes the earlier instructions issued by RBI in regard to FDI in the Banking Sector. Companies Act. if any. etc. 7. RBI grants permission for sale of shares at a price that is market related and is arrived at in terms of guidelines indicated in Regulation 10 above. 9. announced . the Finance Minister. Please acknowledge receipt. Mahapatra ) General Manager Encls : As above February 14. Conformity with SEBI Regulations and Companies Act Provisions Wherever applicable. date of receipt of funds and their rupee equivalent. 5. as stipulated by SEBI. (b) In the second stage.investors. name of bank through whom funds were received and details of Government approval. 2005 Left Parties Note: On The Proposal To Enhance FDI Cap In Banking (Submitted to the UPA-Left Coordination Committee) THE BACKGROUND On 15th December. FDI in banking companies should conform to the provisions regarding shareholding and share transfer. a report in Form FC-GPR (Annexure II) together with a Certificate from the Company Secretary of the concerned company certifying that various regulations have been complied with. the Indian banking company is required to file within 30 days from the date of issue of shares. etc. 6. while responding to a Calling Attention notice on changes in Banking Policy in the Lok Sabha. FEMA 20/2000-RB dated May 3. ( B. (ii) Sale of shares by private arrangement requires RBI's prior approval. 2000 issued under FEMA 1999. Disinvestment by Foreign Investors In terms of Regulations 10 and 11 of RBI Notification No. The report will also be accompanied by a Certificate from a Chartered Accountant indicating the manner of arriving at the price of the shares issued. 8. All commercial banks which either have foreign investments or intending to have foreign investments are requested to observe the above guidelines.

This shows that the economic policy establishment in India. Deregulation of the banking sector. asset creation and employment generation. talks about the appropriate timing of the entry of foreign banks into India so as to be co-terminus with the transition to greater capital account convertibility.[1] who was closely involved with policymaking at the international level when the spate of financial crises occurred in the late-1990s. Even when countries have strong banks. the experience of recurrent financial crises in the 1990s. the RBI has finally agreed to the raising of the 10% voting cap in the private sector banks and make it proportional to equity holding. whose limit in turn would be raised to 74%. BANK DEREGULATION: THE POSITION OF THE LEFT The Left is opposed to the moves to further deregulate the banking sector on several counts. However. “all too often capital account liberalization represents risk without a reward. This lesson was painfully learnt by several developing countries through the decade of the nineties. it can impose enormous risks. which was issued on 2 nd July 2004.” He also mentions. Instances in India such as the Nedungadi Bank and the Global Trust Bank are the harbingers of what may follow if reckless deregulation of the banking sector is carried out. The observed tendency among some promoters or boards of banks to divert a substantial share of its deposits into speculative activities in which the promoter or board may be interested or into investments that are risky but promise quick returns. held that “capital account liberalization was the single most important factor leading to the crisis. lead to bank failures and if the magnitude of the failure is serious enough. Far from contributing positively to economic growth. banks are the principal risk carriers in the system. (A list of major financial crises since the 1990s drawn from RBI Bulletin. However. greatly enhances the scope of speculative activities and exposes the financial system to the risks associated with volatile capital flows. Joseph Stiglitz. it is noteworthy that the removal of the cap on voting rights would require an amendment of Section 12(2) of the Banking Regulation Act. October 2004 is provided in the . can actually precipitate crisis for the entire financial system. can increase financial fragility. and other institutions that many of the Asian countries did not have. financial liberalization has precipitated crises in several countries.the enhancement of the FDI limit to 74% following the 5th March 2004 notification issued by the previous government and justified it by saying that “The revision in FDI limit will create an enabling environment for higher FDI inflows along with infusion of new technology and management practices resulting in enhanced competitiveness”. has shown how banking deregulation along with capital market liberalization often serves as recipes for financial turmoil in developing countries like ours. most famously the East Asian experience. The Left Parties are opposed to this proposed amendment. including the RBI. It is clear by now that after its initial reservations about the move.”[2] Besides. the RBI‟s Report on Trend and Progress of Banking in India 2003-04. which is a vital component of financial liberalization. In fact. has not drawn adequate lessons from the experiences of the financial crisis-affected countries. a mature stock market. taking in small deposits that are liquid and making relatively large investments that are illiquid and can be characterised by substantial income and capital risk. The Minister also said that the RBI is in the process of considering the suggestions/feedback received on its guidelines.

It is therefore a matter of grave concern that the UPA Government is continuing with the previous government‟s policies with regards to financial opening. and in the interest of diversified ownership. Non-Resident Indians). These guidelines stated among other things that no single entity or group of related entities would be allowed to hold shares or exercise control. The RBI had strongly advocated diversified ownership of banks.Annexure). the fit and proper criteria involves its track record of reputation for operating in a manner that is consistent with the standards of good corporate governance. Foreign Institutional Investors. directly or indirectly. so long as it was based on the RBI‟s permission. Where the applicant is a body corporate. Diversified ownership becomes a necessary postulate so as to provide balancing stakes. 2003-04 (Chapter VIII: Perspectives) states. in any private sector bank in excess of 10 % of its paid-up capital. This made the norms with regard to FDI correspond to the 10% cap on voting rights. Corporate governance in banks has therefore. reputation and track record of the applicant in financial matters. the RBI may take into account all matters that it considers relevant to the application. Recognising that the 5th March notification by the Union Government had hiked foreign investment limits in private banking to 74%. It is clear from the guidelines issued by the RBI in July 2004 that despite the NDA government‟s decision to raise the FDI limit in banking to 74%. “The concentrated shareholding in banks controlling substantial amount of public funds poses the risk of concentration of ownership given the moral hazard problem and linkages of owners with businesses. which had raised the FDI limit in Private Sector Banks to 74% under the automatic route. financial strength and integrity. they would also enhance the vulnerability of the financial system to the flows of speculative capital. compliance with tax laws. More rigorous fit and proper tests were suggested where acquisition or investment takes the shareholding of the applicant to a level of 10% or more. The Left Parties are of the opinion that not only are the measures to further deregulate the financial sector and raise the FDI cap in banking unnecessary from the point of view of economic and industrial growth. it had chosen to remain extremely cautious about further opening up of the banking sector and allowing domestic or foreign investors to acquire a large shareholding in any bank and exercising proportionate voting rights. The guidelines stated: “In deciding whether or not to grant acknowledgement. a comprehensive set of policy guidelines on ownership of private banks was issued by the Reserve Bank of India on 2nd July 2004.” It further states that “…in the interest of . become a major issue.” These fitness and proprietary tests include the integrity. The guidelines allowed for an acquisition equal to or in excess of 5%. the percentage of FDI by a single entity or group of related entities was restricted to 10%. RBI‟s Report on Trend and Progress of Banking in India. the source of funds for the acquisition etc. RBI GUIDELINES ON BANK OWNERSHIP Subsequent to the 5th March 2004 notification issued by the Ministry of Commerce and Industry under the NDA government. history of criminal proceedings if any. including ensuring that shareholders whose aggregate holdings are above the specified thresholds meet the fitness and proprietary tests. the guidelines sought to define the ceiling as applicable on aggregate foreign investment in private banks from all sources (FDI.

diversified ownership of banks. In a sense. the Reserve Bank intends to ensure that no single entity or group of related entities have shareholding or control. 2004.” A more elaborate exposition of the RBI‟s views on the matter came from Dr. The owners or shareholders of the banks have only a minor stake and considering the leveraging capacity of banks (more than ten to one) it puts them in control of very large volume of public funds of which their own stake is miniscule. political and human angle. in the present case. which is the regulator of the banking sector. they act as trustees and as such must be fit and proper for the deployment of funds entrusted to them. The Left Parties therefore feel that it would be better if the UPA Government abandon its move to amend the Banking Regulation Act and maintain status quo as far as the law and the RBI . which is the Regulator of the banking sector. The speed with which a bank under a run can collapse is incomparable with any other organisation. there is a more onerous responsibility on the regulator. Besides impairing the effectiveness of existing banking regulation. Hence from a moral. For a developing economy like ours there is also much less tolerance for downside risk among depositors many of whom place their life savings in the banks. concentrated shareholding in banks controlling huge public funds does pose issues related to the risk of concentration of ownership because of the moral hazard problem and linkages of owners with businesses. Hence diversification of ownership is desirable as also ensuring fit and proper status of such owners and directors. and that applies whether the banks are locally. had a strong case for issuing elaborate guidelines on bank ownership to ensure diversification. In a speech made at a Conference on Ownership and Governance in Private Sector Banking organised by the CII at Mumbai on 9th September 2004 he remarked (italics added): The banking system is something that is central to a nation‟s economy. in any bank in excess of 10 per cent of the paid up capital of the private sector banks. That is precisely why the RBI had also specified stringent FDI acquisition norms in its guidelines. directly or indirectly. Any higher levels of acquisition will be with the prior approval of the Reserve Bank and in accordance with the guidelines notified on February 3. it has forced the RBI to dilute its guidelines and thereby weaken the regulatory framework itself. therefore. Thus. this would also create a wrong precedent whereby market players would exert undue pressure for further dilution of regulation in the future. the Government has not only disregarded the views of the RBI. Rakesh Mohan. If the government chooses to permit automatic acquisition of a 74% stake by foreign investors. resulting in a dilution of the RBI guidelines.or foreign-owned. It is evident that the RBI. the then Deputy Governor of the RBI. social. Millions of depositors of the banks whose funds are entrusted with the bank are not in control of their management. The sustained stable and continuing operations depend on the public confidence in individual banks and the banking system. The CMP of the UPA states that “All regulatory institutions will be strengthened to ensure that competition is free and fair. However. These institutions will be run professionally”. a similar facility would eventually have to be provided to domestic investors as well for the sake of ensuring a level playing field. It also states that “Regulation of urban cooperative banks in particular and of banks in general will be made more effective”.

He also mentioned about the enhanced profitability of the banks in the postreforms period. The Finance Minister. compromises and upgradations on the other are provided. including those in the public sector. These claims are contentious. the absolute values of gross or net NPAs have continued to rise for almost all categories of banks. it can curb rather than enhance competitiveness. If disaggregated figures of loan write offs on the one hand and cash recoveries. Such „evergreening‟ can be financially innovative. he gave figures for the declining proportion of net NPAs of the public and private sector banks. Because if loan write offs are driving the observed decline in the net or gross NPAs to net or gross advances ratios respectively. nor does higher FDI inflow necessarily imply infusion of such technology and management practices that are beneficial to the economy and the people. leading to “infusion of new technology and management practices” resulting in “enhanced competitiveness”. the RBI Report on Trend and Progress of Banking in India. especially when a regulatory framework meant to ensure diversified ownership is diluted to pave the way for foreign banks acquiring private Indian banks within three to four years through creeping acquisition. What is more. While it is true that the gross and net NPAs as a percent of total assets or as a percent of gross or net advances have shown a gradual decline over the last few years. such innovations serve little purpose as far as the objectives of an efficient banking system are concerned. Moreover. As far as the increased profitability of the banking sector is concerned. This cannot be interpreted as a sign of growing strength of the banking sector. the claim of growing efficiency and strength of the banking sector becomes even more suspect. However. (Table of NPAs of Scheduled Commercial Banks provided in Annexure). attributing it to the successful implementation of the reforms recommended by the Narasimham Committee in 1991 and said that the UPA Government was taking “this reform process forward”. in the course of his response to the Calling Attention notice on 20th December 2004 referred to the Narasimham Committee Report on Banking Reforms and posed a question for every Member of Parliament: “Has our banking sector become stronger. 2003-04 (Chapter . the Left Parties feel that neither does raising of the equity cap ensure higher FDI inflows. if one further considers the fact that the trend towards window dressing balance sheets in the name of NPA management has grown considerably among all banks.guidelines are concerned. that the hike in the foreign equity cap in banking would create an “enabling environment” for higher FDI flows. however. then it cannot be seriously considered to be symbolizing enhanced efficiency. thanks to the reforms or not?” To buttress his point. it can throw more light on the true picture of the banking sector in the post-reform period. The figures for Non Performing Assets that the Finance Minister has quoted in Parliament are ratios. BANKING SECTOR REFORMS: SOME CRITICAL OBSERVATIONS The Finance Minister said in Parliament on 15th December 2004. or if the banks are inflating their advances portfolio at the end of the year in order to throw up favourable ratios in order to gratify the capital markets. if not for individual banks then at least the total figures for the different categories of scheduled commercial banks.

(emphasis added) The only point.723 rural bank offices were closed between March 1994 and March 2000. Consequently. The target of 40% set by the RBI for priority sector lending. While a declining interest rate scenario has positive spin offs for the banking sector.541 crore in 2001-02 to Rs. which remains to be added in this context. and dramatic effect on rural credit. to create a pressure group which wants further opening up of the banking sector. there does not appear to be any further scope for similar trends to be observed during 2004-05.9 per cent by 2003-04. an increasing proportion of banks‟ income would emanate from the traditional business of lending. there was an absolute contraction in the number of rural bank offices in the 1990s: 2. what has been unambiguous is its immediate.0 per cent and 37.19. which the Left considers to be one of the key parameters to judge the efficacy of the banking system. Consequently. is that the lure of high profits from treasury operations is attracting foreign banks towards India today. There has been a contraction in rural banking in general and in priority sector lending and preferential lending to the poor in particular. In future. which has dovetailed with the possibility of making quick gains by the promoters of private Indian banks by selling off their stakes to foreign banks and FIIs while their balance sheets look good. gradually declined to below 50 % in 1998 and thereafter. treasury income of the banking sector increased from Rs. While the share of priority sector lending shows an apparent increase to about 36% since then. While the impact of the implementation of the banking reforms in the 1990s in terms of increasing the efficiency and strength of the banking sector remain suspect.5 per cent in 2001-02 to 2. the net NPA ratio has declined from 5. Such reductions in interest rates occurred in an environment where credit growth remained sluggish.2 % in March 1990.VIII: Perspectives) states: Over the past few years there has been a steady decline in interest rates largely reflecting sustained reduction in inflation rates and inflationary expectations. The share of rural bank offices in total bank offices. Kelloggs. The credit-deposit ratio in rural areas fell from about 66% in 1990 to about 56% in 2002.9. Loans to multinationals involved in agribusiness like Pepsi. There is no good reason why the UPA Government should frame policies to cater to the needs of such pressure groups. In fact. Hindustan Lever and ConAgra . therefore. For example.1 per cent of operating profit in the corresponding years.6% in 1969 to 36% in 1972 and then rose steadily to attain a peak of 58. which was over-achieved by the scheduled commercial banks between 1985 and 1990 fell from 1991 onwards to reach at only 33% in 1996. This in turn enabled banks to make larger loan loss provisions. which had jumped from 17. given that interest rates had touched historically low levels by 2003-04. direct.532 crore in 2003-04 and constituted 32. there was a favourable impact on banks‟ balance sheets in terms of increased operating profits from treasury operations given the asset concentration in favour of Government securities in excess of the requirement of statutory liquidity ratio (SLR). this was on account of the inclusion of sectors like IT and agro processing in the definition of priority sectors.

which characterizes the Indian countryside today and the agrarian crisis that lie beneath. . increasing the efficiency of the banking system within the existing regulatory framework and gear it up for much increased flows of credit to the credit-starved rural areas. “…the social obligations imposed by regulatory bodies on private banks and private insurance companies will be monitored and enforced strictly”. the Left Parties are not in favour of any amendment of the Banking Regulation Act. The Left believes that the job of the government is well cut out as far as the banking sector is concerned. which was recommended by the Second Report of the Narasimham Committee. especially to agriculture. the most important fact is that the share of outstanding advances to agriculture in total outstanding advances of scheduled commercial banks fell steadily from about 15% in 1989 to 10. which would do away with the existing cap on the exercise of voting rights by shareholders of a bank and make it proportional to equity holding. irrespective of location. It was because the Parliament felt at that time that the process of banking deregulation and financial liberalization has already gone too far in India. was to a significant extent caused by the policies of banking reforms throughout the 1990s that led to a sharp fall in rural and agricultural credit. have also been included in the priority sector.5% in 2000. This grim reality of rural India has to be kept in mind during discussions on banking reforms.now count as priority sector advances! More recently. such statements of intent needs to be backed by concrete efforts towards ensuring that the private sector and foreign banks meet their priority sector lending targets. accounted for the remaining 4. as far as the Indian banking sector is concerned. Therefore the UPA Government should refrain from adopting the notification route to allow acquisition of shares by foreign investors above the existing guidelines and subsequently presenting the Amendment in the Parliament as a fait accompli. Can the Government abide by this commitment if the foreign and private ownership norms of banks are further diluted? CONCLUSION The proposal to dilute stakes of Public Sector Banks upto 33%. The distress. Of this. While the Left had wholeheartedly welcomed the announced target of adding 50 lakhs institutional borrowers within one year by the Finance minister on 18 th June 2004. The CMP of the UPA states. The share of priority sector credit in the total outstanding net credit of foreign banks was 34. about 17.9% of the outstanding credit of foreign banks. The RBI itself has found through its empirical studies that there is no observable link between ownership and efficiency or profitability. had failed to gain Parliamentary approval. including agriculture. especially vis-à-vis raising the foreign equity and voting rights cap in private banks.2% in 2002. As has been mentioned earlier.7% was export credit and 11. loans to cold storage units. particularly into agriculture. well below the 40% norm. There is no justifiable case for another fresh dose of bank deregulation at the present juncture. All the other priority sectors.6% was credit advanced to small sector units. However. which in turn would be allowed to a maximum of 74% for FDI through the automatic route.

[1] He was Chief Economist. 2005. The second phase will commence on April 2009 after a review of the experience of the first phase. This phase would allow much greater freedom to foreign banks. the notification announces that foreign banks will be permitted to establish presence by way of setting up a wholly owned banking subsidiary (WOS) or conversion of the existing branches into WOS. Appropriate amending legislation will also be proposed to the Banking Regulation Act. released a roadmap for the presence of foreign banks in India. has been added as the only safeguard against concentration. Penguin. Regulation of Foreign Investment in India General Rules Limiting Foreign Investment in Indian Companies A traditional argument against foreign equity participation in domestic companies is that these businesses involve strategic national interests and therefore. FDI in banking The UPA Government had chosen to carry forward the policy of banking deregulation. the Reserve Bank at the instance of the Finance Minister. RBI may. The RBI notification formally adopted the guidelines issued by the Ministry of Commerce and Industry under the previous government on March 5. if it is satisfied that such investment by the foreign bank concerned will be in the long term interest of all the stakeholders in the investee bank. Globalization And Its Discontents. 2002. 1997). the same day that the Union Budget 2005-6 was presented before the Parliament. The RBI roadmap demarcates two phases for foreign bank presence. It would extend national treatment to WOS. p. A clause on one-mode-presence. This view held sway in India until the early 1990’s and foreign . permission for acquisition of share holding in Indian private sector banks by eligible foreign banks will be limited to banks identified by RBI for restructuring. Further. as branches or as WOS or as a subsidiary with a foreign investment in a private bank. 1949. in order to provide that the economic ownership of investors is reflected in the voting rights. [2] Joseph Stiglitz. There are no caps specified for individual ownership (except the 74 per cent overall limit). 99. World Bank and also Chaired President Clinton‟s Council of Economic Advisors. 2004 which had raised the FDI limit in Private Sector Banks to 74 per cent under the automatic route. permit dilution of stake of WOS and allow mergers/acquisitions of any private sector banks in India by a foreign bank subject to the overall investment limit of 74 percent. During the first phase. between March 2005 and March 2009. following the th footsteps of the NDA Government. i. permit such acquisition subject to the overall investment limit of 74 percent of the paid up capital of the private bank.e. which in the first phase would be left to 6 RBI’s discretion. one form of banking presence. On 28 February. and went on to spell out the steps that would operationalise these guidelines. operational and strategic control must be retained domestically (Lam.

Initially. The aggregate foreign investment in a private bank from all sources is allowed to reach as much as 74% under Indian regulations. The regulations were complex and allowed for different combinations of caps on FII and FDI. The third quarter of 2008 saw the beginning of negative net capital inflows into the country. the new upper limit was subject to the same conditions (called the “special procedure”) as the thirty percent limit. While FDI and FII both enable foreign institutions to invest in Indian firms. Owing to at least a decade of reforms. FDI and FII are quite different and are subject to very different regulatory treatment. Such investments are referred to as foreign institutional investment (FII). FII and FDI could each be allowed up to forty percent individually.6% between fiscal 2007 . It introduced foreign direct investment (FDI) via the “automatic route”. but the sum could also be limited to a maximum of forty percent. the banking sector in India has seen remarkable improvement in financial health and in providing jobs. Depending on the industry. Cumulative caps limited the sum of FII and FDI and the cumulative cap could be less than the sum of the two individual caps. Over time. allowing companies in selected industries to raise new equity capital (in some industries. the upper limit for FII was allowed to be increased up to thirty percent by the company concerned if its Board of Directors passed a resolution to that effect that was also ratified by its shareholders. Table 1 provides additional detail on the sequence of changes in FII limits. the banking sector continues to be a very dominant sector of the financial system.The New Industrial Policy of 1991 was the first step toward liberalization. In every instance. 2000) and ultimately to the industry’s sectoral cap. Banking was not one of the thirty-five industries where foreign direct investment via the automatic route was allowed. These FII limits were intentionally designed to prevent a controlling interest by any foreign investor or group of investors. Even in the wake of a severe economic downturn. the caps could be independent or cumulative. FDI and FII were regulated by different governmental bodies and were subject to separate legal limitations and regulatory procedures. FDI via the automatic route was viewed by the government as a source of new capital and was expected to create large block investors who would have a long term relationship with the firm and its management. For example. or entities they controlled) to invest up to the full forty percent limit.The next significant step occurred in late 1992 when foreign institutional investors were first allowed to invest in outstanding domestic securities. Notwithstanding this bleak scenario. 1997. The impact of the economic slowdown on the banking sector in India has so far been moderate. For example. Impact of FDI on banking India’s financial system has very little exposure to foreign assets and their derivative products and it is this feature that is likely to prove an antidote to the financial sector ills that have plagued many other emerging economies. the investment pattern with regard to foreign direct investment (FDI) and inflows from non-resident Indians remains resilient and FDI inflows into the country grew by an impressive 145% between fiscal 2006 and 2007 and by a respectable 46. As a result of these different purposes and views 4 by the government. FII did not directly generate new capital for the firm since investment was via secondary trading in existing securities and investment by any single institution was limited with the explicit objective of preventing significant influence by any foreign investor or group of investors. the holding of any single foreign institutional investor was limited to five percent of the company’s total shares with an aggregate cap of twenty-four percent of the issued and paid-up capital for all foreign institutional ownership. The global banking industry weathered turbulent times in 2007 and 2008. up to fifty-one per cent ownership) by issuing new shares in foreign markets without prior approval from the Ministry of Commerce and Industry (MCI).2 A further complication is that the FDI regulation could include sub-limits based on the purchaser of the newly issued shares. the upper limit on FII was gradually increased – first to forty percent (March 1. On April 4. On the other hand.3 investment in all domestic companies was restricted and could be undertaken only with the prior approval of the Government of India. regulation that specified a forty percent limit on FDI could have a sub-limit of twenty percent on capital raised from foreign institutions but allow non-resident Indians (NRIs.

However. as the FDI is a non-debt inflow. the reason is low-capital base and all the problems is the outcome of the transactions carried over in a bank without a substantial capital base. for instance. In a nutshell. it is important to recognize that FDI in banking can address several issues pertaining to the sector such as encouraging development of innovative financial products. The same ceiling also applies in respect of such investment in State Bank of India and its associate banks. better capitalization of banks and better ability to adapt to changing financial market conditions. There are several reasons why giving foreign investors greater voting rights is fraught with dangers. we can say that. At the same time. When domestic or foreign investors acquire a large share holding in any bank and exercise proportionate voting rights. owing to the economic downturn. Despite the surge in investments. FDI and Portfolio investment in nationalized banks are subject to overall statutory limit of 20 per cent. in addition to technological innovation and expertise. But it is opposed on the front that it will lead to state run insurers loosing business and workers their job. The Present Banking Scenario In recent times economy is been pushing to increase the role of multi-national banks in the banking sector. Along with that it entails the following benefits such as – . brings with it a plethora of risks. The aggregate foreign investment in a private bank from all sources will be 74 per cent of paid-up capital of the bank. Opposition is not considering the need of present situation.and 2008. Foreign investment. the stringent regulatory framework governing FDI has proved to be a significant hindrance. which will directly solve the problem of capital base. it creates potential problems not only of excursive concentration in the banking sector but also can expose the economy to more intensive financial crises at the slightest hint of panic. An unwarranted increase in the size of foreign holding in the banking sector will inevitably expose the country to risks not commensurate with those that an emerging market economy such as ours is equipped to grapple with. Limits for FDI FDI in the banking sector has been liberalized by raising FDI limit in private sector banks to 74 per cent under automatic root including investment by foreign investment in India. Such as – i) Innovative Financial Products ii) Technical Developments in the Foreign Markets iii) Problem of Inefficient Management iv) Non-performing Assets v) Financial Instability vi) Poor Capitalization vii) Changing Financial Market Conditions If we consider the root cause of these problems. However. Private banks. the growth in FDI inflows in fiscal 2009 slowed to 18. FDI norms have been relaxed to a considerable extent with respect to certain sectors. improving the efficiency of the banking sector.6% from the previous fiscal. FDI in banking sector can solve various problems of the overall banking sector.

From foreign entry. FDI flows to India have shown a consistent rise from 1.7% in 2005'1. Since 1993-94. This overall FDI is evident from the above graph. They are trying to keep pace with the technological development in the banks. Through FDI. As a proportion to FDI flows to emerging market and developing countries.Technology Transfer As due to the globalization local banks are competing in the global market. Financial Stability and Better Capitalization Host countries may benefit immediately. India's FDI growth of above 30% during past 2 years is encouraging. information sharing. . may reduce the sensitivity of the host country banking system and lead towards financial stability. civil aviation) FDI up to 100% through the Reserve Bank's automatic route was permitted for a no. more efficient allocation of credit in the financial sector. Now a days banks have been prominent and prudent in the rapid expansion of consumer lending in domestic as well as in foreign markets. of new sectors in 200506 such as Greenfield airport projects. In the process also provides needed balance of payment finance. if the foreign bank re-capitalize a struggling local institution. their size is growing on the back of growing interest by many of the world's leading multinationals. Better Risk Management As the banks are expanding their area of operation. has also taken step to enhance the FDI (eg. So due to the aforesaid benefits economy has consistent flow of FDI over the past few years. the govt. export trading. training programs and other forms of technical assistance may help meet this need. In general. there is a need to change their strategies exert competitive pressures and demonstration effect on local institutions. It needs appropriate tools to assess (how such credit is managed) credit management of the banks and authorities in charge of financial stability. Cumulative foreign investment flows have amounted to US & 106 billion since 1990-91 and almost evenly balanced between direct invest flows (US & 49 bn) and portfolio flows (US & 57 bn). the host countries will know efficient management technique. better capitalization and wider diversification of foreign banks along with the access of local operations to parent funding. 'FDI & FII have risen sharply during the 1990s reflecting the policies to attract non-debt creating flows. Although the FDI inflows into India are small as compared to other emerging markets. In addition to that. often including them to reassess business practices. Most of the banks are opting Basel II for making their financial system more safer. India has improved its rank from fifteenth (in 2002) to become the second most likely FDI destination after China in 2005'1. including local lending practices as the whole banking sector is crying for a strategic policy for risk management. where innovative financial products of multinational banks is the key limiting factor in the development of local bank.6% in 1998 to 3. FDI's tech transfers. Telecom. FDI flows have exceeded portfolio flows in the 5 years while portfolio flows have exceeded FDI in the remaining 8 years. It may need additional information and techniques to monitor for financial vulnerabilities. The best example is Basel II. All these measures have been contributing towards increasing direct investment.

Now a days. after China. India slated to be the second largest demand driver in the region. But the foreign investment is finding its own way to come in the economy.Switzerland's largest bank. therefore from last 2 years FIIs have exceeded the FDI and in portfolio investment into India since 2003-04 reflects both domestic and global factors. some of the foreign banks were also using the banks' bonds as an arbitrage opportunity in view of the increasing liquidity. Compared with FII always FDI has a greater and long-term effect on the Indian market due to the whimsical nature of FII. * India is the world's leading recipient of remittances. * India contributed nearly one fifth of Asian domestic demand growth over 2000-05. * India accounts for almost one quarter of the global portfolio flows to emerging market economies. The RBI has. Rabo Group and ANZ are seeking a banking license in India. So. As the ceiling rates are not increased. Looking forward. This study talks about the optimism over India emanates from a contribution of following factors. nearly $ 12 bn in 2005. Even though above discussed factors are fair enough for the development of economy. foreign commercial and investment banks have quietly begun picking up public sector bank's bond issues. (As it is considered as hot money) The present scenario looks more closely at the paradigm of exponential growth and laments that India's role as an engine for global growth has been limited by the still relatively closed nature of its economy. Some of the biggest names in global financial services and banks like Credit Suisse. May be the way of FII. Bankers said that the funds were coming into these bonds. It is evident from the diagram. FDI in Financial Sector is not getting a wholesome environment. and further relaxations are on the anvil by 2010. accounting for about 20% of the global flows. . Dresdner Bank and United Overseas Bank. Growth Prospect Advantage India – FDI The Reserve Bank of India (RBI). has allowed foreign players to set up branches in rural India and take over weak banks with an investment of up to 74 per cent.The IMF's study is in supportive to the above-discussed features of FDI. given fresh banking licenses to UBS . economy drivers are reluctant towards more liberalization for FDI in the banking sector. But it is a noted fact that. with the second phase of opening expected to com-mence in April 2009. in recent months.

ANZ and Rabobank Group. Some of the existing players such as StanChart. April 2009 to be extended further. The Rabobank Group already holds 18. we expect the deadline for second phase i. is now in the process acquiring a banking license. Citi and HSBC. hold India as one of their top markets. the Dutch Group. . Due to current Global crisis.e.2 per cent stake in another local private bank YES Bank. However. banking authorities has not announced about the extension of the phase.