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Do Foreign Banks in India Indulge in 'Cream Skimming' - 0
Do Foreign Banks in India Indulge in 'Cream Skimming' - 0
Do Foreign Banks in India Indulge in 'Cream Skimming' - 0
120
iberalisation of entry norms for foreign banks is an important component of financial sector development
strategies in developing economies. As participation of
foreign banks in developing countries increases, their lending
strategies significantly affect credit availability in these economies (Berger et al 2001). The impact of foreign banks presence in host economies has been analysed from different perspectives. One perception is that foreign banks help in real
economic growth by mitigating credit constraints in developing host countries (Bruno and Hauswald 2009; Giannetti and
Ongena 2012). In this context, it is argued that lending patterns of foreign banks are more stable than domestic banks
because they have better access to international resources and
are supported by parent banks in times of financial distress
(Crdenas et al 2003). While in the context of developing
countries, many studies have found that presence of foreign
banks does not necessarily enhance overall credit availability
and may actually aggravate the conditions of credit constraints
rather than alleviating such constraints (Detriagache et al
2008; Beck and Peria 2010; Gormley 2010). This is because foreign banks often indulge in cream skimming, a lending strategy that involves extending credit to only wealthy and transparent segments of the credit market, while excluding segments that comprise poor and marginal borrowers (Berger
and Udell 1996).
Such cream skimming may induce serious distortion in the
credit market and may adversely affect the supply of aggregate
bank credit. Detragiache et al (2008) establish, both theoretically and empirically, a negative association between the presence of foreign banks and credit availability. In particular, they
found that in the context of developing countries, countries
with larger foreign bank presence have shallower credit markets (p 2125). Similarly, many studies have demonstrated that
foreign banks target best credit risks due to which their presence does not benefit opaque borrowers in host countries1
(see, for example, Mian 2006 for Pakistan; Beck and Peria
2010 for Mexico; Lin 2011 for China). Also, as foreign banks
cream skim the best credit risks, the quality of local borrowers
pool falls and domestic banks cut short their lending activities,
thus leading to decline in firms access to credit and fall in growth
of their business (Giannetti and Ongena 2007 for Eastern
European economies; Gormley 2010 for India).
Berger and Udell (1996), DellAriccia et al (1999), Berger
et al (2001), Stein (2002), Mian (2006) and Detragiache
MARCH 19, 2016
vol lI no 12
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ISSUES IN BANKING
EPW
vol lI no 12
High-income states
1 Delhi
2 Chandigarh
3 Haryana
4 Puducherry
5 Maharashtra
6 Gujarat
Middle-income states
7 Tamil Nadu
8 Kerala
9 Punjab
10 Uttarakhand
11 Andhra Pradesh
12 Karnataka
13 West Bengal
Low-income states
14 Rajasthan
15 Chhattisgarh
16 Odisha
17 Jammu & Kashmir
18 Madhya Pradesh
19 Jharkhand
20 Uttar Pradesh
21 Bihar
Location (Region)
Northern
Northern
Northern
Southern
Western
Western
1,75,812
1,40,066
1,09,227
95,759
94,121
88,787
11.5
9.2
7.1
6.3
6.1
6.0
Southern
Southern
Northern
Central
Southern
Southern
Eastern
84,058
83,725
78,171
75,604
71,540
69,493
55,864
5.5
5.5
5.1
4.9
4.7
4.5
4.0
Northern
Central
Eastern
Northern
Central
Eastern
Central
Eastern
51,474
46,573
46,150
41,833
36,345
31,982
29,417
24,681
3.4
3.0
3.0
2.7
2.4
2.1
1.9
1.6
121
ISSUES IN BANKING
30
12
25
Credit share
0.20
0.18
40
0.16
35
0.14
30
0.12
25
0.10
20
0.08
Bihar
Jharkhand
Uttar Pradesh
Madhya Pradesh
Odisha
Rajasthan
Chhattisgarh
Karnataka
West Bengal
Uttarakhand
Andhra Pradesh
Kerala
Punjab
Gujarat
Tamil Nadu
Maharashtra
0.00
Haryana
0.02
Puducherry
0.04
Delhi
0.06
10
Chandigarh
15
Asset share
10
20
15
10
6
Deposit share
Figure 1 presents the trend of indicators of foreign banks participation in urban regions of the 21 states during 19992012. As
seen from this figure, the share of foreign bank branches during
this period continues to be just about 1% of total bank branches
in urban regions in these states. Over this period of 13 years,
foreign banks share in total commercial bank assets remained
around 7%8% with a slight increase to 9% in 2008 and 2009.
Foreign banks share in total deposits and credit of commercial
122
Bihar
Uttar Pradesh
Jharkhand
Madhya Pradesh
Odisha
Rajasthan
Chhattisgarh
Karnataka
West Bengal
Uttarakhand
Source: Quarterly Statistics on Deposits and Credit of Scheduled Commercial Banks (RBI).
Andhra Pradesh
Kerala
Punjab
Tamil Nadu
Gujarat
Maharashtra
Haryana
Puducherry
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
Delhi
Chandigarh
Share of branches
0.20
0.18
0.16
0.14
0.12
0.10
0.08
0.06
0.04
0.02
0.00
Source: Quarterly Statistics on Deposits and Credit of Scheduled Commercial Banks (RBI) and
Central Statistics Office.
3 Empirical Methodology
vol lI no 12
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ISSUES IN BANKING
Constant
-6.092***
(0.00)
Ln(PCI)
0.407***
(0.00)
IFB
-25.58***
(0.00)
PFB x Ln(PCI)
0.267***
(0.00)
PFB x s.DB
-2.379***
(0.001)
Time dummies (a set of year dummies. Absent
The reference year is 1999)
No of observations
267
States/UTs
21
Hausman test
FIXED
F test
106.64
(0.000)
R squared
0.638
-0.259
(0.834)
-0.203
(0.111)
-2.972
(0.569)
0.230***
(0.00)
-2.172***
(0.00)
All highly significant
except 2000
263
21
FIXED
29.23
(0.000)
0.857
Obs
Mean
Standard Deviation
Min
Max
267
-1.668
0.962
-3.367
1.019
267
0.007
0.007
0.000
0.025
273
10.318
0.683
8.663
12.077
267
0.776
0.418
(PFB LnPCI)foreign banks presence as a binary variable interacted with per capita SDP
267
8.118
4.415
12.077
(PFB s.DB)foreign banks presence as a binary variable interacted with domestic banks credit share 267
0.746
0.405
1.000
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vol lI no 12
123
ISSUES IN BANKING
124
Domestic banks
100
80
60
40
Foreign banks
20
2011
2010
2009
2008
2007
2006
2005
2004
0
2003
Domestic banks
2011
2010
2009
2008
2007
2006
2005
Foreign banks
2004
2003
As on March 2011, India was host to 41 foreign banks affiliating from 16 high-income
countries, five middle-income countries and three low-income countries. Foreign banks
from high-income source countries held 99% share in total foreign banks assets of India
and foreign banks from middle- and low-income contributed to only 1% share in total
foreign banks assets of India in 2012. Source countries are categorised as high-, middleand low-income according to World Banks classification of economies July 2012.
High-income countries are the United Kingdom, the US, Hong Kong, Singapore, Germany,
France, Japan, Canada, Switzerland, Australia, Korea Republic, UAE, Bahrain, Belgium,
the Netherlands, and Oman. Middle-income countries are Mauritius, South Africa, China,
Russia and Thailand. Low-income countries are Sri Lanka, Bangladesh, and Indonesia.
Source: RBI, Statistical Tables Related to Banks of India (Table B1).
2002
The Netherlands
Russia
Indonesia
Thailand
Bangladesh
Australia
China
Sri Lanka
Oman
Bahrain
South Africa
UAE
Mauritius
Switzerland
South Korea
Japan
Canada
France
Singapore
US
Germany
UK
Belgium
2002
15
10
2001
20
2001
25
2000
35
30
1999
45
40
2000
50
1999
vol lI no 12
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ISSUES IN BANKING
foreign banks from middle- and low-income countries contributed to only 1% share in total foreign banks assets in India
as of 2012. As banks from high-income countries are more
specialised in hard information-based lending, we therefore
expect much of the foreign banks to target urban regions of
richer Indian states. As mentioned earlier, high-income states
of India are also characterised by smaller share of unorganised
sector economy than the low-income states, and hence we
expect the credit markets of the urban regions of the highincome states to have less information asymmetry than in the
low-income states.
A look at the data on small borrowers in urban India reveals
that foreign banks do not cater to the credit needs of small borrowers.8 The data on share of credit outstanding and share of
credit accounts of small borrowers of urban India for the years
19992011 are depicted in Figures 5a and 5b (p 124) respectively. As shown by these figures, foreign banks share in credit
notes
1
2
3
References
Beck, Thorsten and Maria S M Peria (2010): Foreign
Bank Participation and Outreach: Evidence
from Mexico, Journal of Financial Intermediation, Vol 19, pp 5273.
Berger, Allen N and Gregory F Udell (1996):
Universal Banking and the Future of Small
Business Lending, Financial System Design: The
Case for Universal Banking, Anthony Saunders
and Ingo Walter (eds), Burr Ridge, IL: Irwin
Publishing.
Economic & Political Weekly
EPW
to the small borrowers is negligible, owing perhaps to the inability of these borrowers to provide hard information.
5 Conclusions
L
Pr ow
ice
s
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