An Empirical Investigation of Foreign Banks in India in Post Reform Period: Trends, Determinants, and Impact

Abstract

Liberalization of economies and establishment of World Trade Organisation (WTO) brought financial reforms that allowed huge Foreign Direct Investment (FDI) and licensing to foreign banks in most of the developing countries including India. With the increasing number and asset share of foreign banks in the host countries raised the concerns to economies to determine the concrete reasons for foreign banks entry and their impact on the host economies. The present study empirically analysis these concerns over the Indian economy. Following Dunning’s eclectic paradigm, the present study uses country-wise panel data to answer the locational advantages of India. Indian bank-wise panel data is used to analyze the impact of foreign banks’ entry on the performance of Indian banks. Further, the study uses firm-wise panel data and bank-group wise panel data to examine the impact on credit access and credit allocation in India. Finally, Generalised method of moments estimator is used to analyze from 1996 to 2015. The study finds that locational advantages of India attract foreign banks such as the presence of their home country firms and huge profit opportunity. Foreign banks’ entry enhances competition and efficiency of Indian banks and reduces profitability. Foreign banks reduce credit access to firms and credit allocation to the agriculture sector in India. This is due to asymmetric information and lending through hard information.