Guidelines for FDI in Banking

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This article provides a preview on the Guidelines for FDI in Banking. Limits to FDI in the banking sector have been increased to 74%. FDI in the banking sector is allowed under the automatic route in India.

Guidelines for FDI in Banking at a Glance-

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. The Reserve Bank of India governs the investment matters in the banking sector.

According to the guidelines for FDI in the banking sector, Indian operations by foreign banks can be executed by any one of the following three channels -

  • Branches in India
  • Wholly owned subsidiaries.
  • Other subsidiaries.
In case of wholly owned subsidiaries (WOS), the guidelines for FDI in the banking sector specified that the WOS must involve a capital of minimum ` 300 crores and should ensure proper corporate governance.

Problems Faced by the Indian Banking Sector-

FDI in Indian banking sector resolves the following problems often faced by various banks in the country:
  • Inefficiency in management
  • Instability in financial matters
  • Innovativeness in financial products or schemes
  • Technical developments happening across various foreign markets
  • Non-performing areas or properties
  • Poor marketing strategies
  • Changing financial market conditions

Benefits of FDI in Banking Sector in India-

  • Transfer of technology from overseas countries to the domestic market
  • Ensure better and improved risk management in the banking sector
  • Assures better capitalization
  • Offers financial stability in the banking sector in India

Last Updated on 05/08/2011