Unit – V: Private Banks - Old generation and New generation private banks - Foreign Banks - NSE

- Depositories - DFHI - New Equity and Debt Instruments - SEBI and RBI guidelines.

INTRODUCTION
The private-sector banks in India represent a significant part of the Indian banking sector that is
made up of both private and public sector banks. The "private-sector banks" are banks where greater parts
of state or equity are held by the private shareholders and not by government. Role of private sector banks
is very much significant in present scenario as far as privatization is concerned. Banking in India has been
dominated by public sector banks since the 1969 when all major banks were nationalized by the Indian
government. However, since liberalization in government banking policy in the 1990s, old and new
private sector banks have re-emerged. They have grown faster & bigger over the two decades since
liberalizations using the latest technology, providing contemporary innovations and monetary tools and
techniques and till now contributed significantly to Indian Economy.
The private sector banks are divided into two groups by financial regulators in India, old and new.
The old private sector banks are those which existed prior to the nationalization in 1969 and kept their
independence because they were either too small or specialist to be included in nationalization. The
new private sector banks are those that have gained their banking license since the liberalization in the
1990s.
The banks, which came in operation after 1991, with the introduction of economic reforms and
financial sector reforms are called "new private-sector banks". Banking regulation act was then amended
in 1993, which permitted the entry of new private-sector banks in the Indian banking sector. However,
there were certain criteria set for the establishment of the new private-sector banks, some of those criteria
being:
1. The bank should have a minimum net worth of Rs. 200 crores.
2. The promoters holding should be a minimum of 25% of the paid-up capital.
3. Reliance Capital, India Post, Larsen & Toubro, Shriram Transport Finance are companies
pending a banking license with the RBI under the new policy, while IDFC & Bandhan were
given a go ahead to start banking services for 2015.
4. Within 3 years of the starting of the operations, the bank should offer shares to public and their
net worth must increase to 300 crores.
Private Sector Banks in India
Private Banks are banks like HDFC bank, ICICI Bank, UTI bank and IDBI bank. The concept of private
banking was introduced about 15 years ago. These are the banks that do not have any government stakes.
Private Banks have gained quite a strong status in the Indian banking industry over the last few years
especially because of optimum use of technology. As on 31 st March 2014, Private banks holds 15.9%
market share. IDBI which is ranked as the tenth largest global development bank is counted as one of the
finest financial institutions in the subcontinent.
Scheduled Commercial Banks (Private Banks) In private sector banks, most of the capital is in private
hands. There are two types of private sector banks in India viz. Old Private Sector Banks and New Private
Sector Banks.
Old Private Banks
There are 13 old private sector banks as follows: [2]
1. Catholic Syrian Bank
2. City Union Bank
3. Dhanlaxmi Bank
4. Federal Bank
5. ING Vysya Bank
6. Jammu and Kashmir Bank
 7. Karnataka Bank
8. Karur Vysya Bank
9. Lakshmi Vilas Bank
10. Nainital Bank
11. Ratnakar Bank
12. South Indian Bank
13. Tamilnad Mercantile Bank
Out of the above banks, the Nainital Bank is a subsidiary of the Bank of Baroda, which has 98.57% stake
in it. Some other old generation private sector banks in India have merged with other banks. For example,
Lord Krishna Bank merged with Centurion Bank of Punjab in 2007; Sangli Bank merged with ICICI
Bank in 2006; Centurion Bank of Punjab merged with HDFC in 2008.
New Private sector banks in India
There are 14 new private sector banks as follows:
1. Axis Bank (earlier UTI)
2. Bank of Punjab (actually an old generation private bank since it was not founded under post-1993
new bank licensing regime)
3. Centurion Bank Ltd. (Merged Bank of Punjab in late 2005 to become Centurion Bank of Punjab,
acquired by HDFC Bank Ltd. in 2008)
4. Development Credit Bank (Converted from Co-operative Bank, now DCB Bank Ltd.)
5. ICICI Bank (previously ICICI and then both merged; total merger SCICI+ICICI+ICICI Bank Ltd)
6. IndusInd Bank
7. Kotak Mahindra Bank
8. Yes Bank
9. Capital Local Area Bank Ltd.
10. Global Trust Bank (India) (Merged with Oriental Bank of Commerce)
11. Balaji Corporation Limited - Private Loan Company, not a Bank
12. HDFC Bank
13. Bandhan Bank
14. IDFC Bank

Private Sector Banks’ Status

 Rural banking and private sector banks
Commercial bank like ICICI Bank Ltd. is now expanding its business to rural areas to cater the
needs of farmers and villagers. The Bank is operating the small office in village to interact
between villager and Banking business. The crop loans, housing loans, automobile loans, farm
equipment loans, seed financing and insurance products are some of the private banking business
priorities in rural areas. These banking products cater the needs of rural customers. The Borrowers
from private banks like ICICI Bank has increased to 97000 today and the rural loan amount has
increased to nearly Rs.32000 crores today. The rate of NPA is also as per the norms laid down by
RBI. Thus, the private banking business in India is helping to grow rural Indian economy as rural
economy plays important role for the economic growth of the country. Micro financing is one of
the important tools for inclusive growth. Micro financing is a popular tool to eradicate poverty
from rural areas. The Banks like ICICI bank are trying to collaborate their services with Self Help
Group in order to extend credit to the rural areas. Along with private banks the leading foreign
commercial banks are also looking for the business in rural India. The banks introduced mobile
based services concept for the rural sector also to reach to the rural customers directly.
Accordingly, the private Banks and finance companies are becoming specialized to offer their
financial services to the rural people and farmers. This is resulting in economic growth of the rural
sector in India. The financial assistance to the farmers is the path of progress of the country like
ours. The private Banks are hence to play important role in economic development of the country.
 Technology adopted by private sector banks
 The New Generation Private Sector Banks are experiencing the positive change in their work and
performance. Banking today is a flourishing industry, focused on technological innovation.
Internet banking has emerged as the biggest focus area in the “Digital Transformation” agenda of
banks. This change is welcome by the customers of the banks. Mobile banking is very much
popular today. In 2012-13, Indian banks deployed technology-intensive solutions to increase
revenue, enhance customer experience, optimize cost structure and manage enterprise risk.
However, there is a wide variation in the technology agendas and implementation capability across
different players of the banking industry. Quick decisions, paperless transactions, Electronic media
for transactions, core banking system are some of the areas which make private sector banking
more relevant to the changing era of globalization. Providing optimum customer service using
information technology is the determining factor of success of private banks in India. Today
internet banking is very much popular today. Customers are now largely dependent on Internet
banking. It is true that private banks have utilized the same and excellent infrastructure of private
banks have helped to gain the confidence of customers. Due to this reason, it has been observed
customers already started to shift from public sector banks to private sector banks. The customers
have no personal touch with the private banks. The staff cannot have direct relationship with the
customers. The customers should get extra personalized services. These are the criteria to achieve
excellence in banking and few new generation private sector banks have achieved the same.
Though there is a competition, the new generation private sector banks are showing growth of the
business.
 Retaining the customers
Customer Relationship Management is the tool to acquire new customers and to retain old
customers and to provide the quality service to new as well as existing customers. It is true that
Private Banks have gained customer’s loyalty as it becomes a positive strength of the bank.
Consistent study of market by market survey and study of customer behavior will help the banks to
assess the needs of customers. This will further help in retaining the customers. It will further grow
the banking business.

Foreign Banks

A foreign bank is a type of International Bank that is obligated to follow the regulations of both the
home and host countries. Because the foreign banks’ loan limits are based on the parent bank’s capital,
foreign banks can provide more loans than subsidiary banks.” Foreign Banks are present in India either as
representative offices or as branches. A bank may choose to open foreign bank branches to meet the needs
of multinational corporate customers.

History

Foreign banks are operating in India since last 150 years and well known to Indian financial system.
In the year 1858 Standard Chartered Bank (SCB) started its working and Citi Bank in 1902 in India. Hong
Kong and Shanghai Bank (HSBC) started operating in India from 1953 for providing financial services to
Indian customers. 1980’s policies related to Indian financial system provided more and more growth
opportunities to foreign banks operating in India. The recent guidelines and initiations of the Reserve Bank
of India (RBI) for foreign banks have encouraged in opening their operations. The role of foreign banks is
extremely important in Indian financial system and it helps to increase the operational efficiency of the
local financial system by introducing sophisticated financial services with specific business practices
models. Within the past decade, the financial system, in India, undertook a substantial transformation from
the initial heavily regulated RBI environment where competition was nearly non-existent, to an open and
competition-driven financing. It would be an interesting study to understand as to why the Reserve Bank of
India and the government of India were slow and cautious in issuing licenses to the foreign banks to
operate in India and what economic benefits the country derived from the presence of foreign banks. As of
now, there are 45 foreign banks with 286 branches and 40 banks from 22 countries operating as
representative offices. Although the discussion around differential licensing is still just coming into
existence and beginning to display signs of future potential.

 Primary objectives of the establishment of foreign banks in India with specific business
practices
models. were as follows:-
 Developing economic relations with the home country of foreign banks.
 To provide them an opportunity in domestic and foreign trade considering the size of home
country and its economy.
 For maximization of profits, with the least risk element, foreign banks operating in India
utilized prevailing less restrictive regulatory practices and high interest rate as compared
with what was prevailing in their home country.

 Eligibility
There is an eligibility criterion on the basis of capital for a foreign bank to operate in India. A
Foreign Bank must have at least 5 billion rupees towards capital on establishment. Also, a Foreign
Bank must credit 18 % of net ANBC (‘adjusted net bank credit’ – which is total investment made
by bank on non-governmental securities.) towards agricultural loans.

 Operation
The Foreign banks can have different modes of operation in India. As mentioned above branch
mode or Subsidiary mode which is known as WOS (Wholly owned Subsidiary). They can either
start the bank branches in the initial setup or later convert them to WOS. To function as a WOS
there are several factors to be met.
 Proof of Economic stability and financial soundness to be provided by the bank
 The bank must provide necessary documents to show the proper ownership.
 The bank must be rated by any International rating agency.
 Bank must have a risk management team.

 Market Share
Foreign Banks account for less than 1% of the total branch network in the country. However,
they account for approximately 7% of the total banking sector assets and around 11% of the
profits. Most of the foreign banks in India are niche players and their business is usually focused on
trade finance, external commercial borrowings, wholesale lending, investment banking and treasury
services. Some other banks are confined to private banking and wealth management.

RBI Policy
RBI policy towards presence of foreign banks in India is based upon two cardinal principles viz.
reciprocity and single mode of presence. By reciprocity, it means that overseas banks are given near
national treatment in India only if their home country allowed Indian banks to open branches there
without much restrictions. By single mode of presence, it means that RBI allows either of the
branch mode or a wholly owned subsidiary (WOS) mode in India. Some other policy guidelines of
RBI towards foreign banks are as follows:
 Foreign Banks have to adhere to mandated Capital Adequacy requirements as per Basel
Standard.
 Foreign Banks should have to meet minimum capital requirement of Rs. 5 billion.
 Foreign Banks should need to maintain minimum CRAR at 10% Priority sector targets
for foreign banks in India is 40%.
 Foreign banks have to follow other norms as set by Reserve Bank of India.
Foreign direct investment (FDI) In Banking Sector:

Foreign direct investment (FDI) is an investment made by a company or individual in one country
in business interests in another country, in the form of either establishing business operations or acquiring
business assets in the other country, such as ownership or controlling interest in a foreign company.
Foreign direct investments are distinguished from portfolio investments in which an investor merely
purchases equities of foreign-based companies. FDI plays a major role in developing countries like India.
They act as a long term source of capital as well as a source of advanced and developed technologies. The
investors also bring along best global practices of management. As large amount of capital comes in
through these investments more and more industries are set up. This helps in increasing employment. FDI
also helps in promoting international trade.
Advantages :
 Access to markets: FDI can be an effective way for FDI you to enter into a foreign market.
Some countries may extremely limit foreign company access to their domestic markets.
Acquiring or starting a business in the market is a means for you to gain access.
 Access to resources: FDI is also an effective way for you to acquire important natural
resources, such as precious metals and fossil fuels. Oil companies, for example, often make
tremendous FDIs to develop oil fields.
 Reduces cost of production: FDI is a means for you to reduce your cost of production if the
labor market is cheaper and the regulations are less restrictive in the target foreign market.

Disadvantages of Foreign Direct Investment

 Hindrance to Domestic Investment:As it focuses its resources elsewhere other than the investor’s
home country, foreign direct investment can sometimes hinder domestic investment.
 Risk from Political Changes: Because political issues in other countries can instantly change,
foreign direct investment is very risky. Plus, most of the risk factors that you are going to
experience are extremely high.
 Negative Influence on Exchange Rates. Foreign direct investments can occasionally affect exchange
rates to the advantage of one country and the detriment of another.
 Higher Costs. If you invest in some foreign countries, you might notice that it is more expensive
than when you export goods. So, it is very imperative to prepare sufficient money to set up your
operations.

FDI In Banking Sector In India

Until 1993, most Indian banks were 100 percent owned by the central government and private
investment was allowed only in a handful of private banks formed around the 1940s. Further, foreign banks
and financial institutions were allowed only 20 percent ownership stakes in Indian banks. In 1993-94, nine
new banks were formed in the private sector and one co-operative bank was converted to a private bank.
Banks were permitted to issue Certificates of Deposits (CDs) and offer foreign currency deposits to Non-
resident Indians (NRIs) with exchange rate risk borne by the banks.

Ceiling On FDI In Indian Banks In the private banking sector of India, FDI is allowed up to a
maximum limit of 74 % of the paid- up capital of the bank. On the other hand, Foreign Direct
Investment and Portfolio Investment in the public or nationalized banks in India are subjected to a
limit of 20 % in totality. This ceiling is also applicable to the investments in the State Bank of India
and its associate banks. FDI limits in the banking sector of India were increased with the aim to
bring in more FDI inflows in the country along with the incorporation of advanced technology and
management practices. The objective was to make the Indian banking sector more competitive.

STATUTORY LIMITS OF FDI IN INDIA Foreign direct investment (FDI) up to 49 percent is

permitted in Indian private sector banks under "automatic route" which includes Initial Public Issue
(IPO), Private Placements, ADR/GDRs; and Acquisition of shares from existing shareholders.
Automatic route is not applicable to transfer of existing shares in a banking company from residents
to non-residents. The "fair price" for transfer of existing shares is determined by RBI, broadly on
the basis of Securities Exchange Board of India (SEBI) guidelines for listed shares and erstwhile
CCI guidelines for unlisted shares.
 Foreign banks having branch-presence in India are eligible for FDI in private sector banks
subject to the overall cap of 49% with RBI approval. Issue of fresh shares under automatic route is
not available to those foreign investors who have a financial or technical collaboration in the same
or allied field. Under the Insurance Act, the maximum foreign investment in an insurance company
has been fixed at 26 percent. Application for foreign investment in banks which have joint
venture/subsidiary in insurance sector should be made to RBI. FDI and Portfolio Investment in
nationalised banks are subject to overall statutory limits of 20 percent.