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Impact of FDI on the Efficiency of Commercial Banks
of India: An Analytical Study
*Arpan Mahapatra
Research Scholar, Sri Sri University, Cuttack, Odisha
Abstract
From the progression of liberalization and reform in the financial sector in 1991,
banking sector has undergone major transformation. The essential objectives of the
reform were to craft the banking system more competitive, productive and profitable.
The input to success in the competitive environment has increased productivity and
profitability. Banking zone provisions the support money that supports and fosters
growth in all the industries. FDI is a device for economic growth through its raise of
domestic capital, productivity and employment. FDI also shows business a vital role in
the up gradation of expertise, skills and managerial capabilities in a variety of sectors of
the economies. This paper discusses the FDI Equity inflows in Service Sector in India
and highlights banking Sector in the form of FDI. This paper analyzes the FDI inflows
and impacts in Banking Sector from January, 2000 to December, 2015. The impact of
FDI on Indian banks is measured on the performance a factor, i.e., its productivity. The
productivity of all banks, in turn, is measured by foreign direct investment inflows,
number of employees, total Expenditure, total earnings, assets, liabilities, amount of
deposits and advances.
.Key Words: FDI equity inflows, Commercial Banks & Productivity
1. Introduction
Indian Federal Government has opened up the banking sector for foreign investors
raising the ceiling of foreign direct investment in the Indian private sector banks to 49
percent. However, the ceiling of FDI in the country's public sector banks remains
unchanged at 20 percent. Foreign banks having branches in India are also entitled to
acquire stakes up to 49% through "automatic routes". It is to be noticed that under
"automatic route" fresh shares would not be issued to foreign investors who already have
financial or technical collaboration in banking or allied sector. They would require FIPB
approval. Foreign Direct Investment has become sin-quo-non for the economic
development of both developed and developing countries. Today, Indian banks are as
technology savvy as their counterparts in developed countries. As a result of
liberalization, privatization and globalization model, Indian banks have entered
international market and global banks have become part of Indian market. Furthermore,
FDI in the banking sector ensures to provide the benefits of technology transfer, better
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risk management, financial stability and better capitalization, integration into global
economy, knowledge transfer and rising competition. Foreign Direct Investment in India
is one of the major monetary sources for economic development in India. Foreign
companies invest in India to take benefits of lower wages and changing business
environment of India. Economic liberalization started in wake of the 1991 economic
crisis and since then FDI has steadily increased in India. But in the banking sector, being
a service sector is the one of the most attractive area for FDI. The FDI in banking sector
should be increased or not depends on their performance. FDI leads to generation of
employment opportunities. There is a positive correlation between FDI inflows with
GDP growth in India. The FDI inflow increases the GDP growth. So growth of Indian
GDP is largely influenced by FDI mentioned that due to FDI the competitive and reform
force have led to the emergence of internet, e-banking, credit cards, mobile banking,
ATMs etc. JayashreePatil (2014) found out that ROA and total business is positively
growing in case of FDI into banks than Non-FDI into public and private banks. study by
Yinggi Wei and V.N. 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 may
create an enabling environment for higher FDI inflows along with infusion of new
technology and management practices resulting in enhanced competitiveness by FDI
inflow in Banking in developing countries in recent years. FDI firms are better
performers that Non-FDI firm in international economics. 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. Foreign Direct Investment has become sin-quo-non for the economic
development of both developed and developing countries. This paper aimed at
examining the impact of foreign direct investment on performance of scheduled
commercial banks. Multiple Linear
Regression technique was adopted to study the impact. This paper found that FDI in
scheduled commercial banks has insignificant impact on total business per branch, net
profit per branch, total business per employee, net profit per employee.
Objectives of the Study:
To analyze the Foreign Direct Investment inflows in Banking Sector
To study the impact of FDI on productivity of Scheduled commercial banks in
India
Research Hypothesis
H01: Regression Coefficient of productivity of SCBs in India on FDI
inflows in banking sector is insignificant.
H02 Regression Coefficient of productivity of SCBs in India on FDI inflows in
banking sector is significant
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2. Review of Literature
Dr. Rajni Saluja(2017) has observed Foreign Direct Investment has become sin-quo-non
for the economic development of both developed and developing countries. As a result
of liberalisation, privatization and globalization model, Indian banks have entered
international market and global banks have become part of Indian market. Furthermore,
FDI in the banking sector ensures to provide the benefits of technology transfer, better
risk management, financial stability and better capitalization, integration into global
economy, knowledge transfer and increasing competition.
Samad (2015) used the credit-deposit ratio for measuring liquidity characteristics of the
banks in India. Return on Assets (hereafter, ROA) was used as a measure of the banks'
profitability and a significant impact of the loan-deposit ratio on ROA has been found in
his study. The credit-deposit ratio, introduced by Reserve Bank of India (RBI), is used as
a measure of capacity of the banks to lend from their available resources for generating
the revenues and improving the market share and it is also referred as loan-deposit ratio.
Patil (2014) investigated the performance of Indian FDI and non-FDI banks and found
that the productivity of Indian banks had increased to some extent in the FDI liberalized
period and showed a significant positive impact on return on assets (ROA) and total
business of the banks, but showed a negative impact on the total net profits and income
of the banks. He evaluated the productivity performance of Indian banks in the post
liberalization era with FDI contents and found that 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 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. The study revealed that foreign banks improve the
profitability and overhead expenses of public sector banks. However, the study further
claimed that it deteriorates asset quality of banking sector.
Gosh (2012) analysis favors foreign bank presence for improving profitability and asset
classes of Indian domestic banks. The study concludes by accepting foreign banks more
as assets than as a liability for India. Indian market is attractive to foreign investors for a
variety of reasons including customer base, a relatively developed financial sector and
high economic growth. It 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.
Tanna (2008) stated that the aggregate inflows of the FDI yield productivity changes in
the banking sector's effect on the economy and this may have a positive or negative
effect on banks' technological progress and established the association between inward
foreign direct investment (FDI) and bank level productivity changes. The results
indicated that inward FDI has a negative short-term effect, but a positive long-term effect
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on total factor productivity change. FDI in Indian banking sector and recognized that
FDI in banking can address several issues pertaining to the sector such as encouraging
development of innovative financial products, improving the efficiency of banking sector
and better ability to adapt to changing financial market conditions.
Singh J. (2010), "Economic Reforms and Foreign Direct Investment in India: Policy,
Trends and Patterns", in the context of increasing competition among nations and sub
national entities to attract Foreign Direct Investment (FDI), the present paper tries to find
out the rising trends and patterns of FDI inflows into India in attraction to various policy
measures announced by the Indian government since mid-1980 and after. The
experiential analysis tends to suggest that the FDI inflows, in general, show an increasing
trend during the post-reform period. Furthermore, country-wise comparison of FDI
inflow also indicates that FDI inflow into India has increased considerably in comparison
to other developing economies in the recent years.
3. Research Methodology
The study is secondary based and the time period of the study is from 2001-02 to2014-
15.The various sources of data were: Statistical Tables Relating to Banks in India, Basic
Statistical Returns of Scheduled Commercial Banks, Report on Trend and Progress of
Banking in India published by RBI. Multiple linear regression analysis technique was
used to study the impact of FDI on performance of scheduled commercial banks in India.
4. Data Analysis
Productivity was measured by taking into consideration the variables such as total
business per branch, net profit per branch. Employee productivity is calculated on the
basis of total business per employee, net profit per employee.
Performance= f (FDI, EMPLY, TEXP, TEA, ASS, LIAB, DEP, ADV) where,
Performance = Productivity
FDI= foreign direct investment
EMPLY= Employees
TEXP= Total Expenditure
TEA= Total Earnings
ASS= Assets
LIAB=Liabilities
DEP= Deposits
ADV= Advances
To study the impact of FDI on performance of scheduled commercial banks, the
following multiple linear regression model has been used:
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Ў = β0 + β1X1 + β2X2 +…….. + βnXn
Where,
Ў= Predicted or expected value of the dependent variables X123.n= Distinct independent
or predicted variables
β0= the value of Ў when all of the independent variables (X1to n) are equal to zero.
β 123.n =The estimated regression coefficients
Table 1: Financial year –wise FDI Inflows in Banking Sector
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Source: Reserve Bank of India, Monthly Bulletin, Various Issues
Table 1 indicates that compound annual growth rate of FDI in RBI is 15.38 and that of
total FDI inflows is 29.73.compound annual growth rate is low in case of FDI in RBI as
compared to total FDI inflows in India.
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Table 2: Multiple Linear Regression Results of Impact of FDI on Total Business per
Branch of SCBs in India
F-Statistic: 202.382 on 8 and 6 DF, p value .000
Multiple Regression Equation:
Y= -7.348+.00001(FDI) + .000009(EMPLY) - .00001(TEXP) + .00001(TEA)-
.00000004(LIAB) +.001(DEP) +.00004(ADV)
a. Dependent Variable: TBB
Table 2 shows the multiple linear regression results of impact of FDI on total business
per branch (TBB) of SCBs in India. It can be seen from multiple linear regression
results that FDI in banking sector is positive and t-value is 1.019 and p-value is .348
which is more than 0.05 (at 5%level of significance). Since p-value is more than 0.05,
the null hypothesis is accepted. It is observed that one unit change in FDI leads to
negative effect of 7.348 on total business per branch. Hence it can be concluded that
FDI in banking sector has no statistical significant impact on the total business per
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branch of the bank. The R-square value .996 states that the dependent variable of total
business per branch is influenced by all the independent variables by 99.6 percent.
Table 3: Multiple Linear Regression Results of Impact of FDI on net profit per
Branch of SCBs in India
F Statistic: 151.530 on 8 and 6 DF, p value .000
Multiple Regression Equation:
Y= .446 + .000004(FDI)-.0000004(EMPLY)-.000001(TEXP) +.000002(TEA)-
.0000001(ASS) +.00000003(LIAB)-.000006(DEP)+.00009(ADV)
a. Dependent Variable: NPB
Table 3 shows the multiple linear regression results of impact of FDI on net profit per
branch (NPB) of SCBs in India. It can be seen from multiple linear regression results that
FDI in banking sector is positive and t-value is 2.726 and p-value is .034 which is less
than 0.05 (at 5%level of significance). Since p-value is less than 0.05, the null hypothesis
is rejected and alternative hypothesis accepted. Hence it can be concluded that FDI in
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banking sector has statistical significant impact on the net profit per branch of the bank.
It is also inferred that one unit change in FDI leads to positive effect of .446 on net
profits per branch. The R-square value .995 states that the dependent variable of net
profit per branch is influenced by all the independent variables by 99.5 percent.
Table 4: Multiple Linear Regression Results of Impact of FDI on Total business
per employee of SCBs in India
F Statistic: 145.484 on 8 and 6 DF, p value .002
Multiple Regression Equation:
Y= -.579+.0000003(FDI)+.0000006(EMPLY)- .000001(TEXP)+.000001(TEA)-
.00000002(ASS)-.00000001(LIAB)+.000(DEP)+.000(ADV)
a. Dependent Variable: TBE
Table 4 shows the multiple linear regression results of impact of FDI on total business
per employee (TBE) of SCBs in India. It can be seen from multiple linear regression
results that FDI in banking sector is positive and t-value is .222 and p-value is .831
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which is more than 0.05 (at 5%level of significance). Since p-value is more than 0.05,
the null hypothesis is accepted. Hence it can be concluded that FDI in banking sector has
no statistical significant impact on the total business per employee of the bank. It is
inferred that one unit change in FDI leads to negative effect on total business per
employee. The R-square value .995 states that the dependent variable of total business
per employee is influenced by all the independent variables by 99.5 percent.
Table 5: Multiple Linear Regression Results of Impact of FDI on net profit per
employee of SCBs in India
F Statistic: 76.303 on 8 and 6 DF, p value .000
Multiple Regression Equation:
Y= -.002+.0000004(FDI)-.000000007(EMPLY)-
.00000001(TEXP) +.0000002(TEA)-.00000002(ASS) +.000000000
a. Dependent Variable: NPE
Table 5 shows the multiple linear regression results of impact of FDI on net profit per
employee (NPE) of SCBs in India. It can be seen from multiple linear regression results
that FDI in banking sector is positive and t-value is 2.400 and p-value is .053 which is
more than 0.05 (at 5%level of significance). Since p-value is more than 0.05, the null
hypothesis is accepted. Hence it can be concluded that FDI in banking sector has no
statistical significant impact on the net profit per employee of the bank. It is observed
that one unit change in FDI leads to negative effect of .002 on net profit per employee. It
is also inferred that one unit change in FDI leads to the R-square value .990 states that
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the dependent variable of net profit per employee is influenced by all the independent
variables by 99.0 percent.
It is concluded from regression analysis that H01 that regression coefficient is
productivity of SCBs in India on FDI inflows in banking sector is insignificant is
partially accepted on the basis of total business per branch, total business per employee,
net profit per employee, indicators of productivity of SCBs in India.
The null hypothesis H01 is partially rejected on the basis of indicators of productivity
such as net profit per branch, and alternative hypothesis H02 is accepted that is regression
coefficient of productivity of SCBs in India to FDI Inflows in banking sector is
significant.
5. Conclusions
It is concluded that there are mixed results of impact of FDI on overall performance of
scheduled commercial banks in India. FDI in scheduled commercial banks has
significant impact on total business per branch, total business per employee and net
profit per employee. FDI in scheduled commercial banks has a significant impact on net
profit per branch. Hence, FDI in the banking sector can be welcomed to accelerate the
performance of scheduled commercial banks.
References
1. Garg R (2013) “Role of Foreign Direct Investment in the Indian Banking Sector”,
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Management Practices, Vol. 1, Issue. 8, pp. 150-154.
3. Laghane K.B (2007), “Foreign Direct Investment & Indian Banking Sector”, Recent
Advances in Management, Marketing, Finances, ISBN: 978-960-474-168-7.
4. Dr.Kunal Badade & Ms. Medha Katkar (2011), “Foreign Direct Investment in
Banking Sector-A Boon in Disguise”,
5. Sirari Singh Arjun and Bohra Singh Narendra (2011), “Foreign Direct Investment in
Indian Service Sector –A Study of Post Liberalization”, International Journal of
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Websites:
9. http://www.dipp.nic.in
10. http://www.sianewsletter.in
11. http://www.rbi.nic.in
12. http://www.allbankingsolutions.com
13. http://www.dipp.nic.in/fdi-statistics
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