Foreign Direct Investment in Banking Services: An Indian Perspective

Foreign Direct Investment plays a vital role in the economy because it does not only provide huge opportunities to host countries to enhance their economic development but also opens new vistas to home countries to optimize their earnings by employing their ultimate resources. On the other hand, 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 aprivate bankfrom all all sources is allowed to reach as much as 74% under Indian regulations. FDI in banking sector can address several issues pertaining to the sector like encouraging development of innovative financial products, improving the efficiency of the banking sector, better capitalization of banks and better ability to adapt to changingfinancial market conditions. Due to globalisation, at present, local banks are competing in the global market, where an innovative financial product of multinational banks is the key factor in the development of local bank.

The Reserve Bank of India (RBI), has allowed foreign players to set up bank branches in rural India and take over weak banks with an investment of up to 74%, and further relaxations by 2010, with the second phase of opening expected to commence in April 2009. The banking industry in India has witnessed many changes since the early 1990s. Initially the Government contributed substantially to the equity of a large number of public sector banks in orderto improve their capital adequacy levels. Then the Government sought to change the structure of the Indian banking industry by granting licenses to a new generation of private sector banks. This step has been quite successful, as these banks have introduced the latest technology to differentiate themselves, opened ATMs and branches at a rapid pace and successfully weaned away customers from other banks. The Government has now taken the next step by allowing foreign banks to take over private sector banks. The aim of this paper is to analyze various aspects relating to Foreign Direct Investment in India IS Banking Sector.