SYNOPSIS PERFORMANCE EVALUATION OF INDIAN FDI AND NON-FDI BANKS: A COMPARATIVE ANALYSIS SUBMITTED BY MRS. JAYASHREE PATIL UNDER SUPERVISION OF

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1 SYNOPSIS PERFORMANCE EVALUATION OF INDIAN FDI AND NON-FDI BANKS: A COMPARATIVE ANALYSIS SUBMITTED BY MRS. JAYASHREE PATIL UNDER SUPERVISION OF PROF. K. SAI HARAGOPAL AND DR. NANDITA SETHI PhD SYNOPSIS (ABSTRACT) SUBMITTED FOR THE AWARD OF DOCTOR OF PHILOSOPHY IN ECONOMICS, OSMANIA UNIVERSITY, HYDERABAD MARCH 2014

2 Performance Evaluation of Indian FDI and Non-FDI Banks: A Comparative Analysis 1.1 Introduction 1.2 Importance of FDI 1.3 Need for the study 1.4 Objectives of Study 1.5 Hypothesis 1.6 Research Methodology 1.7 Scope and Limitation of the Study 1.8 Chapter Scheme 1.9 Main Findings and Conclusion First Hypothesis Second Hypothesis Third Hypothesis 1.10 Suggestions and Recommendations 1

3 1.1 Introduction Indian banking has undergone a sea change after liberalization and reforms. Liberalization and reforms paved the way to foreign direct investment into Indian Banking Sector. It is more than a decade now that we have received Foreign Direct Investment (FDI) in Banking and hence it is important to see the impact on the Indian Banking. The present study is dedicated to analyze and evaluate the performance of Indian FDI and Non-FDI banks in the post liberalization era. FDI is considered as important source of financing the growth of LDCs. FDI flows significantly influences the growth of GDP and its impact is relatively higher in India. FDI has promoted exports and there are no significant inter-country differences in propensity of FDI to export and import increase with FDI but less than proportionately for which there are no intercountry differences. FDI is considered to be important contributor to the performance of firms. Also the performance of FDI is companies are better than that of non-fdi companies and however FDI companies contribution to exports is not great and their import propensity is quite high. 1.2 Importance of FDI It is well accepted fact that external inflows like FDI can supplement domestic savings at least in the short run (Meier,1995, Moran, 1998). There are divergent views on the long run impact of FDI on domestic savings and findings of empirical studies are not uniform. However, 2

4 FDI can play important role in improving the capacity of the host country to respond to the emerging opportunities. The benefits of FDI can occur to domestic labour in the form of higher wages, to consumer by way of higher output and lower prices, to government through higher tax revenue, and most importantly of external economies. For a developing, FDI is significant for employment generation and improving its productivity as well. Hence, the international flow of capital is considered as an alternative to labour migration from the poor countries. FDI brings to the recipient country not only foreign capital but also efficient management, superior technology and innovation in products and marketing technique, which are generally in short supply in the developing countries. Thus, access to foreign capital helps overcome the managerial and technological gaps in the host country. Further, foreign firms can increase competition in domestic markets, reduce monopoly profits and improve quality of products and services. However, there are costs associated with foreign investment, which the host country has to bear such as special concessions to be offered, likely adverse effects on domestic savings, deterioration in the terms of trade, balance of payments problems on account of outward remittances etc. Some of empirical studies on FDI examined the dependency hypothesis and found that FDI discourages savings and investment and pulls down economic growth. In fact, the restrictive economic policies followed by the countries have reduced the benefits and increased the costs of FDI because of costs of regulations, economic costs of production, inefficient project structures, encouragement of the use of transfer pricing to repatriate profits and fiscal losses from tax incentives. Traditionally, the FDI has moved from developed to other developed or developing countries preferably in sectors like mining, tea, coffee, rubber, cocoa plantation, oil extraction 3

5 and refining, manufacturing for home production and exports, etc. Gradually their operations have also included services such as banking, insurance, shipping, hotels, etc. As regards location choice, the Multi National Enterprises (MNEs) tend to set up their plants in big cities in the developing countries, where infrastructure facilities are easily available. Therefore, in order to attract FDI flows, the recipients countries/regions were required to provide basic facilities like land, power and other public utilities, concessions in the form of tax holiday, development rebate, rebate on undistributed profits, additional depreciation allowance and subsidized inputs, etc. Table 1.1 depicts host countries determinants of FDI shown as below. 4

6 Table No: 1.1 Host Country Determinates of FDI I. POLICY FRAMEWORK i) Economic, political and social stability ii) Rules regarding entry and operations iii) Standards of treatment of foreign affiliates iv) Policies on functioning and structure of markets v) Policies governing mergers and acquisitions vi) International agreement on FDI vii) Privatization policy viii) Trade policy ix) Tax policy II. ECONOMIC DETERMINANTS Types of FDI Principal Economic Determinates Market-seeking 1. Market size and per capita income 2. Market Growth 3. Access to regional and global markets 4. Country-specific consumer preferences 5. Structure of markets 2. Recourses/Asset-seeking 1. Raw materials 2. Low cost unskilled labour 3. Technological, innovative and other assets 4. Physical infrastructure 3. Efficiency seeking 1. Cost of resources and assets, adjusted for labour productivity. 2. Other input cost, transport, telecommunication 3. Membership of a regional agreement conducive to the establishment of regional corporate networks III. BUSINESS FACILITATION 1. Investment promotion (image building, investment facilitation services) 2. Investment incentives 3. Hassle costs (related to corruption and administrative efficiency) 4. Social amenities 5. After-investment services Source: UNCTAD, World Investment Report, 1998: Trends and Determinate FDI and India The 1991 reforms brought changes in three broad areas, collectively known as liberalization, privatization and globalization. Liberalization did away with regulatory hurdles and minimized licensing requirements. Privatization reduced the role of the state and public sector in business. Globalization made it easier for the MNCs to operate in India. India's direct investment abroad was initiated in Streamlining of the procedures and substantial 5

7 liberalization has been done since As of now, Indian corporate is allowed to invest abroad up to 100% of their net worth and is permitted to make overseas investments in business activity. Table No: Major features of Indian FDI policies during the four phases Phase I Phase II Phase III Phase IV Onwards Receptive Attitude or Cautious welcome. Restrictive Attitude Gradual Liberalization Open Door Policy. Non-discriminatory Treatment to FDI Restriction on FDI without technology Higher foreign equity in export-oriented unitsallowed. Liberal policies relating to technology collaboration, foreigntrade and foreign exchange. No restrictions on and dividends.remittance of profits Above 40% stake not allowed Procedure for remittance of royalty And technical fees Encouraging FDI in core and infrastructure industries Allowed only in priority area Liberalized FERA replaced with FEMA Ownership and Control with Indians FDI controlled by FERA Procedures transparent Liberal approach for NRI investments Discriminating Power in sanctioning The projects Fast channel for FDI clearance. FDI need not be accompanied by technology FDI through M&AFDI in services & Financial Sectorbanks,NBFCs, Insurance Source: Jeromi P.D. (2002) The above Table 1.2 gives major features of four phases of Indian FDI policy which is depicting liberalization of FDI policies phase wise in India over a period of time. Today, India is the fourth-largest economy in the world and one of the most sought for destination for FDI. This has led to India s services sector boom. India has strength in information technology and other significant areas such as auto components, chemicals, apparels, pharmaceuticals and jewellery. India has always held promise for global investors, but its rigid FDI policies were a significant hindrance in this regard. However, as a result of a series of ambitious and positive economic 6

8 reforms aimed at deregulating the economy and stimulating foreign investment, India has positioned itself as one of the front-runners of the rapidly growing Asia Pacific Region. India has a large pool of skilled managerial and technical expertise. The size of the middle-class population at 300 million exceeds the population of both the US and the EU, and represents a powerful consumer market. Foreign direct investment (FDI) is considered to be the lifeblood for economic development as far as the developing nations are concerned. FDI to developing countries in the 1990s was the leading source of external financing and has become a key component of national development strategies for almost all the countries in the world. FDI is considered to be an essential tool for jump-starting economic growth through its bolstering of domestic capital, productivity and employment. The reliance on FDI is rising heavily due to its all round contributions to the economy. The important effect of FDI is its contributions to the growth of the economy. FDI has an impact on country's trade balance, increasing labour standards and skills, transfer of new technology and innovative ideas, improving infrastructure, skills and the general business climate. Among the various forms of foreign capital inflows to the country (public borrowing, portfolio investment, bank deposits etc), FDI is generally considered as beneficial to India as it is motivated largely by the investor s long term prospects for making profits in production activities than they directly control. In contrast, portfolio investment and foreign bank lending are often motivated by short-term profit considerations that can be influence by a variety of factors. Further they are prone to herd behavior. As FDI is non-debt creating as also not prone to quick reversal; it is considered as the most desirable way of getting the external inflows. Compared to other forms of foreign capital, its significance also lies in the fact that it brings 7

9 along modern technology and management techniques. In this context, the Economic Survey underscored the significance of FDI for domestic industry and consumers as it provides opportunities for technological up gradation, access to global managerial skills and practices, optional utilization of human and natural resources, help Indian industry to become internationally competitive, opens up export markets, provides backward and forward linkages. India's liberalized FDI policy (2005) allows up to a 100% FDI stake in ventures. Industrial policy reforms have substantially reduced industrial licensing requirements, removed restrictions on expansion and facilitated easy access to foreign technology and foreign direct investment FDI. The real-estate sector is showing upward moving growth curve as a result of a booming economy and liberalized FDI regime. In March 2005, the government amended the rules to allow 100 per cent FDI in the construction business. This automatic route has been permitted in townships, housing, built-up infrastructure and construction development projects including housing, commercial premises, hotels, resorts, hospitals, educational institutions, recreational facilities, and city-and regional-level infrastructure. 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 will create an enabling environment for higher FDI inflows along with infusion of new technology and management practices resulting in enhanced competitiveness. However a FDI inflow in Banking in developing countries in recent years is drawing attention of the researchers due to its performance in the post FDI regime. After the liberalization and reforms in the financial sector in 1991, FDI in banking was introduced and initially FDI in Banking was allowed up to 49 per cent. Subsequently, FDI policy in India was liberalized in 2005 and FDI limit was raised from 49 percent to 74 percent. 8

10 1.3 Need for the study It is found that in the contemporary literature reviewed that it is believed the FDI firms are better performers that Non-FDI firm in international economics. (P.D. Jeromi, 2002) It is more than two decades that FDI is introduced in the Indian banking industry as a bundle of reforms. 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. The present study Performance Evaluation of Indian FDI and Non-FDI Banks: A Comparative Analysis, is undertaken to study the performance of FDI and Non-FDI banks, and the specific areas of economic performance where FDI has impacted. Operational Definition for FDI and Non-FDI Banks: The present study undertakes FDI and Non-FDI Indian Commercial Banks performance evaluation. The FDI definition includes FDI and FII both as FDI to show the impact of Foreign Investment as an impact of FDI Policy. FDI Banks are Indian Commercial Banks that have significant level of total foreign investment FDI and FII. The significant level of FDI taken as more than that of the 50 percent of total allowed FDI limits in each private sector (37% i.e., fifty percent of 74%) and for each public sector banks (10% i.e., fifty per cent of 20%). Therefore, for the present study, Public sector FDI banks are those banks which have more than 10% FDI and are called as FDI banks. Private sector FDI banks are those banks, which have, more than 37% and are therefore called as FDI banks. 9

11 For Public sector Non- FDI banks are those banks which have less than 10% FDI. For Private sector Non- FDI banks are those banks which have less than 37% 1.4 Objectives of the Study 1. To study the general impact of liberalized FDI policy on Indian banking industry. 2. To study the productivity of FDI and Non-FDI banks in India post liberalization. 3. To study the profitability of FDI and Non-FDI banks in India post liberalization. 1.5 Hypotheses 1. There is no statistically significant impact of liberalized FDI Policy on the performance of Indian banking industry. 2. Indian FDI banks have statistically significant productivity performance than the Indian Non-FDI Banks. 3. Indian FDI banks have statistically significant profitability performance than the Indian Non-FDI Banks. 1.6 Research Methodology The data sources The study has extensively used secondary sources of data. Data used is yearly data for a financial year from April 2000-March 2001 to April 2011-March Data pertaining to banking sector is collected from Reserve Bank of India s published data. Data pertaining to individual bank is collected from Indian Bank s Association, Mumbai. Also important data related to foreign investment in individual banks is sought by Right to Information Act query by the scholar. Tools 10

12 The Impact of FDI on Indian Banking which is measured using Panel Multiple Regression Approach using R software. The Model Specifications, Data and Description of Variables: The model used is in testing for the presence of FDI effects on banking sector is following: (Performance) it = μ+ α D + β Xu + V it (1.1) Here, (performance) it is the performance measure for the i th bank during the t th period. D is a vector of dummy variable that characterizes FDI. X it is a vector of other control variables that might affect performance and V it is a random error term. α and β the column vectors of the coefficient to be estimated and the elements that characterize the FDI effects. Regression analysis helps to measure the impact and relation of the different variables under study. The available data is a panel data, i.e. a combination of time series and cross section. Hence Panel Data Multiple Regression is used to see the impact of FDI on entire banking sector. It includes 49 banks both from public and private sector and six variables sought after factor analysis. The dummy variable is used to see the policy liberalization impact i.e. by time dummy putting 2005>= 1 and 2005<=0. To measure the performance of FDI and Non-FDI banks, FDI content dummy is used. Accordingly to government of India s definition (internationally accepted and accepted in India by P. Chidambaram in his budget speech of Feb 2013) more than 10% of direct or indirect foreign investment will be called as FDI firm. 11

13 For public sector 20% FDI is upper limit of FDI ceiling. As already mentioned, the study takes 50 per cent of that ceiling which is 10% FDI as non-significant FDI and hence dummy is written as FDI >10% =1 and FDI <10%=0 for public sector banks. For Private sector 74% FDI is upper limit of FDI ceiling. So we are taking 50 per cent of that ceiling which is 37% FDI as non-significant FDI and hence dummy is written as FDI>37% =1 and FDI<37%=0 for private sector banks. Total No. of banks under study = 49 Public Sector Banks = 27 Private Sector Banks = 22 There is no single and uniform definition of the performance and efficiency. However, to measure productivity, the present study is measuring productivity as Profit per Employee (PPE) and Business per Employee (BPE). To measure profitability of banks, Net Profit (NP) is taken as a measurement. However, grossly, Income (Revenue) and Total Business can also be indicative of the performance of the banks. 1.7 Scope and Limitation of the Study The scope of the study is limited to the Indian public sector and private sector banks. The study is limited to yearly data available from from RBI and IBA, purely secondary sources of data. The study is hence limited to the time, data availability and reliability of data and sources. Time period of the study 12

14 The data requirements of the study are from The data from 2005 onwards (FDI data) can be availed from shareholding patterns published in the annexure of Trends and Banking published by RBI but data before 2005 is not available with IBA or could not be reached from RBI. RBI is apex the body in banking and is having data of FDI since on the website. And data from to was only made available by RBI under RTI. Data used is yearly data for a financial year from April 2000-March 2001 to April March Thus the study period is from to Chapter Scheme The study is organized in seven chapters. Chapter 1 deals with introduction and objectives of the study, Chapter 2 gives literature surveyed, Chapter 3 deals with research methodology and tools of analysis. Chapter 4, studies the impact of FDI on the Indian Banking system as a whole. Chapter 5 analyses the impact of FDI on the productivity of the banks and Chapter 6 analyze the impact of FDI on the profitability of the banks under study. Chapter 7 gives conclusion and suggestion for the entire study. 1.9 Main Findings and Conclusion First Hypothesis Firstly, the impact of FDI on Indian banks is analyzed. The impact is measured based on two factors, i.e, its productivity and profitability. The productivity of banks, in turn, is measured by Profit per Employee (PPE) and Business per Employee (BPE). The profitability of Indian banks is measured by four factors: Net Profits, Total Income, Return on Assets (ROA), and Total Business. Productivity 1. Profit per Employee: 13

15 Based on our time dummy results we can conclude that our hypothesis There is no statistically significant impact of liberalized FDI Policy on the Profit per Employee (PPE) performance of Indian banks may not be accepted. There is a statistically significant impact of FDI liberalization on the Profit per Employee of Indian banks in the study period and the estimate is positive, thereby negating our proposition. In the case of Profit per Employee, a positive coefficient in the dummy period shows that the magic word profitability (which is first time used in the Indian banking) introduced in Narasimham Committee report is showing significant results and is the outcome of competition which came about in the light of FDI liberalization policy. 2. Business per Employee: Based on our time dummy results we can conclude that our hypothesis There is no significance impact of FDI liberalization policy on the Business per Employee (BPE) performance of Indian banks may not be accepted. We found that there is a statistically significant impact of FDI liberalization on the Business per Employee of Indian banks in the study period and the estimate is positive thereby negating our proposition. We can therefore conclude that the first hypothesis may not be accepted. Thus considering PPE and BPE as significantly important indicators of the productivity, we find that Productivity of Indian banks has increased to some extent in the FDI Liberalization period. Profitability 1. Net Profit: Based on our time dummy results we can conclude that hypothesis-there is no significant impact of FDI liberalization on the Net Profit performance of Indian banks, may be accepted. Since there is no statistically significant impact of FDI on the Net Profits of Indian banks in the 14

16 study period and the coefficient is negative for dummy period, here the hypothesis may be accepted. 2. Total Income: Based on our time dummy results we can conclude that hypothesis -There is no significant impact of FDI liberalization on the Total Income performance of Indian banks may be accepted. However, as the coefficient is negative and shows a statistical significant impact of FDI on the Total Incomes of Indian banks it implies a fall in Income for dummy period. So FDI liberalization had a negative impact on Total Income of banks. 3. ROA: Based on our time dummy results we can conclude that the Hypothesis-There is no significance impact of FDI liberalization on the Return on Assets (ROA) performance of Indian banks may not be accepted. As there is a statistically significant impact of FDI on the ROA of Indian banks in the study period and the coefficient is positive, hypothesis may be rejected. 4. Total Business: Based on our time dummy results we can conclude that the Hypothesis-There is no significance impact of FDI liberalization on the Total Business performance of Indian banks may be not be accepted (at 10 per cent level of significance). We see that there is a statistically significant impact of FDI on the Total Business of Indian banks in the study period and the coefficient is positive, (though only at 10% level of significance). We can conclude that the FDI liberalization period shows significant positive impact on the productivity of banks through the impact on profit per employee and Business per employee, which are the productivity parameters. However the same cannot be said about the profitability measures. 15

17 In profitability measures, the study shows significant positive impact on Return on Assets (ROA) and Total Business of bank but negative significant impact on the Total Net Profits and Income of banks. This means except ROA, and Total Business other profitability parameters are not showing statistically significant impact of the liberalized FDI policy. Overall observation shows that productivity has gone up in the study period and profitability of Indian banks have grown in the study period in case of some important indicators/parameters, while there is no impact /negative impact in other indicators. So Profitability shows mixed results in the post FDI Liberalization period Second Hypothesis Secondly, performance on productivity is analyzed in terms of time and content dummy for Indian public sector and private sector banks separately. Productivity : Impact of FDI Liberalization (Time Dummy Results) 1. Profit per Employee: Profit per Employees is growing in the FDI liberalization period and it is showing a positive and statistically significant impact. However, for different groups categorized for our study the dummy period does not show similar levels of statistically significant impact on PPE. The dummy period shows growing PPE for all groups of FDI banks except that of private sector banks. It is interesting to note that PPE is falling in FDI liberalization period for both old and new private sector FDI banks. This may be because when public sector banks are opting for no new recruitments and voluntary retirement options, etc, private sector banks were recruiting thereby causing lowered profits per employee. The PPE is negative for this group mainly because of the growing staff component that was being added. 16

18 Therefore the Hypothesis-Indian FDI banks have statistically significant productivity performance as compared to the Non-FDI in terms of PPE may be accepted for All FDI banks (public and private sector taken together), Public sector FDI banks and Private sector FDI Banks. 2. Business per Employee: Business per Employee is growing for all the different categories for banks under study except that of new private sector banks, where it is seen falling. BPE is growing and is statistically significant for old public FDI Banks and non-sb group FDI Banks and also in case of old Private sector FDI Banks and All FDI banks (taken together). However, it is interesting to note that BPE is falling and is not showing statistically significant impact on new private sector FDI banks, taken separately. It is mainly because of the staff element, which is growing in new private sector banks as already mentioned earlier. Therefore; Hypothesis-Indian FDI banks have statistically significant productivity performance than the Indian Non-FDI banks in terms of BPE may be accepted for old public FDI Banks and non-sb group FDI Banks and also in case of old Private sector FDI Banks and All FDI banks (taken together). Productivity: Impact of FDI content(content Dummy Results) 1. Profit per Employee: PPE is showing mixed results for the content dummy for banks under study. We see that PPE is falling for Old Public sector FDI banks, New private sector FDI banks, All public sector FDI banks (here old public sector banks are pushing it down esp. SB and its group), non-icici group of new private sector FDI banks and for SBI too. However though PPE is falling in the above cases, it is showing statistically significant impact of FDI component in case of All FDI Banks group. 17

19 Therefore; Hypothesis- Indian FDI banks have statistically significant productivity performance than the Indian Non-FDI in terms of PPE may be accepted only for All FDI Banks group. 2. Business per Employee: BPE is also showing mixed effects for different group of banks under study. BPE is falling in case of All FDI banks, Old public sector FDI banks, New private sector FDI banks, non-icici and SBI bank. However BPE is growing positively and showing statistically significant impact of content dummy in case of New public sector FDI banks and All public sector FDI banks. BPE is falling and showing statistically significant impact of content dummy in case of New private sector FDI banks and private sector group without ICICI bank. Therefore, the Hypothesis-Indian FDI banks have statistically significant productivity performance than the Indian Non-FDI banks in terms of PPE may be accepted for Public sector FDI banks and for All Public sector FDI Banks together as well as for New Public sector FDI banks. PPP is growing positively for Public FDI Banks. And PPE is falling both in case of private sector FDI banks, old and new. However, FDI is not showing statistically significant on PPE of both public and private FDI banks. BPE is growing positively for Public FDI Banks. And BPE is falling in case of private sector FDI banks. However, PPE is showing statistically significant impact of time dummy on BPE of public sector FDI banks. PPE is also showing statistically significant impact of time dummy on BPE of both private sector FDI banks, old and new. But in case of private sector FDI banks BPE is significantly falling. 18

20 We therefore see mixed results. Since 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 be 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 Third Hypothesis Thirdly, performance on profitability is analyzed. Here it is seen with mixed results with FDI Policy liberalization time dummy. Profitability: Impact of FDI Liberalization (Time dummy results) 1. Net Profit: Net Profits of old and new public and private sector banks are falling i.e. for both FDI and Non-FDI Banks. However, statistically significant fall is seen in case of old public and old private sector banks, which are both Non-FDI banks in their respective categories. This rejects our hypothesis of increasing profitability (as shown by Net Profits). 2. Total Income: Total Income is again seen to be falling for all the banks under study in FDI and Non-FDI categories. This rejects our hypothesis of increasing profitability (as shown by Total Incomes). 3. ROA: ROA are seen to be positively growing in case of public sector banks and falling in case of private sector banks. However, they are showing statistically significant impact of time dummy period on ROA of both FDI and Non-FDI- public and private sector banks. This accepts our hypothesis of increasing profitability (as shown by ROA). 4. Total Business: 19

21 Total Business is seen to be positively growing in case of both FDI and Non-FDI public and private sector banks under study. However, they are showing statistically significant impact of time dummy only in case of old private sector Non-FDI bank alone, which is accepting the hypothesis. In case of FDI time dummy in FDI and Non-FDI Public and Private Sector Banks under study we see mixed results. However, in some cases of private sector FDI banks, they do give positive results to time dummy. Profitability: Impact of FDI Liberalization (Content dummy results) 1. Net Profit: Net Profits are positively growing in case of Private sector FDI banks as compared to Non-FDI banks. In case of public sector FDI banks, net profits are falling as compared to that of Non-FDI banks. However, in case of Net Profits the results are not seen to have a statistically significant impact of content dummy for any of the banks under study. This rejects our hypothesis of FDI banks being more profitable (as shown by Net Profits). 2. Total Income: Total Income is positively growing in case of FDI banks than Non-FDI public and private sectors, for both the groups under study. However, Total Income is not seen as having a statistically significant impact of content dummy for any of the banks under study. This rejects our hypothesis of FDI banks being more profitable (as shown by Total Income). 3. ROA: Return on Assets (ROA) is positively growing in case of FDI banks than Non-FDI public and private sectors for both the groups under study. However, ROA is seen to be having statistically significant impact in case of private sector FDI banks. In case of public sector FDI 20

22 banks it is the reverse. However, in case of all FDI banks, all public sector FDI banks, new public sector FDI banks, new private sector FDI banks, non-icici new private sector FDI banks we find that FDI banks have been more profitable (as shown by ROA). 4. Total Business: Total Business is positively growing in case of FDI banks than Non-FDI public and private sector banks for both the groups (old and new) under study. Total Income is not seen to have a statistically significant impact of content dummy for all sub groups of both private and public sector FDI banks. However, in case of All FDI banks, new private sector FDI banks, old private sector FDI banks, non-icici new private sector FDI banks our hypothesis of FDI banks being more profitable is accepted (as shown by Total Business) Suggestions and Recommendations Suggestions The study suggests that there are mixed results to conclude overall performance of Indian FDI banks. We can see productivity of banks improving significantly than that of profitability. Since there are not enough studies to come across in this area, we take inferences from studies done on reforms. They suggest that the entry of new private sector banks (which are outcome of FDI policy) have made industry more competitive improving the productivity of staff i.e. Business per Employee (BPE) and Profit per Employee (PPE). New private sector banks threw competition to existing old private sector banks and public sector banks in the industry, which made them to change their outlook to become more customers centric. More products came in to suit needs of different customers; foreign capital brought new banking technology such as ATM, Debit and Credit Cards etc., which also brought in more customers in the banking network making financial inclusion possible with good speed 21

23 for a country like India. All this has resulted in improved overall performance of FDI Banks. It is to be noted that there is hardly any study found with respect to performance of banks in the light of FDI. Recommendations Based on above conclusion we have the following recommendations. It is seen that productivity has improved due to competition of these new entrant banks with foreign capital. This has enormously improved customer orientation. While profitability does not show significant impact presently but it is strongly felt that given more time and more consolidation in the sector, this factor may also improve. So it is proposed that further liberalization of FDI for exiting private sector banks and public sector banks should be encouraged. Also few more bank licenses should be issued shortly with 74 per cent foreign capital (FDI). This would increase new entrants and enhance competition among the FDI banks thereby improving the overall performance of not only the FDI banks but also the non FDI banks. The study also recommends allowing FDI banks to open more branches with RBI regulations so that the coverage can increase and this spread benefits rural and other areas. Also this will increase the competition and bring about all the benefits of FDI banks in uncovered areas. There is no strong negation to the impact of FDI on performance of banking industry. However, is quite early to suggest any further policy recommendation as there are already proposed and waiting for implementation hence we recommend that same policy may be continued. BPE and PPE are good indicators of productivity and they are seen to be 22

24 increasing with FDI policy so on that ground we recommend and support more liberalization of FDI policy. As Net profits, Incomes, ROA and Business are crucial profitability variables for any bank and it is observed that ROA and Business is growing under FDI policy so we recommend and support liberalization of FDI policy. The study also recommend for further research in the area of Net profits and Incomes not growing much in policy regime. However, we still recommend FDI policy liberalization as this policy alone cannot be blamed for Net profits and Incomes not growing significantly. ********************** 23