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Impact of FDI on Indian banking sector

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Foreign direct investment (FDI) is considered to be the lifeblood of economic development, especially for a developing country like India. It plays an important role in the long-run development of a country not only as a source of capital, but also for enhancing competitiveness of the domestic economy through transfer of technology, strengthening infrastructure, raising productivity, and generating employment opportunities. Growth of FDI IN Banking Sector: The banking industry in India has shown remarkable progress in financial health and offering employment since the last few years. The banking sector continues to remain a highly dominant sector in India in spite of financial slowdown.

Because of globalization, many Indian banks are competing at global level on the virtue of their innovative products and sound financial status. Foreign Direct Investment plays an important role for the economy of the host country as it not only provides opportunities to enhance economic development but also opens several doors to optimize national earnings by employing all the resources effectively. The financial sector is always the key sector for the overall development of any country, and the banking sector is the primary sector amongst all. Indian banking has come a long way since India adopted economic reforms in 1991.

Today, Indian banks are as technology savvy as their counterparts in the developed countries. The competitive and reform forces have led to the emergence of the Internet, e-banking, ATM, credit cards, and mobile banking too in order to attract and retain the customers by a bank. This STUDY aimed at examining the impact of foreign direct investment on performance of select public and private sector banks .FDI has a significant positive impact on total business, business per employee (BPE), and total income of the banks.Today Indian Banks are as technology savvy as their counter parts in developed countries. The competitive and reform force have led to the emergence of internet, e-banking, ATM, credit card and mobile banking too, in order to attract and retain the customers by bank. As a result of Liberalization, Privatization and Globalization mode, Indian banks going global and many global banks setting up business in India, the Indian banking system is set to involve into a totally new level it will help the banking system grow in strength going into the future.

The banking sector plays an important role in the economic development of a country. It supplies the lifeblood –money that supports and fosters growth in all the industries.. FDI is a tool for economic growth through its strengthening of domestic capital, productivity and employment. FDI also plays a vital role in the up gradation of technology, skills and managerial capabilities in various sectors of the economy. Foreign Direct Investment as seen as an important source of non-debt inflows 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. FDI has contributed a lot in enhancing efficiency of the Indian banking sector, creating innovative financial products and improving capitalization of banks by making them adaptable to changing market conditions. Since the year 1990, the banking sector in India has undergone many drastic changes. Initially, Indian government has contributed to the equity of a large number of public sector banks in order to enhance their capital adequacy levels. After that, the Government has tried to improve the structure of the Indian banking sector by offering licenses to latest generation of private sector banks. This step was highly successful, as most of the banks introduced modern technology to excel in the competition by opening branches and ATMs across India in order to acquire customers from their competitors. In recent times, the Indian government has taken an important step by allowing foreign banks to take over Indian private sector banks.

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.FDI in Banking Sector provide benefits of Technology Transfer, Better Risk Management, Financial stability, Innovative Products and Employment.

Despite the surge in investments, the stringent regulatory framework governing FDI has proved to be a significant hindrance. 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.

Benefits of FDI in Indian Banking Sector:

  • 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
  • Problems faced by Indian Banking Sector: FDI in Indian banking sector resolves the following problems often faced by various banks in the country: Instability in financial matters
  • Non-performing areas or properties (NPA)
  • Poor marketing strategies
  • Innovativeness in financial products or schemes
  • Technical developments happening across various foreign markets
  • Inefficiency in management
  • Changing financial market conditions

C.P.Chandrasekhar and Jayati Ghosh (2002) have pointed out that an important objective of promoting FDI has been to promote efficiency in production and increase exports. However, any increase in the equity stake of the foreign investors in existing joint ventures or purchase of a share of equity by them in domestic firms would not automatically change the orientation of the firm. That is, “the aim of such FDI investors would be to benefit from the profit earned in the Indian market”.

Laghane B.K (2011) empirically examined the impact of FDI model on borrower account, bank branches, time deposits and profitability of domestic and foreign banks. In the study, he suggested that FDI must be considered in poverty reduction, unemployment reduction and primary education and priority sectors of banking. Finally, he concluded that the LPG sponsored FDI model’s impact on foreign banks and Indian bank’s profitability is positive. The impact of FDI on Indian banking sector is negative except profitability

Kunal Badade & Medha katkar (2011) have studied that India has sought to increase inflows of FDI with a much liberal policy since 1991 after decade cautious attitude. The 1990’s have witnessed a sustained rise in annual inflows to India. They pointed out that 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.

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GradesFixer. (2019, January, 28) Impact of FDI on Indian banking sector. Retrived June 6, 2020, from https://gradesfixer.com/free-essay-examples/impact-of-fdi-on-indian-banking-sector/
"Impact of FDI on Indian banking sector." GradesFixer, 28 Jan. 2019, https://gradesfixer.com/free-essay-examples/impact-of-fdi-on-indian-banking-sector/. Accessed 6 June 2020.
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GradesFixer. Impact of FDI on Indian banking sector. [Internet]. January 2019. [Accessed June 6, 2020]. Available from: https://gradesfixer.com/free-essay-examples/impact-of-fdi-on-indian-banking-sector/
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