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CHAPTER- 4
IMPACT OF FDI ON INDIAN BANKING INDUSTRY
4.1 Introduction
4.2 FDI in Indian Banks
4.2.1 FDI in Public Sector Banks
4.2.2 FDI in Private Sector Banks
4.3 Analysis of Impact of FDI
4.4 Impact of FDI on Productivity of Indian Banks
4.4.1 Profit per Employee
4.4.2 Business per Employee
4.5 Impact of FDI on Profitability of Indian Banks
4.5.1 Net Profits
4.5.2 Total Income
4.5.3 Return on Assets
4.5.4 Total Business
4.6 Main Findings
4.7 Conclusion
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4.1 Introduction
As per our objectives the study analyzes the impact of FDI on performance of Indian
banking industry with respect to productivity and profitability. This chapter deals with the testing
of the first hypothesis of the study, i.e. hypothesis: there is no significant impact of FDI on
productivity and profitability of the banks.
FDI was introduced in 1991 with liberalization of Indian economy and financial sector
reforms in Indian banking industry. Any policy takes some time period to show significant
results and impact. So it was almost about 1995 when we first see FDI in the Indian banks with
the new private sector banks getting formed such as ICICI, etc.
The bank wise FDI data that is available with RBI is from 2000-01 to 2011-12.So, the time
period for the study is also chosen from 2000-01 to 2011-12.The effect of FDI on performance of
banks is studied by panel data regression method using dummy variable as year 2005=1 as that
was the year of enhancement of FDI from 49 per cent to 74 percent in Banks in the post FDI
liberalization period.
4.2 FDI in Indian Banks
These following sections will analyze the presence and role of FDI in public and private
banks separately as they were subject to different conditions of FDI.
4.2.1 FDI in Public Sector Banks
The Table No 4.1 depicts the FDI inflows in the Indian public sector banks from 2000-01
to 2011-12 (Figures are percentages). As mentioned earlier, Indian public sector banks had FDI
cap of 10 per cent till 2005 and thereafter it was liberalized to 20 per cent in 2005. The table also
depicts the CAGR for Public Sector banks for the entire study period of 12 years including the
136
liberalized FDI regime of 7 years. Further it also shows the CAGR for old (i.e. State bank group
as mentioned earlier in Chapter 3) and the new public sector banks.
Sr. No.
Bank2000-2001
2001-2002
2002-2003
2003-2004
2004-2005
2005-2006
2006-2007
2007-2008
2008-2009
2009-2010
2010-2011
2011-2012
CAGR from 2001-12
CAGR from 2005-12
1 Allahabad Bank 0.00 0.00 0.01 0.04 0.80 13.10 19.50 18.60 10.30 13.10 0.00 12.61 28.49% -0.63%
2 Andhra Bank 3.39 0.00 0.00 0.00 0.00 17.50 19.20 19.40 14.70 13.10 14.83 13.64 -2.24% -4.07%
3 Bank of Baroda 0.00 5.89 7.15 18.00 19.00 20.90 20.90 20.40 14.20 17.10 17.08 14.01 8.20% -6.45%
4 Bank of India 3.69 4.55 4.93 8.60 14.00 16.30 16.20 15.80 14.90 15.60 14.72 15.12 13.68% -1.24%
5 Bank of Maharashtra 0.00 0.00 0.00 0.00 0.90 1.50 7.30 8.20 4.60 2.20 1.15 0.91 0.10% -7.99%
6 Canara Bank 0.00 0.00 1.67 11.83 15.40 18.50 17.20 14.00 11.30 11.70 15.01 14.56 21.76% -3.91%
7 Central Bank of India 0.00 0.00 0.00 0.00 0.00 0.00 0.00 5.50 1.90 5.20 3.42 2.63 -6.49% -11.57%
8 Corporation Bank 6.97 3.75 5.49 8.80 10.30 10.20 10.10 10.40 3.90 4.50 0.26 4.78 -3.37% -11.87%
9 Dena Bank 0.33 0.00 0.36 0.33 7.60 9.80 12.80 12.80 10.30 16.10 14.10 12.09 38.73% 3.56%
10 IDBI Bank Ltd. 0.13 0.00 0.00 0.00 0.80 0.70 0.70 0.00 0.00 8.00 4.50 0.44 11.72% -7.45%
11 Indian Bank 0.00 0.00 0.00 0.00 0.00 0.00 11.40 14.00 12.30 12.90 10.18 9.14 -1.99% -6.86%
12 Indian Overseas Bank 0.01 0.03 0.13 4.95 10.10 18.20 18.80 19.00 8.50 9.30 6.84 4.20 73.17% -21.68%
13 Oriental Bank of Commerce0.35 0.26 2.02 15.10 14.00 19.90 19.10 18.10 9.70 15.20 13.84 10.39 36.10% -10.27%
14 Punjab & Sind Bank 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 5.03 3.46 -3.34% -6.05%
15 Punjab National Bank 0.00 0.00 4.15 4.65 18.40 20.20 20.10 20.10 14.90 19.10 19.35 17.39 13.91% -2.47%
16 Syndicate Bank 0.03 0.00 0.15 0.96 2.90 12.50 12.00 12.40 3.50 4.10 4.40 4.04 56.16% -17.16%
17 UCO Bank 0.00 0.00 0.00 0.00 1.20 2.20 2.80 1.10 2.00 3.10 5.68 3.79 11.02% 9.49%
18 Union Bank of India 0.00 0.00 3.99 12.94 18.30 0.10 19.70 19.50 14.10 17.50 0.00 9.63 8.34% 114.09%
19 United Bank of India 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 1.20 0.10 2.18 5.58% 10.46%
20 Vijaya Bank 0.01 0.05 0.07 10.02 14.30 16.60 18.30 15.40 1.90 5.20 8.49 5.04 76.07% -18.02%
0.75 0.73 1.51 4.81 7.40 9.91 12.31 12.24 7.65 9.71 7.95 8.00 24.01% -3.51%
21 State Bank of Bikaner & Jaipur3.02 3.00 2.88 4.43 4.50 4.90 5.30 5.40 5.30 5.40 5.71 5.26 5.17% 1.19%
22 State Bank of Hyderabad0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00% 0.00%
23 Sate Bank of Indore 18.31 19.41 19.37 19.39 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 -100.00% 0.00%
24 State Bank of India 0.00 0.00 0.00 0.00 19.80 19.80 19.80 19.60 12.30 13.80 15.78 11.39 -4.90% -8.80%
25 State Bank of Mysore 0.00 0.00 0.00 0.21 0.10 0.00 0.00 0.00 0.00 0.00 0.06 0.07 -3.19% 7.00%
26 State Bank of Patiala 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00% 0.00%
27 State Bank of Travancore4.56 4.55 4.52 5.73 6.10 6.20 6.50 6.60 6.20 6.10 6.43 6.33 3.03% 0.35%
3.70 3.85 3.82 4.25 4.36 4.41 4.51 4.51 3.40 3.61 4.00 3.29 -1.06% -4.77%
1.48 1.51 2.09 4.67 6.64 8.54 10.36 10.30 6.59 8.19 6.96 6.83 14.92% -3.66%Pub Banks CAGR
Source: Data by RBI and calculations by scholar
New Public Sector Banks
Table No - 4.1 FDI in Indian Public Sector Banks 2000-01 to 2011-12
New Pub CAGRSB Group (Old Public Sector Banks)
Old Pub CAGR
FDI Figures are percentages
137
It is observed from the table that FDI CAGR for old public sector banks is falling
continuously for both, the entire study period and the FDI liberalization period as compared with
new public sector banks. However, new public sector banks have shown that for the entire study
period FDI CAGR is rising but in post FDI liberalization period it is falling, although not as
much as for old public sector banks.
4.2.2 FDI in Private Sector Banks
The Table No 4.2 depicts the FDI inflows in the Indian private sector banks from 2000-01
to 2011-12 (Figures are percentages). As mentioned earlier, Indian private sector banks had FDI
cap of 49% till 2005 and thereafter it was liberalized to 74% in 2005.The table also depicts the
CAGR for Private Sector banks for entire study period of 12 years and also for liberalized FDI
regime of 7 years. Further it reveals CAGR for old and new private sector banks.
138
Sr. No.
Bank2000-2001
2001-2002
2002-2003
2003-2004
2004-2005
2005-2006
2006-2007
2007-2008
2008-2009
2009-2010
2010-2011
2011-2012
CAGR from 2001-12
CAGR from 2005-12
1 Catholic Syrian 0.45 0.45 0.45 0.45 0.4 0.4 0.5 31.2 44.4 38 33.8 33.01 47.77% 108.66%
2 City Union Bank 0 0 0.07 0.11 0.2 0.8 7.9 20.4 21.8 21.1 25.15 31.09 74.05% 84.04%
3 Dhanalakshmi 2.85 2.78 2.19 1.99 0.9 1.8 1.8 27.1 28.4 30.6 38.76 38.92 26.83% 66.91%
4 Federal Bank Ltd. 1.31 2.8 0 7.85 7.9 45.8 57.2 58.1 49.2 43.5 44.17 50.75 39.44% 1.73%
5 ING Vysya Bank 3.26 34.12 58.52 73.43 68.7 70.8 73.3 71.2 73 67.3 71.09 70.71 32.28% -0.02%
6 Jammu & Kashmir 0.51 2.43 4.59 20.06 23 30.3 34.9 33.9 31.5 29.9 23.43 25.64 42.78% -2.74%
7 Karnataka Bank 0.02 0.08 0.17 0.28 0.4 0.4 0.2 0.3 0.3 0.4 0.41 18.47 86.03% 89.41%
8 Karur Vysya Bank 0.92 2 1.02 5.84 16.9 20.9 23 25.3 26.3 24.2 24.87 24.71 34.87% 2.83%
9 Lakshmi Vilas 0 0.17 0.08 0.15 0.5 0.7 2 2.9 2.9 3.4 7.98 12.92 48.25% 62.57%
10 Nainital Bank Ltd. 0 0 0.13 0.13 0 0 0 0 0 0 0 0 -100.00% 0.00%
11 Ratnakar Bank 0 0 0 0 0 0 0 27.3 27.3 27.3 38.97 36.54 2.69% 4.98%
12 SBI Commercial & 0 0 0 0 0 0 0 0 0 0 0 0 0.00% 0.00%
13 South Indian Bank 6.84 7.23 7.12 8.41 6 4.6 3.6 53.2 39.3 39.9 39.56 49.21 19.65% 48.44%
14 The Bank of 0.06 0.54 0.59 1.62 0 0 0 0 0 0 0 0 -100.00% 0.00%
15 Tamilnad 0.41 0.41 0.41 0.41 0.4 0.4 0.4 16.9 16.9 16.6 16.64 16.89 40.22% 86.61%
1.11 3.53 5.02 8.05 8.35 11.79 13.65 24.52 24.09 22.81 24.32 27.26 33.78% 14.99%
16 Axis Bank Ltd. 0 24.11 28.21 27.1 45.7 42.2 41.9 39.1 32.9 42 47.07 41.73 5.11% -0.19%
17 Development Credit Bank Ltd
37.5 37.56 49 49 68.9 68.7 64.1 65.5 40.9 33.6 39.43 38.11 0.15% -9.35%
18 HDFC Bank Ltd. 33.52 44 43.22 46.17 53 53.6 51.5 49.3 46.8 45.5 47.18 48.82 3.48% -1.54%
19 ICICI Bank Ltd. 35.56 45.44 64.7 72.79 71.5 73.9 72 69.8 63.8 66.3 66.47 63.16 5.36% -2.58%
20 IndusInd Bank Ltd. 33.16 33.28 1.43 0.69 45.6 51.1 59.3 62 66 68.5 70.62 70.02 7.03% 5.39%
21 Kotak Mahindra Bank Ltd.
0 0 9.59 17.58 23.4 22.3 25.1 27.6 29.7 30.8 31.08 33.9 12.16% 7.23%
22 Yes Bank Ltd 0 0 0 0 45 50 50.8 55.9 50.5 58 51.14 51.89 1.30% 0.62%
19.96 26.34 28.02 30.48 50.44 51.69 52.1 52.74 47.23 49.24 50.43 49.66 8.64% -0.67%
6.85 10.48 12.02 14.87 21.16 23.93 25.35 33.11 31.13 30.86 32.27 34.08 15.70% 6.07%
Table No - 4.2 FDI in Indian Private Sector Banks 2000-01 to 2011-12
Source: Data by RBI and calculations by scholar
New Private Sector Banks
Old Private Sector Banks
Old Pvt CAGR
New Pvt CAGR Pvt Banks CAGR
FDI Figures are percentages
139
It is observed that new private sector banks, such as HDFC, ICICI, Axis, IndusInd and
DCB, came into existence with FDI as they are the outcome of reforms and they are found to
have more FDI as compared to the old private sector banks and they have crossed 50% of total
holdings.
4.3 Analysis of Impact of FDI
Though FDI in Indian banking can be traced with the entry of new private sector banks in
1995 the official data on FDI is not available before year 2000. The FDI policy liberalization
took place in the year 2005 raising limits to up to 74 per cent from 49 per cent. The present
study uses time dummy to gauge the performance of Indian banks in pre and post FDI
liberalization era. We are using time dummy for year 2005>1, which is, post FDI liberalization
time period and 2005<0 for pre FDI liberalization era.
The total number of banks under study is 49 constituting all public and private sector
banks which are published in the list of Shareholding Patterns published by RBI’s Trend and
Progress of Banking in India, which is the only official source to know the residents and non
residents investments in Indian banks and is used to find the FDI content of banks under study
(list enclosed in Appendix I).The Panel data multiple regression models used for the analysis is
discussed in the Chapter 3 – Research Methodology and Tools of Analysis.
The impact of FDI on Indian banks is measured on the performance of 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 Net Profits, Total Income, Return on Assets (ROA), and Total Business.
The following Table - 4.3 depicts the performance of vital banking variables for the
entire FDI regime i.e. from 2001-2012 and liberalized FDI regime i.e. 2005-2012.
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Public sector banks
Public Banks Year FDI Business NetProfit Income Expen PPE BPE Invest Staff ROA Npub avg 2005-12 9.15 180825.26 1057.89 10129.26 8411.52 4.34 9473.87 34215.07 24131 5.45Npub avg 2001-12 6.77 137735.12 818.90 8044.41 6791.94 3.46 6631.76 28180.84 24255 3.91
Npub Total 2001-12 NA 31403607.07 186709.12 1834125.79 1548562.54 NA NA 6425231.05 5530147 NAOpub avg 2005-12 4.01 226792.13 1396.92 13745.86 11306.79 3.43 610.02 44689.57 38135 6.82Opub Avg 2001-12 3.82 176911.27 1114.99 11313.63 9503.83 2.85 466.05 38779.91 38627 4.90
OpubTotal 2001-12 NA 14860546.47 93659.47 950345.07 798321.38 NA NA 3257512.37 3244675 NApub avg 2005-12 7.77 193200.95 1149.17 11102.96 9191.02 4.10 7087.45 37035.12 27901 5.82pub avg 2001-12 5.98 148282.54 898.62 8924.59 7522.06 3.30 4971.76 31034.43 28124 4.18
pub Total 2001-12 NA 46264153.54 280368.59 2784470.86 2346883.92 NA NA 9682743.42 8774822 NA
Private Banks Year FDI Business NetProfit Income Expen PPE BPE Invest Staff ROA Opvt avg 2005-12 19.93 21762.93 140.32 1329.14 1120.04 3.75 1830.96 4557.94 3452 0.92Opvt avg 2001-12 14.63 16988.82 117.97 1087.00 925.74 3.53 1468.87 3759.90 3268 1.02
Opvt Total 2001-12 NA 3057987.79 21235.07 195659.22 166633.82 NA NA 676781.87 588244 NANPvt Avg 2005-12 50.43 132851.62 1286.36 9689.29 7711.57 6.38 846.44 32583.62 14562 0.95NPvt Avg 2001-12 45.04 102216.10 988.94 7515.75 6036.66 7.05 881.28 25696.63 11230 1.04NPvt Total 2001-12 NA 8075071.86 78126.02 593744.49 476896.49 NA NA 1978640.63 887194 NA
pvt avg 2005-12 29.58 57109.33 504.97 3989.19 3217.35 4.59 1517.70 13255.56 6987 0.93pvt avg 2001-12 23.94 42984.79 383.63 3047.89 2484.67 4.60 1289.64 10332.38 5697 1.02
Pvt Total 2001-12 NA 11133059.65 99361.09 789403.71 643530.31 NA NA 2655422.50 1475438 NA
Public Banks Year FDI Business NetProfit Income Expen PPE BPE Invest Staff ROA pub avg 2005-12 7.77 193200.95 1149.17 11102.96 9191.02 4.10 7087.45 37035.12 27901 5.82pub avg 2001-12 5.98 148282.54 898.62 8924.59 7522.06 3.30 4971.76 31034.43 28124 4.18pub total 2001-12 NA 46264153.54 280368.59 2784470.86 2346883.92 NA NA 9682743.42 8774822 NA
Private Banks Year FDI Business NetProfit Income Expen PPE BPE Invest Staff ROA pvt avg 2005-12 29.58 57109.33 504.97 3989.19 3217.35 4.59 1517.70 13255.56 6987 0.93pvt avg 2001-12 23.94 42984.79 383.63 3047.89 2484.67 4.60 1289.64 10332.38 5697 1.02
pvt total 2001-12 NA 11133059.65 99361.09 789403.71 643530.31 NA NA 2655422.50 1475438 NAAll Banks Year FDI Business NetProfit Income Expen PPE BPE Invest Staff ROA
All Bank avg 2005-12 17.67 129835.33 847.74 7783.82 6404.73 4.36 4502.29 26009.61 18179 3.58All Banks Avg 2001-12 14.11 100520.51 665.03 6258.97 5237.15 3.89 3301.59 21683.95 17951 2.75All Bank Total 2001-12 NA 57397213.19 379729.68 3573874.57 2990414.23 NA NA 12338165.92 10250259 NA
Table No - 4.3 Indian Banks Data
Private Sector Bank
Public Sector Banks
Source: RBI and IBA Data and Scholar's calculations on MS Excel
Indian Public and Private Sector Bank
Values are in INR Crores. PPE,BPE are in Lacs and Staff is absolute figure & FDI, ROA figure are percentages
141
Average FDI in Old public sector banks is found be around 3.82 per cent and in New
public sector banks is at 6.77 per cent. Average Business for old public sector banks is at
Rs.176911.27 Cr. as against Rs.137735.12 Cr. for New Public Sector banks and Average Net
Profits of old public sector banks is at Rs.1114.99 Cr. and Rs.818.90 Cr. for new public sector
banks. Average Income of old public sector banks is at Rs.11313.63 Cr. and for new public
sector bank it is at Rs.8044.41 cr. and Average Expenditure is at Rs.9503.83 Cr. for old public
sector while it is Rs.6791.94 Cr. for new public sector banks. Average Investment is at
Rs.38779.91 Cr. for old public sector banks and Rs.28180.84 Cr. for new public sector banks.
ROA is at Rs.4.90 Cr. for old public sector banks and Rs.3.91Cr. for new public sector banks.
Total number of staff is 32,44,675 for old public sector banks and for new public sector banks it
is at 55,30,147 for all 12 years of our study.
Private sector banks
Private sector banks
Average FDI in Old private sector banks is found be around 14.63 per cent and for New
Private sector bank it is at 45 per cent. Average Business for old private sector banks is at
16088.82 cr. as against Rs.45837 crore for New private Sector banks. Average Net Profits of old
a private sector bank is at Rs.11797 Cr. and Rs.98894 Cr. for new private sector banks and
Average Income of old private sector banks is at Rs.1087 Cr. and for new private sector bank it
is at Rs.7515.75 and Average Expenditure is at Rs.925.74 Cr. for old private sector and
Rs.6036.66 Cr. for new private sector banks and Average Investment is at Rs.3759.90 Cr. for
old private sector banks and Rs.25696.63 for new private sector banks. ROA is at 1.02 for old
private sector banks and 1.04 for new private sector banks. Total number of staff is 588243 for
old private sector banks and for new private sector banks it is at 887194 for all 12 years of our
142
study. It must be noted that the staff number of 887194 can be attributed to FDI policy as this
employment generation is due to FDI capital by which these new private sector banks have come
into existence.
All Banks
The average FDI is 17.67 per cent for 2005-12 as against 14.11 for 2001-12. The average
figures of Total Business, Net Profits, Income, Investments, Expenditure, PPE, BPE, ROA and
Staff is more in post FDI liberalization regime i.e. 2005-12 than 2001-12 i.e. entire FDI policy
regime. This shows that FDI liberalization policy has shown rise in the performance of crucial
variables of banking sector. Hence, now the task to see that if this rise is significant or not, is
studied in following sections.
4.4 Impact of FDI on Productivity of Indian Banks
The productivity of Indian banks as already mentioned is analyzed with two variables -
profit per employee and business per employee. The data on these variables can be found in
Annexure-II.
4.4.1 Profits per Employee
Table No 4.4 depicts the panel regression results for Profit per Employee (PPE) for all 49
banks.
143
FDI is positive; however it is not showing a statistically significant impact on the profit
per employee of Indian banks.
Expenditure is showing a statistically significant impact on the profit per employee of
Indian banks.
The impact of Staff is negative and is showing a statistically significant impact on the
profit per employee of Indian banks.
The Profit per Employee is growing and there is a statistically significant impact in the
dummy period i.e. liberalization of FDI has a positive impact on the profit per employee
of banks.
4.4.2 Business per Employee
The Table 4.5 depicts panel regression results for Business per Employee for all banks.
Coefficients Estimate Std.Error t-value Pr(>|t|) Singnificance
FI 1.51E-03 1.56E-02 0.0969 0.92285
Expen 2.57E-04 3.52E-05 7.2954 1.12E-12 ***
Staff -1.35E-04 3.13E-05 -4.3098 1.96E-05 ***
dummy1 7.48E-01 3.42E-01 2.1883 0.02909 *
Table No 4.4 - All Banks Profit Per Employee
Model 4.1 : PPE ~ FI + Expen + Staff + dummy1
R-Squared-0.13877 R-Squared-0.12613
F-statistic: 20.906 on 4 and 519 DF, p-value: 5.3976e-16
Significance Codes: 0 ‘***’ 0.001 ‘**’ 0.01 ‘*’ 0.05 ‘.’ 0.1 ‘ ’ 1
All Banks = All Public and Private Sector : Old and New Banks
Source: Scholar's Calculations on R
144
FDI is negative and showing no statistically significant impact on the Business per
employee of Indian banks.
Expenditure is positive and is showing statistically significant impact on the Business per
employee of Indian banks.
The Staff is also having a positive and statistically significant impact on the Business per
employee of Indian banks.
The Business per Employee is growing positively and there is a statistically significant
impact in dummy period. The liberalization of FDI policy has shown a positive
significant impact on the business per employee of banks.
4.5 Impact of FDI on Profitability of Indian Banks
The profitability of Indian banks is studied under Net Profits, Total Income, ROA and
Total Business.
4.5.1 Net Profits
The Table No 4.6 depicts the panel regression results for Net Profits for all 49 banks.
Coefficients Estimate Std.Error t-value Pr(>|t|) Singnificance
FI -35.556 86.40298 -0.4115 0.68087
Expen 0.36151 0.19523 1.8517 0.06464 ***
Staff 0.18238 0.17396 1.0484 0.29492 ***
dummy1 2453.68959 1897.62375 1.293 0.19658 *
F-statistic: 3.35252 on 4 and 519 DF, p-value: 0.01005
Table No 4.5 -All Banks Business Per Employee
Model 4.2 : BPE ~ FI + Expen + Staff + dummy1
R-Squared-0.025188 R-Squared-0.022894
Significance Codes: 0 ‘***’ 0.001 ‘**’ 0.01 ‘*’ 0.05 ‘.’ 0.1 ‘ ’ 1 All Banks = All Public and Private Sector : Old and New Banks
Source: Scholar's Calculations on R
145
The FDI is showing a statistically significant impact on the Net Profits of all Indian banks
under study, in the period.
The Expenditure is showing a statistically significant impact on the Net Profits of all
Indian banks under study during the period of review.
The Staff is not showing any statistically significant impact on the Net Profits of the
Indian banks in the study period.
The Net Profits are falling in the dummy period; however there is no statistically
significant impact of dummy period i.e. the liberalization of FDI on the Net Profits of
banks.
4.5.2 Total Income
The Table No 4.7 depicts the panel regression results for Total Income for all 49 banks.
Coefficients Estimate Std.Error t-value Pr(>|t|) Singnificance
FI 3.4561977 1.6135886 2.1419 0.03266 *
Expen 0.1543337 0.003646 42.3298 < 2e-16 ***
Staff 0.0018256 0.0032487 0.562 0.57438
dummy1 -65.0297332 35.4384095 -1.835 0.06708 .
Table No - 4.6 All Banks Net Profits Results
Model 4.3 : NetProfit~FI+Expen+Staff+dummy1
R-Squared-0.82919 R-Squared-0.75368F-statistic: 629.858 on 4 and 519 DF, p-value: < 2.22e-16
Significance Codes: 0 ‘***’ 0.001 ‘**’ 0.01 ‘*’ 0.05 ‘.’ 0.1 ‘ ’ 1
All Banks = All Public and Private Sector : Old and New Banks
Source: Scholar's Calculations on R
146
The FDI is showing a negative impact which is not statistically significant on the Total
Income of all Indian banks under study in the period.
The Expenditure is positive and showing a statistically significant impact on the Total
Income of all Indian banks under study in the period.
The Staff is positive but not showing any statistically significant impact on the Total
Income of all Indian banks under study in the period.
The Total Income is falling and there is a significant impact of the dummy period, i.e. the
liberalization of FDI, on the Total Income of banks.
4.5.3 Return on Assets
The Table No 4.8 depicts the panel regression results for ROA for all 49 banks.
Coefficients Estimate Std.Error t-value Pr(>|t|) Singnificance
FI -1.34E+00 4.74E+00 -0.2832 0.7771
Expen 1.37E+00 1.07E-02 128.4286 < 2e-16 ***
Staff 8.17E-03 9.54E-03 0.856 0.392381
dummy1 -2.88E+02 1.04E+02 -2.7723 0.005766 **
Table No - 4.7 All Banks Total Income Results
Model 4.4 : Income~FI+Expen+Staff+dummy1
R-Squared-0.97802 R-Squared-0.88895
F-statistic: 5772.74 on 4 and 519 DF, p-value: < 2.22e-16
Significance Codes: 0 ‘***’ 0.001 ‘**’ 0.01 ‘*’ 0.05 ‘.’ 0.1 ‘ ’ 1
All Banks = All Public and Private Sector : Old and New Banks
Source: Scholar's Calculations on R
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The FDI is positive; however it is not showing any statistically significant impact on the
ROA of all Indian banks under study in the period.
The Expenditure is negative and showing a statistically significant impact on the ROA of
all Indian banks under study in the period.
The Staff is positive and showing no statistically significant impact on the ROA of all
Indian banks under study in the period.
The ROA is growing and there is a statistically significant impact of dummy period, i.e.
the liberalization of FDI, on the ROA of banks.
4.5.4 Total Business
The Table No 4.9 depicts the panel regression results for Total Business for all 49 banks.
Coefficients Estimate Std.Error t-value Pr(>|t|) SingnificanceFI 2.30E-02 2.44E-02 0.9424 0.346444
Expen -3.44E-04 5.51E-05 -6.2393 9.13E-10 ***
Staff 8.14E-05 4.91E-05 1.6573 0.098071 .
dummy1 1.72E+00 5.36E-01 3.2167 0.001378 **
Source: Scholar's Calculations on R
Model - 4.5 ROA~FI+Expen+Staff+dummy1
R-Squared-0.080384 R-Squared-0.073064F-statistic: 11.3415 on 4 and 519 DF, p-value:7.8613e-09
Significance Codes: 0 ‘***’ 0.001 ‘**’ 0.01 ‘*’ 0.05 ‘.’ 0.1 ‘ ’ 1 All Banks = All Public and Private Sector : Old and New Banks
Table No 4.8 -All Banks ROA Results
Coefficients Estimate Std.Error t-value Pr(>|t|) SingnificanceFI -89.30365 141.0354 -0.6332 0.52688
Expen 24.38011 0.31868 76.5043 < 2e-16 ***Staff -2.57983 0.28395 -9.0856 < 2e-16 ***
dummy1 5576.56973 3097.48734 1.8004 0.07239 .
Source: Scholar's Calculations on R
Significance Codes: 0 ‘***’ 0.001 ‘**’ 0.01 ‘*’ 0.05 ‘.’ 0.1 ‘ ’ 1 All Banks = All Public and Private Sector : Old and New Banks
Table No - 4.9 All Banks Total Business Results
Model 4.6 : Business~FI+Expen+Staff+dummy1
R-Squared-0.93711 R-Squared-0.85177
F-statistic: 1933.39 on 4 and 519 DF, p-value:< 2.22e-16
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The FDI is negative and not showing any statistically significant impact on the Total
Business of all Indian banks under study in the period.
The Expenditure is positive and is showing a statistically significant impact on the Total
Business of all Indian banks under study in the period.
The Staff is negative and showing a statistically significant impact on the Total Business
of all Indian banks under study in the period.
The Total Business is growing but there is no statistically significant impact of dummy
period, i.e. the liberalization of FDI, on the Total Business of banks.
4.6 Main Findings
This chapter analyzed the impact of FDI on Indian banking industry for complying with
our objective of studying the impact of FDI on the performance of productivity and profitability
of Indian banking industry.
Productivity Performance:
Table 4.10 shows the results for the productivity performance of Indian banks.
Sr. No. Dependent Independent Coefficient Pr(>|t|) Adjst R2 Singnificant
FI 1.51E-03 0.92285 No
Expen 2.57E-04 1.121e-12 *** Yes
Staff -1.35E-04 1.955e-05 *** Yes
Dummy 7.48E-01 0.02909 * Yes
FI -35.556 0.68087 No
Expen 0.36151 0.06464 *** Yes
Staff 0.18238 0.29492 *** Yes
Dummy 2453.68959 0.19658 * Yes
Source: Scholar's Calculations on software R
Table No 4.10 - All Banks Productivity Time Dummy Results
1 PPE 0.13
2 BPE 0.02
Signif. codes: 0 ‘***’ 0.001 ‘**’ 0.01 ‘*’ 0.05 ‘.’ 0.1 ‘ ’ 1 , Yes*= Significant at 0.1 and No= Not significant
All Banks = All Public and Private Sector : Old and New Banks
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1. Profit per Employee:
Based on our time dummy results we can conclude that 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. As there is a statistical significant impact of
FDI liberalization on the Profit per Employee of Indian banks in the study period and the
estimate is positive, the hypothesis may not be accepted.
In the case of Profit per Employee, a positive coefficient in the dummy period shows that
the magic word ‘profitability’ (which is used for the first time in the Indian banking) introduced
in Narasimham Committee report is showing significant results and is the outcome of
competition due to several private banks which in turn, are an outcome of FDI).
2. Business per Employee:
Based on our time dummy results we can conclude that hypothesis: There is no
significant impact of FDI liberalization on the Business per Employee (BPE) performance of
Indian banks; may not be accepted. As 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, the hypothesis may not be accepted.
Based on our time dummy results we conclude that hypothesis may be rejected on the
productivity of Indian banks in the study period. We have taken Profit per Employee (PPE) and
Business per Employee (BPE) as proxy for Productivity performance of banks under study. Our
study shows statistically significant impact on Profit per Employee and Business per Employee
which are the Productivity performance parameters. This is mainly because Total Business
consists of sum of Total Deposits and Total Advances by the bank and is divided across by the
number of employee. Thus considering PPE and BPE as significantly important indicators of the
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productivity, we can confidently conclude that Productivity of Indian banks has increased to
some extent in the FDI Liberalization period.
Profitability Performance:
Table 4.11 shows the profitability performance of Indian banks in the post FDI
liberalization study period.
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. As there is no statistically significant impact of FDI on the Net Profits of Indian banks
Sr. No. Dependent Independent Coefficient Pr(>|t|) Adjst R2 Singnificant
FI 3.4561977 0.03266 * Yes
Expen 0.1543337 < 2e-16 *** Yes
Staff 0.0018256 0.57438 No
Dummy -65.0297332 0.06708 . Yes*
FI -1.34E+00 0.7771 No
Expen 1.37E+00 < 2.2e-16 *** Yes
Staff 8.17E-03 0.392381 NoDummy -2.88E+02 0.005766 ** Yes
FI 2.30E-02 0.346444 No
Expen -3.44E-04 9.132e-10 *** Yes
Staff 8.14E-05 0.098071 . Yes*
Dummy 1.72E+00 0.001378 ** Yes
FI -89.30365 0.52688 No
Expen 24.38011 < 2e-16 *** YesStaff -2.57983 < 2e-16 *** Yes
Dummy 5576.56973 0.07239 . Yes*
Table No 4.11 - All Banks Profitability Time Dummy Results
Source: Scholar's Calculations on software R
1 NetProfit 0.75
2 Income 0.89
3 ROA 0.07
4 Business 0.85
Signif. codes: 0 ‘***’ 0.001 ‘**’ 0.01 ‘*’ 0.05 ‘.’ 0.1 ‘ ’ 1 , Yes*= Significant at 0.1 and No= Not significant
All Banks = All Public and Private Sector : Old and New Banks
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in the study period and the coefficient is negative for dummy period, 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. As there is a statistical significant impact of FDI on the Total Incomes of Indian
banks in the study period and the coefficient being negative implies a fall in Income for dummy
period, the hypothesis may be accepted.
3. ROA:
Based on our time dummy results we can conclude that hypothesis: There is no
significant 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 not be accepted.
4. Total Business:
Based on our time dummy results we can conclude that hypothesis: There is no
significant impact of FDI liberalization on the Total Business performance of Indian banks may
not be accepted; at 10 per cent level of significance. There is no statistically significant impact of
FDI on the Total Business of Indian banks in the study period though the coefficient is positive,
however; at 10 per cent level of significance; the hypothesis may not be accepted.
Based on our time dummy results we cannot fully conclude whether hypothesis may be
accepted or rejected on the profitability of Indian banks in the study period. We have taken Net
Profits, Total Income, ROA and Total Business as proxy for Profitability performance of banks
under study. Our results show that FDI has a statistically significant impact on the profitability
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performance of Indian banks only in the case of ROA and Total Business. However, the dummy
period does not show statistically significant impact on the Net Profitability or Total Income of
banks. This implies that, FDI liberalization dummy period or the FDI liberalization policy per se
is not showing any great impact on either the Net Profits or the Total Income of banks. But we
do see statistically significant impact on Total Business and ROA in the study period, which are
also important profitability indicators for banks. So the results show a mixed impact. This is in
line with the results of other studies undertaken by Jeromi (2002), RBI (2002), Athrege and
Kapoor (2001) Sharma (2000) on FDI, which show mixed results.
4.7 Conclusion
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 fully said about the
profitability measures. The study shows significant positive impact on Return on Assets (ROA)
and Total Business (at 10 per cent level of significance) of bank but negative significant impact
on the Total Net Profit and Income of banks. So it can be said that the dummy period (FDI
liberalization policy period) did not have any significant impact on Net Profits or Total Income
of Banks. This means that except ROA, other profitability parameters are not showing
statistically significant impact of the liberalized FDI policy. Overall observation shows that
productivity has gone up in the FDI liberalization period and profitability of Indian banks have
grown in the 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.
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Hence it is important to see the impact of FDI and FDI liberalization policy on different
group of banks under study, taking better cross section views in order to see if there can be some
conclusive results from our study. Further cross section analysis is explained in the following
chapter with Time and Content dummy analysis in different sub-groups of banks for better cross
section results. The need of time and content dummy in the analysis of the present study is
explained with required details in Chapter 3 – Research Methodology and Tools of Analysis. In
the following Chapter 5 – Productivity of Indian FDI and Non-FDI Banks, we conduct a
Productivity analysis with Time and Content dummy analysis for the different groups of banks
under study.
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