GBF Cia 3 A

FDI in Banking, financial services and
insurance Sector & Its Impact on Economic

Growth
By:
Pratham Agarwal – 19212439
Rhea John – 19212444
Vishesh Gupta – 19212476
Yash Lakhwani – 19212478
Raghav Agarwal – 19212481
Aditi Agrawal - 19212485
Introduction
• FDI has shown an increasing trend in India. It was around $56 billion, $60 billion, $61 billion, $62
billion and $74 billion from 2015-2016 to 2019-2020, respectively.
• During 2020-2021, total FDI inflow was around $36 billion, which is the highest ever for the first five
months of the financial year and 13 percent more as compared to the previous one.
• Currently, 20 percent of FDI is allowed in PSU banks under the government approval route. Private
banks have a higher FDI cap at 74 percent, provided there is no change of control and management.
RBI regulations do not permit a single entity to invest more than 10 percent in a bank.
Guidelines For Investment In Banking
Sector
• The limits of FDI in the banking sector has been increased to 74% of the paid up capital of bank.
• FDI in the banking sector is allowed under the automatic route in India.
• FDI and portfolio investment in the public or nationalised banks in India are subject to limit of 20% in totality.
• This ceiling is also applicable to the investors in SBI and its associated banks.
• FDI limits in 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 RBI of India governs the investment matters in the banking sector.
FDI is permitted through 4 distinct Channels
FDI IN in the Banking Sector-
BANKING In Public Sector Banks: FDI is permitted with

a cap of 20% of equity.
SECTOR In Private Sector Banks: FDI is permitted
in INDIA
with a cap of 74% of equity.
Branches of Foreign Banks
Wholly Owned Subsidiaries of Foreign

Banks
• In 2018, the Modi administration held talks to increase the foreign investment limit in private sector banks to 100
per cent from 74 per cent and in state-run banks to 49 per cent from 20 per cent. Many brokerage houses such as
Morgan Stanley, Edelweiss and ICICI Direct appreciated the government’s decision. They said that large, state-
owned banks would benefit the most if the government implements its plan.” (Source — India Legal (FDI in
banking can revitalise sector)
Benefits of FDI in BFSI Sector
Transfer of technology from overseas countries to the domestic markets
Ensure better and improved risk management in the banking sector
Assure better capitalization
Offers financial stability in the banking sector in India
FDI promotes better customer services. Competition in the banking sector aids the borrowers the
most as they can select suitable schemes among the variety offered to them.
The emphasis on customer satisfaction is a paradigm change in the formation of better and
beneficial services to the customers.
74% FDI in Insurance
Insurance is considered a sensitive sector as it holds the long-term money of

people. Various attempts were made in the past to open up the sector but without
much success.
India first opened up the insurance sector in the year 2000 under the Atal Bihari
Vajpayee government when it allowed private sector firms to set up insurance
companies and allowed FDI of 26 per cent.
The current amendment is an enabling amendment that gives companies access to
foreign capital if they need it.
74% FDI in insurance
It is an important shift in stance as the increase in the FDI cap means

insurance companies can now be foreign-owned and -controlled as against
the current situation wherein they are only Indian-owned and -controlled.
This will give a foreign company the right to appoint a majority of directors,
control the management and the policy decisions taken.
The move is expected to increase India’s insurance penetration or premiums

as a percentage of GDP, which is currently only 3.76 per cent, as against a
global average of more than 7 per cent.
BFSI Sector Recent Investment
• February 2021- The Reserve Bank of India (RBI) has approved the Piramal Group's acquisition of Dewan Housing Finance
Corporation (DHFL) for Rs. 34,250 crores (US$ 4.7 billion).
• January 2021- Sundaram Asset Management Company has bought Principal Asset Management for Rs. 338.53 crores (US$
46.78 million).
• November 2020- LIC launched ANANDA, a digital application, to complete proposals more quickly.
FDI Facts:
• In FY21, India received the highest-ever total foreign direct investment (FDI) inflow of $81.72 billion, up 10% from 2019-20.
• 100% FDI allowed under automatic route.
• It is expected that the digital payments market will reach $1 trillion by 2023.
What this means for Indian insurance companies
India has more than 60 insurance companies specialising in life

insurance, non-life insurance and health insurance. The number of
state-owned firms are only six and the remaining are in the private
sector.
A higher FDI limit will help insurance companies access foreign
capital to meet their growth requirements.
What higher FDI means for policy holders
Policy holders will get a wide

Higher FDI limits could see This could mean higher choice, access to more
more global insurance firms competition and better innovative products and a
and their best practices pricing of insurance better customer service and
entering India. products. claims settlement
experience.
FDI and Economic
Development
FDI is considered to be the life blood and an important vehicle of for

economic development as far as the developing nations are
concerned. The important effect of FDI is its contribution to the
growth of the economy.
FDI has an important impact on country’s trade balance, increasing

labour standards and skills, transfer of technology and innovative
ideas, skills and the general business climate.
Government Initiatives
• In June 2021, the Finance Ministers of G-7 countries including the US, the UK, Japan, Italy, Germany,
France and Canada attained a historic contract on taxing multinational firms; under this, the minimum
global tax rate would be at least 15%. The move is expected to further boost foreign direct investments
in the country.
• In September 2021, the Union Cabinet announced to allow 100% foreign direct investment (FDI) via
the automatic route, from the previous 49% in the telecom sector in India, to boost the sector.
• In August 2021, the government amended the Foreign Exchange Management (non-debt instruments)
Rules, 2019, to allow the 74% increase in foreign direct investment limit in the insurance sector.
• In May 2021, the Finance Ministry notified the final rules for foreign investment limit (74%) in the
insurance sector. This is expected to benefit 23 private life insurers, 21 private non-life insurers and
seven specialised private health insurance firms.
Road ahead
• India is expected to attract foreign direct investments (FDI) of US$ 120-160 billion per year by
2025, according to CII and EY report. Over the past 10 years, the country witnessed a 6.8% rise
in GDP with FDI increasing to GDP at 1.8%.
• In terms of attractiveness, investors ranked India #3; ~80% investors have plans to invest in
India in the next 2-3 years, while ~25% reported investments worth >US$ 500 million, the
Economic Times reported.
• Further, as per a Deloitte report published in September 2021, India remains an attractive
market for international investors both in terms of short-term and long-term prospects.

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GBF Cia 3 A

Uploaded by

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FDI in Banking, financial services and

insurance Sector & Its Impact on Economic

BANKING In Public Sector Banks: FDI is permitted with

SECTOR In Private Sector Banks: FDI is permitted

Branches of Foreign Banks

Wholly Owned Subsidiaries of Foreign

Ensure better and improved risk management in the banking sector

Assure better capitalization

Offers financial stability in the banking sector in India

Insurance is considered a sensitive sector as it holds the long-term money of

It is an important shift in stance as the increase in the FDI cap means

The move is expected to increase India’s insurance penetration or premiums

India has more than 60 insurance companies specialising in life

Policy holders will get a wide

FDI is considered to be the life blood and an important vehicle of for

FDI has an important impact on country’s trade balance, increasing

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