SYNOPSIS

“PERFORMANCE EVALUATION OF

INDIAN FDI AND NON-FDI BANKS: A

COMPARATIVE ANALYSIS”

SUBMITTED BY

MRS. JAYASHREE PATIL

UNDER SUPERVISION OF

PROF. K. SAI HARAGOPAL

AND

DR. NANDITA SETHI

PhD SYNOPSIS (ABSTRACT) SUBMITTED FOR THE

AWARD OF DOCTOR OF PHILOSOPHY IN ECONOMICS,

OSMANIA UNIVERSITY, HYDERABAD

MARCH 2014

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Performance Evaluation of Indian FDI and Non-FDI Banks:

A Comparative Analysis

1.1 Introduction

1.2 Importance of FDI

1.3 Need for the study

1.4 Objectives of Study

1.5 Hypothesis

1.6 Research Methodology

1.7 Scope and Limitation of the Study

1.8 Chapter Scheme

1.9 Main Findings and Conclusion

1.9.1 First Hypothesis

1.9.2 Second Hypothesis

1.9.3 Third Hypothesis

1.10 Suggestions and Recommendations

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1.1 Introduction

Indian banking has undergone a sea change after liberalization and reforms.

Liberalization and reforms paved the way to foreign direct investment into Indian Banking

Sector. It is more than a decade now that we have received Foreign Direct Investment (FDI) in

Banking and hence it is important to see the impact on the Indian Banking. The present study is

dedicated to analyze and evaluate the performance of Indian FDI and Non-FDI banks in the post

liberalization era.

FDI is considered as important source of financing the growth of LDCs. FDI flows

significantly influences the growth of GDP and its impact is relatively higher in India. FDI has

promoted exports and there are no significant inter-country differences in propensity of FDI to

export and import increase with FDI but less than proportionately for which there are no inter-

country differences.

FDI is considered to be important contributor to the performance of firms. Also the

performance of FDI is companies are better than that of non-FDI companies and however FDI

companies’ contribution to exports is not great and their import propensity is quite high.

1.2 Importance of FDI

It is well accepted fact that external inflows like FDI can supplement domestic savings at

least in the short run (Meier,1995, Moran, 1998). There are divergent views on the long run

impact of FDI on domestic savings and findings of empirical studies are not uniform. However,

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FDI can play important role in improving the capacity of the host country to respond to the

emerging opportunities.

The benefits of FDI can occur to domestic labour in the form of higher wages, to

consumer by way of higher output and lower prices, to government through higher tax revenue,

and most importantly of external economies. For a developing, FDI is significant for

employment generation and improving its productivity as well. Hence, the international flow of

capital is considered as an alternative to labour migration from the poor countries. FDI brings to

the recipient country not only foreign capital but also efficient management, superior technology

and innovation in products and marketing technique, which are generally in short supply in the

developing countries. Thus, access to foreign capital helps overcome the managerial and

technological gaps in the host country. Further, foreign firms can increase competition in

domestic markets, reduce monopoly profits and improve quality of products and services.

However, there are costs associated with foreign investment, which the host country has

to bear such as special concessions to be offered, likely adverse effects on domestic savings,

deterioration in the terms of trade, balance of payments problems on account of outward

remittances etc. Some of empirical studies on FDI examined the “dependency hypothesis” and

found that FDI discourages savings and investment and pulls down economic growth. In fact,

the restrictive economic policies followed by the countries have reduced the benefits and

increased the costs of FDI because of costs of regulations, economic costs of production,

inefficient project structures, encouragement of the use of transfer pricing to repatriate profits

and fiscal losses from tax incentives.

Traditionally, the FDI has moved from developed to other developed or developing

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

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

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

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

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

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

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

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

etc. Table 1.1 depicts host countries determinants of FDI shown as below.

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FDI and India

The 1991 reforms brought changes in three broad areas, collectively known as

liberalization, privatization and globalization. Liberalization did away with regulatory hurdles

and minimized licensing requirements. Privatization reduced the role of the state and public

sector in business. Globalization made it easier for the MNCs to operate in India. India's direct

investment abroad was initiated in 1992. Streamlining of the procedures and substantial

---------------------------------------------------------------------------------------------------------------------------------Table No: 1.1 Host Country Determinates of FDI

---------------------------------------------------------------------------------------------------------------------------------I. POLICY FRAMEWORKi) Economic, political and social stabilityii) Rules regarding entry and operationsiii) Standards of treatment of foreign affiliatesiv) Policies on functioning and structure of marketsv) Policies governing mergers and acquisitionsvi) International agreement on FDIvii) Privatization policyviii) Trade policyix) Tax policyII. ECONOMIC DETERMINANTS -------------------------------------------------------------------------------------------------

Types of FDI Principal Economic Determinates -------------------------------------------------------------------------------------------------1. Market-seeking 1. Market size and per capita income

2. Market Growth3. Access to regional and global markets4. Country-specific consumer preferences5. Structure of markets

2. Recourses/Asset-seeking 1. Raw materials2. Low cost unskilled labour3. Technological, innovative and other assets4. Physical infrastructure

3. Efficiency seeking 1. Cost of resources and assets, adjusted for labour productivity.2. Other input cost, transport, telecommunication3. Membership of a regional agreement conducive to the establishment of regional corporate networks

--------------------------------------------------------------------------------------------------------------------------------------III. BUSINESS FACILITATION

1. Investment promotion (image building, investment facilitation services) 2. Investment incentives3. Hassle costs (related to corruption and administrative efficiency)4. Social amenities5. After-investment services

----------------------------------------------------------------------------------------------------------------------------------------Source: UNCTAD, World Investment Report, 1998: Trends and Determinate

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liberalization has been done since 1995. As of now, Indian corporate is allowed to invest abroad

up to 100% of their net worth and is permitted to make overseas investments in business activity.

The above Table 1.2 gives major features of four phases of Indian FDI policy which is

depicting liberalization of FDI policies phase wise in India over a period of time. Today, India is

the fourth-largest economy in the world and one of the most sought for destination for FDI. This

has led to India’s services sector boom. India has strength in information technology and other

significant areas such as auto components, chemicals, apparels, pharmaceuticals and jewellery.

India has always held promise for global investors, but its rigid FDI policies were a significant

hindrance in this regard. However, as a result of a series of ambitious and positive economic

Phase I Phase II Phase III Phase IV1950-67 1968-80 1980-90 1991 Onwards

Discriminating Power in sanctioning The projects

FDI need not be accompanied by technology

Procedure for remittance of royalty

And technical fees

Encouraging FDI in core and infrastructure industries

Above 40% stake not allowed

FDI through M&AFDI in services & Financial Sector-

banks,NBFCs, Insurance

Fast channel for FDI clearance.

Ownership and Control with Indians

FDI controlled by FERAProcedures transparent Liberal approach for NRI

investments

Source: Jeromi P.D. (2002)

Receptive Attitude or Cautious welcome.

Restrictive Attitude Gradual Liberalization Open Door Policy.

Non-discriminatory Treatment to FDI

Restriction on FDI without technology

Higher foreign equity in export-oriented

unitsallowed.

Liberal policies relating to technology collaboration, foreignTrade and foreign

exchange.

No restrictions on and dividends.Remittance of profits

Allowed only in priority area Liberalized FERA replaced with FEMA

Table No: 1.2 - Major features of Indian FDI policies during the four phases

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reforms aimed at deregulating the economy and stimulating foreign investment, India has

positioned itself as one of the front-runners of the rapidly growing Asia Pacific Region. India has

a large pool of skilled managerial and technical expertise. The size of the middle-class

population at 300 million exceeds the population of both the US and the EU, and represents a

powerful consumer market.

Foreign direct investment (FDI) is considered to be the lifeblood for economic

development as far as the developing nations are concerned. FDI to developing countries in the

1990s was the leading source of external financing and has become a key component of national

development strategies for almost all the countries in the world. FDI is considered to be an

essential tool for jump-starting economic growth through its bolstering of domestic capital,

productivity and employment. The reliance on FDI is rising heavily due to its all round

contributions to the economy. The important effect of FDI is its contributions to the growth of

the economy. FDI has an impact on country's trade balance, increasing labour standards and

skills, transfer of new technology and innovative ideas, improving infrastructure, skills and the

general business climate.

Among the various forms of foreign capital inflows to the country (public borrowing,

portfolio investment, bank deposits etc), FDI is generally considered as beneficial to India as it is

motivated largely by the investor’s long term prospects for making profits in production

activities than they directly control. In contrast, portfolio investment and foreign bank lending

are often motivated by short-term profit considerations that can be influence by a variety of

factors. Further they are prone to herd behavior. As FDI is non-debt creating as also not prone to

quick reversal; it is considered as the most desirable way of getting the external inflows.

Compared to other forms of foreign capital, its significance also lies in the fact that it brings

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along modern technology and management techniques. In this context, the Economic Survey

2001-02 underscored the significance of FDI for domestic industry and consumers as it provides

opportunities for technological up gradation, access to global managerial skills and practices,

optional utilization of human and natural resources, help Indian industry to become

internationally competitive, opens up export markets, provides backward and forward linkages.

India's liberalized FDI policy (2005) allows up to a 100% FDI stake in ventures.

Industrial policy reforms have substantially reduced industrial licensing requirements, removed

restrictions on expansion and facilitated easy access to foreign technology and foreign direct

investment FDI. The real-estate sector is showing upward moving growth curve as a result of a

booming economy and liberalized FDI regime. In March 2005, the government amended the

rules to allow 100 per cent FDI in the construction business. This automatic route has been

permitted in townships, housing, built-up infrastructure and construction development projects

including housing, commercial premises, hotels, resorts, hospitals, educational institutions,

recreational facilities, and city-and regional-level infrastructure.

FDI in banking is raised to 74% from the earlier limits of 49% to further liberalize the

FDI norms in the Banking Sector. 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. However a FDI inflow in Banking in developing

countries in recent years is drawing attention of the researchers due to its performance in the post

FDI regime.

After the liberalization and reforms in the financial sector in 1991, FDI in banking was

introduced and initially FDI in Banking was allowed up to 49 per cent. Subsequently, FDI policy

in India was liberalized in 2005 and FDI limit was raised from 49 percent to 74 percent.

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1.3 Need for the study

It is found that in the contemporary literature reviewed that it is believed the FDI firms

are better performers that Non-FDI firm in international economics. (P.D. Jeromi, 2002) It is

more than two decades that FDI is introduced in the Indian banking industry as a bundle of

reforms. Therefore, the impact of FDI on productivity, profitability and efficiency of Indian

banking needs to be studied. There is a liberalization of FDI policy from 49% to 74% in 2005,

so it become necessary to check if there was an impact of FDI and liberalized FDI policy on the

Indian banking industry.

The present study “Performance Evaluation of Indian FDI and Non-FDI Banks: A

Comparative Analysis”, is undertaken to study the performance of FDI and Non-FDI banks, and

the specific areas of economic performance where FDI has impacted.

Operational Definition for FDI and Non-FDI Banks:

The present study undertakes FDI and Non-FDI Indian Commercial Banks’ performance

evaluation. The FDI definition includes FDI and FII both as FDI to show the impact of Foreign

Investment as an impact of FDI Policy.

FDI Banks are Indian Commercial Banks that have significant level of total foreign

investment FDI and FII. The significant level of FDI taken as more than that of the 50 percent of

total allowed FDI limits in each private sector (37% i.e., fifty percent of 74%) and for each

public sector banks (10% i.e., fifty per cent of 20%). Therefore, for the present study, Public

sector FDI banks are those banks which have more than 10% FDI and are called as FDI banks.

Private sector FDI banks are those banks, which have, more than 37% and are therefore called as

FDI banks.

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For Public sector Non- FDI banks are those banks which have less than 10% FDI. For

Private sector Non- FDI banks are those banks which have less than 37%

1.4 Objectives of the Study

1. To study the general impact of liberalized FDI policy on Indian banking industry.

2. To study the productivity of FDI and Non-FDI banks in India post liberalization.

3. To study the profitability of FDI and Non-FDI banks in India post liberalization.

1.5 Hypotheses

1. There is no statistically significant impact of liberalized FDI Policy on the performance

of Indian banking industry.

2. Indian FDI banks have statistically significant productivity performance than the Indian

Non-FDI Banks.

3. Indian FDI banks have statistically significant profitability performance than the Indian

Non-FDI Banks.

1.6 Research Methodology

• The data sources

The study has extensively used secondary sources of data. Data used is yearly data for a

financial year from April 2000-March 2001 to April 2011-March 2012.

Data pertaining to banking sector is collected from Reserve Bank of India’s published

data. Data pertaining to individual bank is collected from Indian Bank’s Association, Mumbai.

Also important data related to foreign investment in individual banks is sought by Right to

Information Act query by the scholar.

• Tools

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The Impact of FDI on Indian Banking which is measured using Panel Multiple

Regression Approach using R software.

• The Model Specifications, Data and Description of Variables:

The model used is in testing for the presence of FDI effects on banking sector is

following:

(Performance) it = μ+ α’ D + β’ Xu + V it ------------------------ (1.1)

Here, (performance) it is the performance measure for the ith bank during the tth period.

D is a vector of dummy variable that characterizes FDI.

X it is a vector of other control variables that might affect performance and

V it is a random error term.

α and β the column vectors of the coefficient to be estimated and the elements that

characterize the FDI effects.

Regression analysis helps to measure the impact and relation of the different variables

under study. The available data is a panel data, i.e. a combination of time series and cross

section. Hence Panel Data Multiple Regression is used to see the impact of FDI on entire

banking sector. It includes 49 banks both from public and private sector and six variables sought

after factor analysis. The dummy variable is used to see the policy liberalization impact i.e. by

time dummy putting 2005>= 1 and 2005<=0.

To measure the performance of FDI and Non-FDI banks, FDI content dummy is used.

Accordingly to government of India’s definition (internationally accepted and accepted in India

by P. Chidambaram in his budget speech of Feb 2013) more than 10% of direct or indirect

foreign investment will be called as FDI firm.

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For public sector 20% FDI is upper limit of FDI ceiling. As already mentioned, the study

takes 50 per cent of that ceiling which is 10% FDI as non-significant FDI and hence dummy is

written as

FDI >10% =1 and FDI <10%=0 for public sector banks.

For Private sector 74% FDI is upper limit of FDI ceiling. So we are taking 50 per cent of

that ceiling which is 37% FDI as non-significant FDI and hence dummy is written as

FDI>37% =1 and FDI<37%=0 for private sector banks.

Total No. of banks under study = 49

Public Sector Banks = 27

Private Sector Banks = 22

There is no single and uniform definition of the performance and efficiency. However, to

measure productivity, the present study is measuring productivity as Profit per Employee (PPE)

and Business per Employee (BPE).

To measure profitability of banks, Net Profit (NP) is taken as a measurement. However,

grossly, Income (Revenue) and Total Business can also be indicative of the performance of the

banks.

1.7 Scope and Limitation of the Study

The scope of the study is limited to the Indian public sector and private sector banks. The

study is limited to yearly data available from 2000-2012 from RBI and IBA, purely secondary

sources of data. The study is hence limited to the time, data availability and reliability of data

and sources.

Time period of the study

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The data requirements of the study are from 1991-2012. The data from 2005 onwards

(FDI data) can be availed from shareholding patterns published in the annexure of Trends and

Banking published by RBI but data before 2005 is not available with IBA or could not be

reached from RBI. RBI is apex the body in banking and is having data of FDI since 2005-2012

on the website. And data from 2000-2001 to 2004-05 was only made available by RBI under

RTI. Data used is yearly data for a financial year from April 2000-March 2001 to April 2011-

March 2012. Thus the study period is from 2000-2001 to 2011-2012.

1.8 Chapter Scheme

The study is organized in seven chapters. Chapter 1 deals with introduction and

objectives of the study, Chapter 2 gives literature surveyed, Chapter 3 deals with research

methodology and tools of analysis. Chapter 4, studies the impact of FDI on the Indian Banking

system as a whole. Chapter 5 analyses the impact of FDI on the productivity of the banks and

Chapter 6 analyze the impact of FDI on the profitability of the banks under study. Chapter 7

gives conclusion and suggestion for the entire study.

1.9 Main Findings and Conclusion

1.9.1 First Hypothesis

Firstly, the impact of FDI on Indian banks is analyzed. The impact is measured based on

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 four factors: Net Profits, Total Income, Return on Assets (ROA), and Total

Business.

Productivity

1. Profit per Employee:

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Based on our time dummy results we can conclude that our 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. There is a statistically significant impact of

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

estimate is positive, thereby negating our proposition.

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

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

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

which came about in the light of FDI liberalization policy.

2. Business per Employee:

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

significance impact of FDI liberalization policy on the Business per Employee (BPE)

performance of Indian banks’ may not be accepted. We found that 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 thereby negating our proposition.

We can therefore conclude that the first hypothesis may not be accepted. Thus

considering PPE and BPE as significantly important indicators of the productivity, we find that

Productivity of Indian banks has increased to some extent in the FDI Liberalization period.

Profitability

1. Net Profit:

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

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

Since there is no statistically significant impact of FDI on the Net Profits of Indian banks in the

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

accepted.

2. Total Income:

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

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

be accepted. However, as the coefficient is negative and shows a statistical significant impact of

FDI on the Total Incomes of Indian banks it implies a fall in Income for dummy period. So FDI

liberalization had a negative impact on Total Income of banks.

3. ROA:

Based on our time dummy results we can conclude that the Hypothesis-There is no

significance 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 be rejected.

4. Total Business:

Based on our time dummy results we can conclude that the Hypothesis-There is no

significance impact of FDI liberalization on the Total Business performance of Indian banks

may be not be accepted (at 10 per cent level of significance). We see that there is a statistically

significant impact of FDI on the Total Business of Indian banks in the study period and the

coefficient is positive, (though only at 10% level of significance).

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 said about

the profitability measures.

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In profitability measures, the study shows significant positive impact on Return on Assets

(ROA) and Total Business of bank but negative significant impact on the Total Net

Profits and Income of banks. This means except ROA, and Total Business other

profitability parameters are not showing statistically significant impact of the liberalized

FDI policy.

Overall observation shows that productivity has gone up in the study period and

profitability of Indian banks have grown in the study 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.

1.9.2 Second Hypothesis

Secondly, performance on productivity is analyzed in terms of time and content dummy

for Indian public sector and private sector banks separately.

Productivity : Impact of FDI Liberalization (Time Dummy Results)

1. Profit per Employee:

Profit per Employees is growing in the FDI liberalization period and it is showing a

positive and statistically significant impact. However, for different groups categorized for our

study the dummy period does not show similar levels of statistically significant impact on PPE.

The dummy period shows growing PPE for all groups of FDI banks except that of private

sector banks. It is interesting to note that PPE is falling in FDI liberalization period for both old

and new private sector FDI banks. This may be because when public sector banks are opting for

no new recruitments and voluntary retirement options, etc, private sector banks were recruiting

thereby causing lowered profits per employee. The PPE is negative for this group mainly

because of the growing staff component that was being added.

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Therefore the Hypothesis-Indian FDI banks have statistically significant productivity

performance as compared to the Non-FDI in terms of PPE may be accepted for All FDI banks

(public and private sector taken together), Public sector FDI banks and Private sector FDI Banks.

2. Business per Employee:

Business per Employee is growing for all the different categories for banks under study

except that of new private sector banks, where it is seen falling. BPE is growing and is

statistically significant for old public FDI Banks and non-SB group FDI Banks and also in case

of old Private sector FDI Banks and All FDI banks (taken together). However, it is interesting to

note that BPE is falling and is not showing statistically significant impact on new private sector

FDI banks, taken separately. It is mainly because of the staff element, which is growing in new

private sector banks as already mentioned earlier.

Therefore; Hypothesis-Indian FDI banks have statistically significant productivity

performance than the Indian Non-FDI banks in terms of BPE may be accepted for old public

FDI Banks and non-SB group FDI Banks and also in case of old Private sector FDI Banks and

All FDI banks (taken together).

Productivity: Impact of FDI content(Content Dummy Results)

1. Profit per Employee:

PPE is showing mixed results for the content dummy for banks under study. We see that

PPE is falling for Old Public sector FDI banks, New private sector FDI banks, All public sector

FDI banks (here old public sector banks are pushing it down esp. SB and its group), non-ICICI

group of new private sector FDI banks and for SBI too. However though PPE is falling in the

above cases, it is showing statistically significant impact of FDI component in case of All FDI

Banks group.

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Therefore; Hypothesis- Indian FDI banks have statistically significant productivity

performance than the Indian Non-FDI in terms of PPE may be accepted only for All FDI Banks

group.

2. Business per Employee:

BPE is also showing mixed effects for different group of banks under study. BPE is

falling in case of All FDI banks, Old public sector FDI banks, New private sector FDI banks,

non-ICICI and SBI bank. However BPE is growing positively and showing statistically

significant impact of content dummy in case of New public sector FDI banks and All public

sector FDI banks. BPE is falling and showing statistically significant impact of content dummy

in case of New private sector FDI banks and private sector group without ICICI bank.

Therefore, the Hypothesis-Indian FDI banks have statistically significant productivity

performance than the Indian Non-FDI banks in terms of PPE may be accepted for Public sector

FDI banks and for All Public sector FDI Banks together as well as for New Public sector FDI

banks.

PPP is growing positively for Public FDI Banks. And PPE is falling both in case of

private sector FDI banks, old and new. However, FDI is not showing statistically

significant on PPE of both public and private FDI banks.

BPE is growing positively for Public FDI Banks. And BPE is falling in case of private

sector FDI banks. However, PPE is showing statistically significant impact of time

dummy on BPE of public sector FDI banks. PPE is also showing statistically significant

impact of time dummy on BPE of both private sector FDI banks, old and new. But in

case of private sector FDI banks BPE is significantly falling.

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We therefore see mixed results. Since the new private sector banks are mainly the banks

with more FDI than other sub groups, it is showing mixed effects of FDI time and content

dummy that could be mainly be due to the staff components of the productivity parameter

as staff for these banks is continuously growing since they are new entrants to the

business.

1.9.3 Third Hypothesis

Thirdly, performance on profitability is analyzed. Here it is seen with mixed results with

FDI Policy liberalization time dummy.

Profitability: Impact of FDI Liberalization (Time dummy results)

1. Net Profit:

Net Profits of old and new public and private sector banks are falling i.e. for both FDI

and Non-FDI Banks. However, statistically significant fall is seen in case of old public and old

private sector banks, which are both Non-FDI banks in their respective categories. This rejects

our hypothesis of increasing profitability (as shown by Net Profits).

2. Total Income:

Total Income is again seen to be falling for all the banks under study in FDI and Non-FDI

categories. This rejects our hypothesis of increasing profitability (as shown by Total Incomes).

3. ROA:

ROA are seen to be positively growing in case of public sector banks and falling in case

of private sector banks. However, they are showing statistically significant impact of time

dummy period on ROA of both FDI and Non-FDI- public and private sector banks. This accepts

our hypothesis of increasing profitability (as shown by ROA).

4. Total Business:

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Total Business is seen to be positively growing in case of both FDI and Non-FDI public

and private sector banks under study. However, they are showing statistically significant impact

of time dummy only in case of old private sector Non-FDI bank alone, which is accepting the

hypothesis.

In case of FDI time dummy in FDI and Non-FDI Public and Private Sector Banks under

study we see mixed results. However, in some cases of private sector FDI banks, they do give

positive results to time dummy.

Profitability: Impact of FDI Liberalization (Content dummy results)

1. Net Profit:

Net Profits are positively growing in case of Private sector FDI banks as compared to

Non-FDI banks. In case of public sector FDI banks, net profits are falling as compared to that of

Non-FDI banks. However, in case of Net Profits the results are not seen to have a statistically

significant impact of content dummy for any of the banks under study. This rejects our

hypothesis of FDI banks being more profitable (as shown by Net Profits).

2. Total Income:

Total Income is positively growing in case of FDI banks than Non-FDI public and private

sectors, for both the groups under study. However, Total Income is not seen as having a

statistically significant impact of content dummy for any of the banks under study. This rejects

our hypothesis of FDI banks being more profitable (as shown by Total Income).

3. ROA:

Return on Assets (ROA) is positively growing in case of FDI banks than Non-FDI public

and private sectors for both the groups under study. However, ROA is seen to be having

statistically significant impact in case of private sector FDI banks. In case of public sector FDI

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banks it is the reverse. However, in case of all FDI banks, all public sector FDI banks, new

public sector FDI banks, new private sector FDI banks, non-ICICI new private sector FDI banks

we find that FDI banks have been more profitable (as shown by ROA).

4. Total Business:

Total Business is positively growing in case of FDI banks than Non-FDI public and

private sector banks for both the groups (old and new) under study. Total Income is not seen to

have a statistically significant impact of content dummy for all sub groups of both private and

public sector FDI banks. However, in case of All FDI banks, new private sector FDI banks, old

private sector FDI banks, non-ICICI new private sector FDI banks our hypothesis of FDI banks

being more profitable is accepted (as shown by Total Business).

1.10 Suggestions and Recommendations

Suggestions

The study suggests that there are mixed results to conclude overall performance of Indian

FDI banks. We can see productivity of banks improving significantly than that of profitability.

Since there are not enough studies to come across in this area, we take inferences from studies

done on reforms. They suggest that the entry of new private sector banks (which are outcome of

FDI policy) have made industry more competitive improving the productivity of staff i.e.

Business per Employee (BPE) and Profit per Employee (PPE).

New private sector banks threw competition to existing old private sector banks and

public sector banks in the industry, which made them to change their outlook to become more

customers centric. More products came in to suit needs of different customers; foreign capital

brought new banking technology such as ATM, Debit and Credit Cards etc., which also brought

in more customers in the banking network making financial inclusion possible with good speed

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for a country like India. All this has resulted in improved overall performance of FDI Banks. It is

to be noted that there is hardly any study found with respect to performance of banks in the light

of FDI.

Recommendations

Based on above conclusion we have the following recommendations.

It is seen that productivity has improved due to competition of these new entrant banks

with foreign capital. This has enormously improved customer orientation. While

profitability does not show significant impact presently but it is strongly felt that given

more time and more consolidation in the sector, this factor may also improve. So it is

proposed that further liberalization of FDI for exiting private sector banks and public

sector banks should be encouraged.

Also few more bank licenses should be issued shortly with 74 per cent foreign capital

(FDI). This would increase new entrants and enhance competition among the FDI banks

thereby improving the overall performance of not only the FDI banks but also the non

FDI banks.

The study also recommends allowing FDI banks to open more branches with RBI

regulations so that the coverage can increase and this spread benefits rural and other

areas. Also this will increase the competition and bring about all the benefits of FDI

banks in uncovered areas.

There is no strong negation to the impact of FDI on performance of banking industry.

However, is quite early to suggest any further policy recommendation as there are already

proposed and waiting for implementation hence we recommend that same policy may be

continued. BPE and PPE are good indicators of productivity and they are seen to be

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increasing with FDI policy so on that ground we recommend and support more

liberalization of FDI policy.

As Net profits, Incomes, ROA and Business are crucial profitability variables for any

bank and it is observed that ROA and Business is growing under FDI policy so we

recommend and support liberalization of FDI policy.

The study also recommend for further research in the area of Net profits and Incomes not

growing much in policy regime. However, we still recommend FDI policy liberalization

as this policy alone cannot be blamed for Net profits and Incomes not growing

significantly.

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