The Role of foreign Banks in Indian Banking System

Foreign banks have significantly influenced the development of the Indian banking system by introducing new capital, advanced technologies, and global best practices to the market.

Foreign banks, by providing a diverse array of financial products and services, have enhanced competition, elevated customer service, and contributed to the overall growth of the Indian banking sector.

Background

The Hong Kong and Shanghai Banking Corporation (HSBC), established in 1853 as the ‘Mercantile Bank of India,’ is the oldest foreign bank in India. During British rule, foreign banks like Standard Chartered Bank also operated in the country. In 1991, the Narasimha Committee Report laid out a framework for foreign banks to establish fully-owned banks, subsidiaries, or joint ventures in India.

In 2005, the RBI released a roadmap for the presence of foreign banks in India to ensure fair competition within the banking industry. It also provided a clear vision for how the Indian banking system should evolve in the coming decades.

In 2005, the RBI introduced the ‘twin tracks’ approach, outlining two pathways for foreign banks to enter the Indian banking system.

The Indian banking system

Banking involves accepting deposits from the public at lower interest rates and providing loans at higher interest rates, playing a crucial role in a country’s economic growth. The Indian banking system comprises a wide range of banks that offer financial services to individuals, businesses, and the government.

The Reserve Bank of India (RBI) serves as a cornerstone of the Indian banking framework. Money is vital for the growth of both startups and established companies, and banks create a dynamic environment for their strategic operations. The Indian banking system mainly comprises the RBI, which is divided into two categories: Scheduled Banks and Unscheduled Banks. Scheduled Banks are those recognized in the Second Schedule of the RBI Act. They are mandated to maintain a minimum reserve of ₹0.5 million and comply with the regulations established by the RBI.

Additionally, scheduled banks are categorized into commercial and cooperative banks. Commercial banks operate similarly to traditional banks, primarily catering to the public sector. The banks that fall under this category include:

Foreign Banking System

A foreign bank offers financial services to customers beyond its home country, with its main headquarters located elsewhere. These banks serve Indian citizens by establishing a diverse array of branches in various countries.

Foreign banks must adhere to the rules and regulations set by both their parent company and the host country. In India, these institutions are referred to as foreign branch banks. The loan limits for these banks are entirely determined by the capital of their branches operating in India. Let’s explore this further by looking at some of the top foreign banks in the country.

Standard Chartered Bank's

Standard Chartered Bank, with its headquarters in London, UK, operates an extensive network of 96 branches across India, ensuring broad access to its banking services. The bank’s name reflects the merger of two institutions: Standard Bank, originally established in Africa, and Chartered Bank, which has its roots in India.

Hong Kong and Shanghai Banking Corporation (HSBC)

The Hong Kong and Shanghai Banking Corporation (HSBC) operates 50 branches in India, with its headquarters located in London, UK. HSBC acquired the Mercantile Bank of India and introduced the first ATM facility in India in 1987. It is recognized as the most successful foreign bank in India and ranks as the third-largest bank globally.

Citibank

Citibank operates 42 branches across 40 cities in India and has over 70 ATMs. Established in 1902, it is one of the oldest foreign banks in the country, boasting a history of 119 years. The bank offers a wide range of financial services and provides loans to foreign investors in India.

Advantages of Foreign Banks in India

The entry of foreign banks in India has significantly boosted technology, employment, and foreign exchange, contributing to the robust competitiveness of the Indian banking sector.

As we previously discussed, HSBC was the pioneer in introducing ATMs in India. The Indian banking system is also witnessing improvements in the quality of policies and services. Below, we outline the key advantages of foreign banks operating in India.

Challenges faced by Foreign Banks in India

Although foreign banks enjoy a diverse array of advantages, they also encounter several challenges, which we will discuss further.

Role of Foreign Banks in India

Let’s explore the key roles played by foreign banks in the Indian banking system.