CHAPTER - 7 CONCLUSION AND SUGGESTIONS

CHAPTER - 7
CONCLUSION AND SUGGESTIONS
7.1
Introduction
7.1.1 Objectives
7.1.2 Hypotheses
7.2
Main Findings and Conclusion
7.2.1 First Hypothesis.
7.2.2 Second Hypothesis
7.2.3 Third Hypothesis
7.3
Suggestions and Recommendations
7.4
Further Scope for Research
7.5
Conclusion
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7.1
Introduction
In this chapter an attempt is made to present briefly the main analysis of this study and
suggest some policy measures.
The present analysis studied the impact of FDI Policy on Indian Banking Sector. The
impact is measured by two ways. First, it gauges the impact on the banking sector as a whole by
studying public sector and private sectors banks together and then by studying public sector and
private sector banks separately in the light of FDI. Second, the study also further categorizes the
banks as Old and New, both in the private and public sector, and tries to gauge the impact of FDI
liberalization. The impact is measured through two main parameters i.e., productivity and
profitability of FDI and Non-FDI banks, both in the public and private sectors.
7.1.1
Objectives
The main Objectives of the study are as follows
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.
7.1.2
Hypotheses
Following propositions were made
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.
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The study is organized in seven chapters. The first chapter deals with introduction and
objectives of the study, Chapter two gives literature surveyed. Chapter three, deals with research
methodology and tools of analysis. Chapter four, studies the impact of FDI on the Indian
Banking system as a whole. Chapter five analyses the impact of FDI on the productivity of the
banks and Chapter six analyze the impact of FDI on the profitability of the banks under study.
The present chapter seven gives conclusion and suggestion for the entire study.
7.2
Main Findings and Conclusion
7.2.1
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:
Based on our time dummy results we can conclude that our hypothesis ‘There is no a
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, 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
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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. As 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.
However, as there is no statistical significant impact of FDI on the Net Profits of Indian banks in
the 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
significance impact of FDI liberalization on the Total Income performance of Indian banks may
be accepted. However, as there is a statistical significant impact of FDI on the Total Incomes of
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Indian banks in the study period but the coefficient being negative 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 not be accepted.
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). As 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, the hypothesis may not be accepted.

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.

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 Incomes 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
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indicators/parameters, while there is no impact /negative impact in other indicators. So
Profitability shows mixed results in the post FDI Liberalization period.
7.2.2
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. 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.
Therefore; Hypothesis-Indian FDI banks have statistically significant productivity
performance as compared to the Indian 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
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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 privates sector FDI banks and for SBI too. However though PPE is falling it is
showing statistically significant impact of FDI component in case of public sector, New public
sector banks and All public sector banks.
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 Public
sector FDI banks.
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,
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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; Hypothesis-Indian FDI banks have statistically significant productivity
performance than the Indian Non-FDI in terms of PPE may be accepted for Public sector FDI
banks and for All Public sector FDI Banks together and 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, PPE is not showing statistically significant
impact of time dummy on PPE of both public and private FDI.

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.

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.
7.2.3
Third Hypothesis
Thirdly, performance on profitability is analyzed. Here it is seen with mixed results with
FDI Policy liberalization Time dummy.
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
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:
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)
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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. But in case of public sector
FDI 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
this accepts our hypothesis of FDI banks 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 for both the groups (old and new) under study. However, 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
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private sector FDI banks, non-ICICI new private sector FDI banks this accepts our hypothesis of
FDI banks more profitable (as shown by Total Business).
7.3
Suggestions and Recommendations

Suggestions
The study suggests that there are mixed results to conclude overall performance of Indian
FDI banks. However, we can see productivity of banks improving significantly than that of
profitability. Since there are not enough studies to come across in this area of study, 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
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.
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
It is seen that productivity has improved due to competition of these new entrant banks
with foreign capital. Profitability does not show significant impact presently. However, it
is proposed to be further liberalized to 100 per cent FDI for exiting private sector banks.
For public sector banks the FDI limit is proposed to be increased to 49 per cent.

Also few more bank licenses should be issued shortly with 74 per cent foreign capital
(FDI). This would increase competition among the FDI banks and improve 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 the 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.

Productivity: BPE and PPE are good indicators of productivity and they are seen to be
increasing with FDI policy so on that ground we recommend and support more
liberalization of FDI policy.

Profitability: Net profits, Incomes, ROA and Business are crucial profitability variables
for any bank. 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
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as this policy alone cannot be blamed for Net profits and Incomes not growing
significantly.
7.4
Further Scope for Research
There is a vast scope for further research in this area as in survey of literature we come
across very scanty reviews or no reviews in the area of FDI in Indian Banks and performance
evaluation of banks in the light of FDI.
Following areas are identified
Impact of FDI on performance of Banks using Data Envelopment Analysis (DEA).

Further analytical studies on analyzing the reason of the above researched results.

Performance of Indian banks using different variables to see if there is any change in the
outlook.

Impact of FDI on the variables such as ROE etc. which are more capital market related.

Impact of FDI on the capital structure and capital decisions of banks.

Case studies of banks with more and less FDI to see better micro picture.

Cross country comparisons in less developed countries (LDCs) as compared with
developed countries are almost absent when it comes to measure performance of banks
with and without FDI. This area is under researched.

FDI regime in other financial sectors such as Insurance and Financial services can also be
studied to see impact of FDI on other financial services sectors in India.

FDI in retail is another area of future research areas.
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7.5
Conclusion
This studies pertaining to foreign investment in Indian Banking sector suggests the
importance of foreign investment in Indian banks and tries to gauge the impact thereof.
It can be concluded that, indeed, FDI policy and FDI content have shown significant
impact on the performance variables of Indian banking industry. As FDI has positive impact on
managerial effectiveness, capital, banking products, productivity, bank coverage and expansion,
new technology and technical knowhow and latest banking trends, etc, FDI may be encouraged
in this sector. This would lead to the overall improvement of the performance of this sector and
bring it to international standards.
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