CHAPTER- 4 IMPACT OF FDI ON INDIAN BANKING...

134

CHAPTER- 4

IMPACT OF FDI ON INDIAN BANKING INDUSTRY

4.1 Introduction

4.2 FDI in Indian Banks

4.2.1 FDI in Public Sector Banks

4.2.2 FDI in Private Sector Banks

4.3 Analysis of Impact of FDI

4.4 Impact of FDI on Productivity of Indian Banks

4.4.1 Profit per Employee

4.4.2 Business per Employee

4.5 Impact of FDI on Profitability of Indian Banks

4.5.1 Net Profits

4.5.2 Total Income

4.5.3 Return on Assets

4.5.4 Total Business

4.6 Main Findings

4.7 Conclusion

135

4.1 Introduction

As per our objectives the study analyzes the impact of FDI on performance of Indian

banking industry with respect to productivity and profitability. This chapter deals with the testing

of the first hypothesis of the study, i.e. hypothesis: there is no significant impact of FDI on

productivity and profitability of the banks.

FDI was introduced in 1991 with liberalization of Indian economy and financial sector

reforms in Indian banking industry. Any policy takes some time period to show significant

results and impact. So it was almost about 1995 when we first see FDI in the Indian banks with

the new private sector banks getting formed such as ICICI, etc.

The bank wise FDI data that is available with RBI is from 2000-01 to 2011-12.So, the time

period for the study is also chosen from 2000-01 to 2011-12.The effect of FDI on performance of

banks is studied by panel data regression method using dummy variable as year 2005=1 as that

was the year of enhancement of FDI from 49 per cent to 74 percent in Banks in the post FDI

liberalization period.

4.2 FDI in Indian Banks

These following sections will analyze the presence and role of FDI in public and private

banks separately as they were subject to different conditions of FDI.

4.2.1 FDI in Public Sector Banks

The Table No 4.1 depicts the FDI inflows in the Indian public sector banks from 2000-01

to 2011-12 (Figures are percentages). As mentioned earlier, Indian public sector banks had FDI

cap of 10 per cent till 2005 and thereafter it was liberalized to 20 per cent in 2005. The table also

depicts the CAGR for Public Sector banks for the entire study period of 12 years including the

136

liberalized FDI regime of 7 years. Further it also shows the CAGR for old (i.e. State bank group

as mentioned earlier in Chapter 3) and the new public sector banks.

Sr. No.

Bank2000-2001

2001-2002

2002-2003

2003-2004

2004-2005

2005-2006

2006-2007

2007-2008

2008-2009

2009-2010

2010-2011

2011-2012

CAGR from 2001-12

CAGR from 2005-12

1 Allahabad Bank 0.00 0.00 0.01 0.04 0.80 13.10 19.50 18.60 10.30 13.10 0.00 12.61 28.49% -0.63%

2 Andhra Bank 3.39 0.00 0.00 0.00 0.00 17.50 19.20 19.40 14.70 13.10 14.83 13.64 -2.24% -4.07%

3 Bank of Baroda 0.00 5.89 7.15 18.00 19.00 20.90 20.90 20.40 14.20 17.10 17.08 14.01 8.20% -6.45%

4 Bank of India 3.69 4.55 4.93 8.60 14.00 16.30 16.20 15.80 14.90 15.60 14.72 15.12 13.68% -1.24%

5 Bank of Maharashtra 0.00 0.00 0.00 0.00 0.90 1.50 7.30 8.20 4.60 2.20 1.15 0.91 0.10% -7.99%

6 Canara Bank 0.00 0.00 1.67 11.83 15.40 18.50 17.20 14.00 11.30 11.70 15.01 14.56 21.76% -3.91%

7 Central Bank of India 0.00 0.00 0.00 0.00 0.00 0.00 0.00 5.50 1.90 5.20 3.42 2.63 -6.49% -11.57%

8 Corporation Bank 6.97 3.75 5.49 8.80 10.30 10.20 10.10 10.40 3.90 4.50 0.26 4.78 -3.37% -11.87%

9 Dena Bank 0.33 0.00 0.36 0.33 7.60 9.80 12.80 12.80 10.30 16.10 14.10 12.09 38.73% 3.56%

10 IDBI Bank Ltd. 0.13 0.00 0.00 0.00 0.80 0.70 0.70 0.00 0.00 8.00 4.50 0.44 11.72% -7.45%

11 Indian Bank 0.00 0.00 0.00 0.00 0.00 0.00 11.40 14.00 12.30 12.90 10.18 9.14 -1.99% -6.86%

12 Indian Overseas Bank 0.01 0.03 0.13 4.95 10.10 18.20 18.80 19.00 8.50 9.30 6.84 4.20 73.17% -21.68%

13 Oriental Bank of Commerce0.35 0.26 2.02 15.10 14.00 19.90 19.10 18.10 9.70 15.20 13.84 10.39 36.10% -10.27%

14 Punjab & Sind Bank 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 5.03 3.46 -3.34% -6.05%

15 Punjab National Bank 0.00 0.00 4.15 4.65 18.40 20.20 20.10 20.10 14.90 19.10 19.35 17.39 13.91% -2.47%

16 Syndicate Bank 0.03 0.00 0.15 0.96 2.90 12.50 12.00 12.40 3.50 4.10 4.40 4.04 56.16% -17.16%

17 UCO Bank 0.00 0.00 0.00 0.00 1.20 2.20 2.80 1.10 2.00 3.10 5.68 3.79 11.02% 9.49%

18 Union Bank of India 0.00 0.00 3.99 12.94 18.30 0.10 19.70 19.50 14.10 17.50 0.00 9.63 8.34% 114.09%

19 United Bank of India 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 1.20 0.10 2.18 5.58% 10.46%

20 Vijaya Bank 0.01 0.05 0.07 10.02 14.30 16.60 18.30 15.40 1.90 5.20 8.49 5.04 76.07% -18.02%

0.75 0.73 1.51 4.81 7.40 9.91 12.31 12.24 7.65 9.71 7.95 8.00 24.01% -3.51%

21 State Bank of Bikaner & Jaipur3.02 3.00 2.88 4.43 4.50 4.90 5.30 5.40 5.30 5.40 5.71 5.26 5.17% 1.19%

22 State Bank of Hyderabad0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00% 0.00%

23 Sate Bank of Indore 18.31 19.41 19.37 19.39 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 -100.00% 0.00%

24 State Bank of India 0.00 0.00 0.00 0.00 19.80 19.80 19.80 19.60 12.30 13.80 15.78 11.39 -4.90% -8.80%

25 State Bank of Mysore 0.00 0.00 0.00 0.21 0.10 0.00 0.00 0.00 0.00 0.00 0.06 0.07 -3.19% 7.00%

26 State Bank of Patiala 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00% 0.00%

27 State Bank of Travancore4.56 4.55 4.52 5.73 6.10 6.20 6.50 6.60 6.20 6.10 6.43 6.33 3.03% 0.35%

3.70 3.85 3.82 4.25 4.36 4.41 4.51 4.51 3.40 3.61 4.00 3.29 -1.06% -4.77%

1.48 1.51 2.09 4.67 6.64 8.54 10.36 10.30 6.59 8.19 6.96 6.83 14.92% -3.66%Pub Banks CAGR

Source: Data by RBI and calculations by scholar

New Public Sector Banks

Table No - 4.1 FDI in Indian Public Sector Banks 2000-01 to 2011-12

New Pub CAGRSB Group (Old Public Sector Banks)

Old Pub CAGR

FDI Figures are percentages

137

It is observed from the table that FDI CAGR for old public sector banks is falling

continuously for both, the entire study period and the FDI liberalization period as compared with

new public sector banks. However, new public sector banks have shown that for the entire study

period FDI CAGR is rising but in post FDI liberalization period it is falling, although not as

much as for old public sector banks.

4.2.2 FDI in Private Sector Banks

The Table No 4.2 depicts the FDI inflows in the Indian private sector banks from 2000-01

to 2011-12 (Figures are percentages). As mentioned earlier, Indian private sector banks had FDI

cap of 49% till 2005 and thereafter it was liberalized to 74% in 2005.The table also depicts the

CAGR for Private Sector banks for entire study period of 12 years and also for liberalized FDI

regime of 7 years. Further it reveals CAGR for old and new private sector banks.

138

Sr. No.

Bank2000-2001

2001-2002

2002-2003

2003-2004

2004-2005

2005-2006

2006-2007

2007-2008

2008-2009

2009-2010

2010-2011

2011-2012

CAGR from 2001-12

CAGR from 2005-12

1 Catholic Syrian 0.45 0.45 0.45 0.45 0.4 0.4 0.5 31.2 44.4 38 33.8 33.01 47.77% 108.66%

2 City Union Bank 0 0 0.07 0.11 0.2 0.8 7.9 20.4 21.8 21.1 25.15 31.09 74.05% 84.04%

3 Dhanalakshmi 2.85 2.78 2.19 1.99 0.9 1.8 1.8 27.1 28.4 30.6 38.76 38.92 26.83% 66.91%

4 Federal Bank Ltd. 1.31 2.8 0 7.85 7.9 45.8 57.2 58.1 49.2 43.5 44.17 50.75 39.44% 1.73%

5 ING Vysya Bank 3.26 34.12 58.52 73.43 68.7 70.8 73.3 71.2 73 67.3 71.09 70.71 32.28% -0.02%

6 Jammu & Kashmir 0.51 2.43 4.59 20.06 23 30.3 34.9 33.9 31.5 29.9 23.43 25.64 42.78% -2.74%

7 Karnataka Bank 0.02 0.08 0.17 0.28 0.4 0.4 0.2 0.3 0.3 0.4 0.41 18.47 86.03% 89.41%

8 Karur Vysya Bank 0.92 2 1.02 5.84 16.9 20.9 23 25.3 26.3 24.2 24.87 24.71 34.87% 2.83%

9 Lakshmi Vilas 0 0.17 0.08 0.15 0.5 0.7 2 2.9 2.9 3.4 7.98 12.92 48.25% 62.57%

10 Nainital Bank Ltd. 0 0 0.13 0.13 0 0 0 0 0 0 0 0 -100.00% 0.00%

11 Ratnakar Bank 0 0 0 0 0 0 0 27.3 27.3 27.3 38.97 36.54 2.69% 4.98%

12 SBI Commercial & 0 0 0 0 0 0 0 0 0 0 0 0 0.00% 0.00%

13 South Indian Bank 6.84 7.23 7.12 8.41 6 4.6 3.6 53.2 39.3 39.9 39.56 49.21 19.65% 48.44%

14 The Bank of 0.06 0.54 0.59 1.62 0 0 0 0 0 0 0 0 -100.00% 0.00%

15 Tamilnad 0.41 0.41 0.41 0.41 0.4 0.4 0.4 16.9 16.9 16.6 16.64 16.89 40.22% 86.61%

1.11 3.53 5.02 8.05 8.35 11.79 13.65 24.52 24.09 22.81 24.32 27.26 33.78% 14.99%

16 Axis Bank Ltd. 0 24.11 28.21 27.1 45.7 42.2 41.9 39.1 32.9 42 47.07 41.73 5.11% -0.19%

17 Development Credit Bank Ltd

37.5 37.56 49 49 68.9 68.7 64.1 65.5 40.9 33.6 39.43 38.11 0.15% -9.35%

18 HDFC Bank Ltd. 33.52 44 43.22 46.17 53 53.6 51.5 49.3 46.8 45.5 47.18 48.82 3.48% -1.54%

19 ICICI Bank Ltd. 35.56 45.44 64.7 72.79 71.5 73.9 72 69.8 63.8 66.3 66.47 63.16 5.36% -2.58%

20 IndusInd Bank Ltd. 33.16 33.28 1.43 0.69 45.6 51.1 59.3 62 66 68.5 70.62 70.02 7.03% 5.39%

21 Kotak Mahindra Bank Ltd.

0 0 9.59 17.58 23.4 22.3 25.1 27.6 29.7 30.8 31.08 33.9 12.16% 7.23%

22 Yes Bank Ltd 0 0 0 0 45 50 50.8 55.9 50.5 58 51.14 51.89 1.30% 0.62%

19.96 26.34 28.02 30.48 50.44 51.69 52.1 52.74 47.23 49.24 50.43 49.66 8.64% -0.67%

6.85 10.48 12.02 14.87 21.16 23.93 25.35 33.11 31.13 30.86 32.27 34.08 15.70% 6.07%

Table No - 4.2 FDI in Indian Private Sector Banks 2000-01 to 2011-12

Source: Data by RBI and calculations by scholar

New Private Sector Banks

Old Private Sector Banks

Old Pvt CAGR

New Pvt CAGR Pvt Banks CAGR

FDI Figures are percentages

139

It is observed that new private sector banks, such as HDFC, ICICI, Axis, IndusInd and

DCB, came into existence with FDI as they are the outcome of reforms and they are found to

have more FDI as compared to the old private sector banks and they have crossed 50% of total

holdings.

4.3 Analysis of Impact of FDI

Though FDI in Indian banking can be traced with the entry of new private sector banks in

1995 the official data on FDI is not available before year 2000. The FDI policy liberalization

took place in the year 2005 raising limits to up to 74 per cent from 49 per cent. The present

study uses time dummy to gauge the performance of Indian banks in pre and post FDI

liberalization era. We are using time dummy for year 2005>1, which is, post FDI liberalization

time period and 2005<0 for pre FDI liberalization era.

The total number of banks under study is 49 constituting all public and private sector

banks which are published in the list of Shareholding Patterns published by RBI’s Trend and

Progress of Banking in India, which is the only official source to know the residents and non

residents investments in Indian banks and is used to find the FDI content of banks under study

(list enclosed in Appendix I).The Panel data multiple regression models used for the analysis is

discussed in the Chapter 3 – Research Methodology and Tools of Analysis.

The impact of FDI on Indian banks is measured on the performance of two factors, i.e, its

productivity and profitability. The productivity of banks, in turn, is measured by Profit per

Employee (PPE) and Business per Employee (BPE). The profitability of Indian banks is

measured by Net Profits, Total Income, Return on Assets (ROA), and Total Business.

The following Table - 4.3 depicts the performance of vital banking variables for the

entire FDI regime i.e. from 2001-2012 and liberalized FDI regime i.e. 2005-2012.

140

Public sector banks

Public Banks Year FDI Business NetProfit Income Expen PPE BPE Invest Staff ROA Npub avg 2005-12 9.15 180825.26 1057.89 10129.26 8411.52 4.34 9473.87 34215.07 24131 5.45Npub avg 2001-12 6.77 137735.12 818.90 8044.41 6791.94 3.46 6631.76 28180.84 24255 3.91

Npub Total 2001-12 NA 31403607.07 186709.12 1834125.79 1548562.54 NA NA 6425231.05 5530147 NAOpub avg 2005-12 4.01 226792.13 1396.92 13745.86 11306.79 3.43 610.02 44689.57 38135 6.82Opub Avg 2001-12 3.82 176911.27 1114.99 11313.63 9503.83 2.85 466.05 38779.91 38627 4.90

OpubTotal 2001-12 NA 14860546.47 93659.47 950345.07 798321.38 NA NA 3257512.37 3244675 NApub avg 2005-12 7.77 193200.95 1149.17 11102.96 9191.02 4.10 7087.45 37035.12 27901 5.82pub avg 2001-12 5.98 148282.54 898.62 8924.59 7522.06 3.30 4971.76 31034.43 28124 4.18

pub Total 2001-12 NA 46264153.54 280368.59 2784470.86 2346883.92 NA NA 9682743.42 8774822 NA

Private Banks Year FDI Business NetProfit Income Expen PPE BPE Invest Staff ROA Opvt avg 2005-12 19.93 21762.93 140.32 1329.14 1120.04 3.75 1830.96 4557.94 3452 0.92Opvt avg 2001-12 14.63 16988.82 117.97 1087.00 925.74 3.53 1468.87 3759.90 3268 1.02

Opvt Total 2001-12 NA 3057987.79 21235.07 195659.22 166633.82 NA NA 676781.87 588244 NANPvt Avg 2005-12 50.43 132851.62 1286.36 9689.29 7711.57 6.38 846.44 32583.62 14562 0.95NPvt Avg 2001-12 45.04 102216.10 988.94 7515.75 6036.66 7.05 881.28 25696.63 11230 1.04NPvt Total 2001-12 NA 8075071.86 78126.02 593744.49 476896.49 NA NA 1978640.63 887194 NA

pvt avg 2005-12 29.58 57109.33 504.97 3989.19 3217.35 4.59 1517.70 13255.56 6987 0.93pvt avg 2001-12 23.94 42984.79 383.63 3047.89 2484.67 4.60 1289.64 10332.38 5697 1.02

Pvt Total 2001-12 NA 11133059.65 99361.09 789403.71 643530.31 NA NA 2655422.50 1475438 NA

Public Banks Year FDI Business NetProfit Income Expen PPE BPE Invest Staff ROA pub avg 2005-12 7.77 193200.95 1149.17 11102.96 9191.02 4.10 7087.45 37035.12 27901 5.82pub avg 2001-12 5.98 148282.54 898.62 8924.59 7522.06 3.30 4971.76 31034.43 28124 4.18pub total 2001-12 NA 46264153.54 280368.59 2784470.86 2346883.92 NA NA 9682743.42 8774822 NA

Private Banks Year FDI Business NetProfit Income Expen PPE BPE Invest Staff ROA pvt avg 2005-12 29.58 57109.33 504.97 3989.19 3217.35 4.59 1517.70 13255.56 6987 0.93pvt avg 2001-12 23.94 42984.79 383.63 3047.89 2484.67 4.60 1289.64 10332.38 5697 1.02

pvt total 2001-12 NA 11133059.65 99361.09 789403.71 643530.31 NA NA 2655422.50 1475438 NAAll Banks Year FDI Business NetProfit Income Expen PPE BPE Invest Staff ROA

All Bank avg 2005-12 17.67 129835.33 847.74 7783.82 6404.73 4.36 4502.29 26009.61 18179 3.58All Banks Avg 2001-12 14.11 100520.51 665.03 6258.97 5237.15 3.89 3301.59 21683.95 17951 2.75All Bank Total 2001-12 NA 57397213.19 379729.68 3573874.57 2990414.23 NA NA 12338165.92 10250259 NA

Table No - 4.3 Indian Banks Data

Private Sector Bank

Public Sector Banks

Source: RBI and IBA Data and Scholar's calculations on MS Excel

Indian Public and Private Sector Bank

Values are in INR Crores. PPE,BPE are in Lacs and Staff is absolute figure & FDI, ROA figure are percentages

141

Average FDI in Old public sector banks is found be around 3.82 per cent and in New

public sector banks is at 6.77 per cent. Average Business for old public sector banks is at

Rs.176911.27 Cr. as against Rs.137735.12 Cr. for New Public Sector banks and Average Net

Profits of old public sector banks is at Rs.1114.99 Cr. and Rs.818.90 Cr. for new public sector

banks. Average Income of old public sector banks is at Rs.11313.63 Cr. and for new public

sector bank it is at Rs.8044.41 cr. and Average Expenditure is at Rs.9503.83 Cr. for old public

sector while it is Rs.6791.94 Cr. for new public sector banks. Average Investment is at

Rs.38779.91 Cr. for old public sector banks and Rs.28180.84 Cr. for new public sector banks.

ROA is at Rs.4.90 Cr. for old public sector banks and Rs.3.91Cr. for new public sector banks.

Total number of staff is 32,44,675 for old public sector banks and for new public sector banks it

is at 55,30,147 for all 12 years of our study.

Private sector banks

Private sector banks

Average FDI in Old private sector banks is found be around 14.63 per cent and for New

Private sector bank it is at 45 per cent. Average Business for old private sector banks is at

16088.82 cr. as against Rs.45837 crore for New private Sector banks. Average Net Profits of old

a private sector bank is at Rs.11797 Cr. and Rs.98894 Cr. for new private sector banks and

Average Income of old private sector banks is at Rs.1087 Cr. and for new private sector bank it

is at Rs.7515.75 and Average Expenditure is at Rs.925.74 Cr. for old private sector and

Rs.6036.66 Cr. for new private sector banks and Average Investment is at Rs.3759.90 Cr. for

old private sector banks and Rs.25696.63 for new private sector banks. ROA is at 1.02 for old

private sector banks and 1.04 for new private sector banks. Total number of staff is 588243 for

old private sector banks and for new private sector banks it is at 887194 for all 12 years of our

142

study. It must be noted that the staff number of 887194 can be attributed to FDI policy as this

employment generation is due to FDI capital by which these new private sector banks have come

into existence.

All Banks

The average FDI is 17.67 per cent for 2005-12 as against 14.11 for 2001-12. The average

figures of Total Business, Net Profits, Income, Investments, Expenditure, PPE, BPE, ROA and

Staff is more in post FDI liberalization regime i.e. 2005-12 than 2001-12 i.e. entire FDI policy

regime. This shows that FDI liberalization policy has shown rise in the performance of crucial

variables of banking sector. Hence, now the task to see that if this rise is significant or not, is

studied in following sections.

4.4 Impact of FDI on Productivity of Indian Banks

The productivity of Indian banks as already mentioned is analyzed with two variables -

profit per employee and business per employee. The data on these variables can be found in

Annexure-II.

4.4.1 Profits per Employee

Table No 4.4 depicts the panel regression results for Profit per Employee (PPE) for all 49

banks.

143

FDI is positive; however it is not showing a statistically significant impact on the profit

per employee of Indian banks.

Expenditure is showing a statistically significant impact on the profit per employee of

Indian banks.

The impact of Staff is negative and is showing a statistically significant impact on the

profit per employee of Indian banks.

The Profit per Employee is growing and there is a statistically significant impact in the

dummy period i.e. liberalization of FDI has a positive impact on the profit per employee

of banks.

4.4.2 Business per Employee

The Table 4.5 depicts panel regression results for Business per Employee for all banks.

Coefficients Estimate Std.Error t-value Pr(>|t|) Singnificance

FI 1.51E-03 1.56E-02 0.0969 0.92285

Expen 2.57E-04 3.52E-05 7.2954 1.12E-12 ***

Staff -1.35E-04 3.13E-05 -4.3098 1.96E-05 ***

dummy1 7.48E-01 3.42E-01 2.1883 0.02909 *

Table No 4.4 - All Banks Profit Per Employee

Model 4.1 : PPE ~ FI + Expen + Staff + dummy1

R-Squared-0.13877 R-Squared-0.12613

F-statistic: 20.906 on 4 and 519 DF, p-value: 5.3976e-16

Significance Codes: 0 ‘***’ 0.001 ‘**’ 0.01 ‘*’ 0.05 ‘.’ 0.1 ‘ ’ 1

All Banks = All Public and Private Sector : Old and New Banks

Source: Scholar's Calculations on R

144

FDI is negative and showing no statistically significant impact on the Business per

employee of Indian banks.

Expenditure is positive and is showing statistically significant impact on the Business per


The Staff is also having a positive and statistically significant impact on the Business per


The Business per Employee is growing positively and there is a statistically significant

impact in dummy period. The liberalization of FDI policy has shown a positive

significant impact on the business per employee of banks.

4.5 Impact of FDI on Profitability of Indian Banks

The profitability of Indian banks is studied under Net Profits, Total Income, ROA and

Total Business.

4.5.1 Net Profits

The Table No 4.6 depicts the panel regression results for Net Profits for all 49 banks.


FI -35.556 86.40298 -0.4115 0.68087

Expen 0.36151 0.19523 1.8517 0.06464 ***

Staff 0.18238 0.17396 1.0484 0.29492 ***

dummy1 2453.68959 1897.62375 1.293 0.19658 *

F-statistic: 3.35252 on 4 and 519 DF, p-value: 0.01005

Table No 4.5 -All Banks Business Per Employee

Model 4.2 : BPE ~ FI + Expen + Staff + dummy1


Significance Codes: 0 ‘***’ 0.001 ‘**’ 0.01 ‘*’ 0.05 ‘.’ 0.1 ‘ ’ 1 All Banks = All Public and Private Sector : Old and New Banks


145

The FDI is showing a statistically significant impact on the Net Profits of all Indian banks

under study, in the period.

The Expenditure is showing a statistically significant impact on the Net Profits of all

Indian banks under study during the period of review.

The Staff is not showing any statistically significant impact on the Net Profits of the

Indian banks in the study period.

The Net Profits are falling in the dummy period; however there is no statistically

significant impact of dummy period i.e. the liberalization of FDI on the Net Profits of

banks.

4.5.2 Total Income

The Table No 4.7 depicts the panel regression results for Total Income for all 49 banks.


FI 3.4561977 1.6135886 2.1419 0.03266 *

Expen 0.1543337 0.003646 42.3298 < 2e-16 ***

Staff 0.0018256 0.0032487 0.562 0.57438

dummy1 -65.0297332 35.4384095 -1.835 0.06708 .

Table No - 4.6 All Banks Net Profits Results

Model 4.3 : NetProfit~FI+Expen+Staff+dummy1

R-Squared-0.82919 R-Squared-0.75368F-statistic: 629.858 on 4 and 519 DF, p-value: < 2.22e-16




146

The FDI is showing a negative impact which is not statistically significant on the Total

Income of all Indian banks under study in the period.

The Expenditure is positive and showing a statistically significant impact on the Total


The Staff is positive but not showing any statistically significant impact on the Total


The Total Income is falling and there is a significant impact of the dummy period, i.e. the

liberalization of FDI, on the Total Income of banks.

4.5.3 Return on Assets

The Table No 4.8 depicts the panel regression results for ROA for all 49 banks.


FI -1.34E+00 4.74E+00 -0.2832 0.7771

Expen 1.37E+00 1.07E-02 128.4286 < 2e-16 ***

Staff 8.17E-03 9.54E-03 0.856 0.392381

dummy1 -2.88E+02 1.04E+02 -2.7723 0.005766 **

Table No - 4.7 All Banks Total Income Results

Model 4.4 : Income~FI+Expen+Staff+dummy1


F-statistic: 5772.74 on 4 and 519 DF, p-value: < 2.22e-16




147

The FDI is positive; however it is not showing any statistically significant impact on the

ROA of all Indian banks under study in the period.

The Expenditure is negative and showing a statistically significant impact on the ROA of

all Indian banks under study in the period.

The Staff is positive and showing no statistically significant impact on the ROA of all

Indian banks under study in the period.

The ROA is growing and there is a statistically significant impact of dummy period, i.e.

the liberalization of FDI, on the ROA of banks.

4.5.4 Total Business

The Table No 4.9 depicts the panel regression results for Total Business for all 49 banks.

Coefficients Estimate Std.Error t-value Pr(>|t|) SingnificanceFI 2.30E-02 2.44E-02 0.9424 0.346444

Expen -3.44E-04 5.51E-05 -6.2393 9.13E-10 ***

Staff 8.14E-05 4.91E-05 1.6573 0.098071 .

dummy1 1.72E+00 5.36E-01 3.2167 0.001378 **


Model - 4.5 ROA~FI+Expen+Staff+dummy1

R-Squared-0.080384 R-Squared-0.073064F-statistic: 11.3415 on 4 and 519 DF, p-value:7.8613e-09


Table No 4.8 -All Banks ROA Results

Coefficients Estimate Std.Error t-value Pr(>|t|) SingnificanceFI -89.30365 141.0354 -0.6332 0.52688

Expen 24.38011 0.31868 76.5043 < 2e-16 ***Staff -2.57983 0.28395 -9.0856 < 2e-16 ***

dummy1 5576.56973 3097.48734 1.8004 0.07239 .



Table No - 4.9 All Banks Total Business Results

Model 4.6 : Business~FI+Expen+Staff+dummy1


F-statistic: 1933.39 on 4 and 519 DF, p-value:< 2.22e-16

148

The FDI is negative and not showing any statistically significant impact on the Total

Business of all Indian banks under study in the period.

The Expenditure is positive and is showing a statistically significant impact on the Total

Business of all Indian banks under study in the period.

The Staff is negative and showing a statistically significant impact on the Total Business

of all Indian banks under study in the period.

The Total Business is growing but there is no statistically significant impact of dummy

period, i.e. the liberalization of FDI, on the Total Business of banks.

4.6 Main Findings

This chapter analyzed the impact of FDI on Indian banking industry for complying with

our objective of studying the impact of FDI on the performance of productivity and profitability

of Indian banking industry.

Productivity Performance:

Table 4.10 shows the results for the productivity performance of Indian banks.

Sr. No. Dependent Independent Coefficient Pr(>|t|) Adjst R2 Singnificant

FI 1.51E-03 0.92285 No

Expen 2.57E-04 1.121e-12 *** Yes

Staff -1.35E-04 1.955e-05 *** Yes

Dummy 7.48E-01 0.02909 * Yes

FI -35.556 0.68087 No

Expen 0.36151 0.06464 *** Yes

Staff 0.18238 0.29492 *** Yes

Dummy 2453.68959 0.19658 * Yes

Source: Scholar's Calculations on software R

Table No 4.10 - All Banks Productivity Time Dummy Results

1 PPE 0.13

2 BPE 0.02

Signif. codes: 0 ‘***’ 0.001 ‘**’ 0.01 ‘*’ 0.05 ‘.’ 0.1 ‘ ’ 1 , Yes*= Significant at 0.1 and No= Not significant


149

1. Profit per Employee:

Based on our time dummy results we can conclude that hypothesis: There is no

statistically significant impact of liberalized FDI Policy on the Profit per Employee (PPE)

performance of Indian banks; may not be accepted. As there is a statistical significant impact of

FDI liberalization on the Profit per Employee of Indian banks in the study period and the

estimate is positive, the hypothesis may not be accepted.

In the case of Profit per Employee, a positive coefficient in the dummy period shows that

the magic word ‘profitability’ (which is used for the first time in the Indian banking) introduced

in Narasimham Committee report is showing significant results and is the outcome of

competition due to several private banks which in turn, are an outcome of FDI).

2. Business per Employee:


significant impact of FDI liberalization on the Business per Employee (BPE) performance of

Indian banks; may not be accepted. As there is a statistically significant impact of FDI

liberalization on the Business per Employee of Indian banks in the study period and the estimate

is positive, the hypothesis may not be accepted.

Based on our time dummy results we conclude that hypothesis may be rejected on the

productivity of Indian banks in the study period. We have taken Profit per Employee (PPE) and

Business per Employee (BPE) as proxy for Productivity performance of banks under study. Our

study shows statistically significant impact on Profit per Employee and Business per Employee

which are the Productivity performance parameters. This is mainly because Total Business

consists of sum of Total Deposits and Total Advances by the bank and is divided across by the

number of employee. Thus considering PPE and BPE as significantly important indicators of the

150

productivity, we can confidently conclude that Productivity of Indian banks has increased to

some extent in the FDI Liberalization period.

Profitability Performance:

Table 4.11 shows the profitability performance of Indian banks in the post FDI

liberalization study period.

1. Net Profit:


significant impact of FDI liberalization on the Net Profit performance of Indian banks, may be

accepted. As there is no statistically significant impact of FDI on the Net Profits of Indian banks

Sr. No. Dependent Independent Coefficient Pr(>|t|) Adjst R2 Singnificant

FI 3.4561977 0.03266 * Yes

Expen 0.1543337 < 2e-16 *** Yes

Staff 0.0018256 0.57438 No

Dummy -65.0297332 0.06708 . Yes*

FI -1.34E+00 0.7771 No

Expen 1.37E+00 < 2.2e-16 *** Yes

Staff 8.17E-03 0.392381 NoDummy -2.88E+02 0.005766 ** Yes

FI 2.30E-02 0.346444 No

Expen -3.44E-04 9.132e-10 *** Yes

Staff 8.14E-05 0.098071 . Yes*

Dummy 1.72E+00 0.001378 ** Yes

FI -89.30365 0.52688 No

Expen 24.38011 < 2e-16 *** YesStaff -2.57983 < 2e-16 *** Yes

Dummy 5576.56973 0.07239 . Yes*

Table No 4.11 - All Banks Profitability Time Dummy Results

Source: Scholar's Calculations on software R

1 NetProfit 0.75

2 Income 0.89

3 ROA 0.07

4 Business 0.85

Signif. codes: 0 ‘***’ 0.001 ‘**’ 0.01 ‘*’ 0.05 ‘.’ 0.1 ‘ ’ 1 , Yes*= Significant at 0.1 and No= Not significant


151

in the study period and the coefficient is negative for dummy period, the hypothesis may be

accepted.

2. Total Income:


significant impact of FDI liberalization on the Total Income performance of Indian banks may

be accepted. As there is a statistical significant impact of FDI on the Total Incomes of Indian

banks in the study period and the coefficient being negative implies a fall in Income for dummy

period, the hypothesis may be accepted.

3. ROA:


significant impact of FDI liberalization on the Return on Assets (ROA) performance of Indian

banks, may not be accepted. As there is a statistically significant impact of FDI on the ROA of

Indian banks in the study period and the coefficient is positive, hypothesis may not be accepted.

4. Total Business:


significant impact of FDI liberalization on the Total Business performance of Indian banks may

not be accepted; at 10 per cent level of significance. There is no statistically significant impact of

FDI on the Total Business of Indian banks in the study period though the coefficient is positive,

however; at 10 per cent level of significance; the hypothesis may not be accepted.

Based on our time dummy results we cannot fully conclude whether hypothesis may be

accepted or rejected on the profitability of Indian banks in the study period. We have taken Net

Profits, Total Income, ROA and Total Business as proxy for Profitability performance of banks

under study. Our results show that FDI has a statistically significant impact on the profitability

152

performance of Indian banks only in the case of ROA and Total Business. However, the dummy

period does not show statistically significant impact on the Net Profitability or Total Income of

banks. This implies that, FDI liberalization dummy period or the FDI liberalization policy per se

is not showing any great impact on either the Net Profits or the Total Income of banks. But we

do see statistically significant impact on Total Business and ROA in the study period, which are

also important profitability indicators for banks. So the results show a mixed impact. This is in

line with the results of other studies undertaken by Jeromi (2002), RBI (2002), Athrege and

Kapoor (2001) Sharma (2000) on FDI, which show mixed results.

4.7 Conclusion

We can conclude that the FDI liberalization period shows significant positive impact on

the productivity of banks through the impact on profit per employee and Business per employee

which are the productivity parameters. However the same cannot be fully said about the

profitability measures. The study shows significant positive impact on Return on Assets (ROA)

and Total Business (at 10 per cent level of significance) of bank but negative significant impact

on the Total Net Profit and Income of banks. So it can be said that the dummy period (FDI

liberalization policy period) did not have any significant impact on Net Profits or Total Income

of Banks. This means that except ROA, other profitability parameters are not showing

statistically significant impact of the liberalized FDI policy. Overall observation shows that

productivity has gone up in the FDI liberalization period and profitability of Indian banks have

grown in the period in case of some important indicators/parameters, while there is no impact

/negative impact in other indicators. So Profitability shows mixed results in the post FDI

Liberalization period.

153

Hence it is important to see the impact of FDI and FDI liberalization policy on different

group of banks under study, taking better cross section views in order to see if there can be some

conclusive results from our study. Further cross section analysis is explained in the following

chapter with Time and Content dummy analysis in different sub-groups of banks for better cross

section results. The need of time and content dummy in the analysis of the present study is

explained with required details in Chapter 3 – Research Methodology and Tools of Analysis. In

the following Chapter 5 – Productivity of Indian FDI and Non-FDI Banks, we conduct a

Productivity analysis with Time and Content dummy analysis for the different groups of banks

under study.

CHAPTER- 4 IMPACT OF FDI ON INDIAN BANKING...

Documents

Transcript of CHAPTER- 4 IMPACT OF FDI ON INDIAN BANKING...