Foreword

The Indian economy has quite clearly emerged as an attractive market, driven by growing demand, increased savings and high investment rate. The steadily increasing middle class segment in India, coupled with its demographic advantages continues to fuel its growth. Nearly 35% of the population classifies as being young, with a median age of 25.5 years, which signifies that India is set to gain the benefits of its demographic dividend. India has a strong middle class of 250-300 million expected to double in the next two decades. India is also set to become the fifth largest consumer economy with aggregate consumption expected to grow to 1.53 trillion USD in 2025. India is ready to experience an average real Gross Domestic Product (GDP) growth of 5.8% between 2007-50 and it is likely to grow to almost 90% of the size of the US economy by 2050, while in the short-term, the GDP growth is projected to be 8.2% in FY11 and 9% in FY12. The rapid growth of the Indian economy is adequately supported by foreign direct investments (FDI), with investments exhibiting a growth from $5.5 billion in 2006 to $22.9 billion in January 2010. Over the last five years, India has ranked amongst the top three FDI destinations, taking its place after China and the United States. This publication aims to establish the fact that India is an attractive destination for conducting business, with a focussed approach on the banking sector. It illustrates the regulations governing the banking sector, the Indian tax regime, with a separate section on licensing requirements.
The publication has been compiled by a team of PricewaterhouseCoopers inbound investment advisory specialists in India, drawing on their extensive knowledge and experience of the typical issues faced by first time investors in India.

Introduction
India has a huge and untapped potential for banks to explore and provide enhanced geographic coverage to the unbanked areas. Counted as one of the prime emerging markets, there is a robust demand of banking services in India. The rural population of India remains significantly under-penetrated, and it is essential to leverage technology to reach this unbanked population. Mobile technology, in todays times has been recognised as a cost-effective and popular channel to extend the financial services net to the unbanked population. In emerging markets, banking reaches about 37%of the population, compared to a 50% penetration rate for mobile phones. For every 10,000 people, these countries have one bank branch and one ATMbut 5,100 mobile phones. Banks are progressively integrating technology in their systems and this has been reflected in the rising number of banks moving into the more than 90% but less than 100%category.

Why India?
India is governed by strong growth fundamentals, which is eminently reflected in the macroeconomic situation of the country. In addition, policy measures undertaken by the government have helped India withstand the crisis and turn towards a quick recovery. India could become the worlds third largest economy by purchasing power parity (PPP), overtaking Japan in 2012. India could also rise from relatively low levels today to emerge as third largest domestic banking market in the world by 2040.

Economic Growth
India has witnessed GDP growth in the range of 8-9% from FY03-07, which slowed down in FY08-09. However, the forecast by IMF for 2009-10 is 6.75% and 8% in 2011, supported by increased private consumption and investment. India is set to experience real average GDP growth of 5.8% between 2007-50 and PPP growth of 8.5%; likely to grow to almost 90% of the size of the US economy by 2050

Bank Credit
Total Credit stood at around 60% of GDP in 2009-10 YTD. Credit has seen an expansion of around 25% from FY03-07; however, growth slowed down to 17.5% in FY09 and currently is at 14.4%. RBI has pared the 2010 growth target of 18% to 16%..

Demographic Advantage
Indias middle class segment is steadily rising and with 250-300 million people in this segment, it is expected to double in the next two decades. Compared to other economies, India has a relatively young population with around 35% of the population falling in this category. The median age of the Indian population is 25.5 years which indicates that India is in a good position to benefit from its demographic dividend.

Foreign Trade
The Indian economy is opening up at a steady pace. The quantitative restrictions on imports ended in 2001, opening up the economy to foreign businesses, especially in consumer goods. Gradually, barriers to trade and investment are coming down. The peak customs duty rate was reduced to 10% in 2008 (for non-agricultural and other specified goods). In August 2009, India signed Free Trade Agreements with the Association of Southeast Asian Nations (ASEAN) nations and Korea, which is expected to boost trade. Currently, India has one of the most liberal investment regimes among the emerging economies. Opportunities exist for investment in India in sectors as diverse as tourism and infrastructure, defence production and engineering. The Indian government has released its draft Direct Tax Code, indicating a paradigm shift in the direct tax regime for the Indian economy. It seeks to address some of the key facets of a progressive tax regimesimplicity, uniformity, clarity, stability, ease of compliance, and, most importantly, compatibility with the needs of a rapidly developing economy.

India Overview

Key Statistics
Size Population Political set up Written Constitution Written Constitution State Religion Directive principles of State Policy Union of India Parliament Head of State Head of Government Independent Judiciary 3.3 million sq. kms. Worlds seventh largest nation Over 1.1 billion people, Worlds second most populous nation Parliamentary democracy since independence from British Rule in 1947 Preamble Preamble Secular State - there is no state religion Promotion of peoples welfare in a social order 28 Federal States and seven Union Territories Two Houses - Lok Sabha (Lower House) and Rajya Sabha (Upper House). President Prime Minister Supreme Court - highest judicial authority in India High Court - Head of judicial hierarchy in the State Official Language is Hindi, but English is the preferred language for conducting business and is widely read and spoken

Language

Laws Governing India

India has an exhaustive legal framework governing all aspects of business. Some of the important ones include

Arbitration & Reconciliation Act, 1996 Central Excise Act, 1944

Companies Act, 1956 Competition Act, 2002 Consumer Protection Act, 1986

Law relating to alternate redressal of disputes amongst parties Governs duty levied on manufacture or production of goods in India Governs all corporate bodies Law to ensure free and fair competition in the market Law relating to protection of consumers from unscrupulous traders/ manufacturers Law Deals with import and export regulations Puts in place a uniform commodity classification code based on the globally adopted Harmonised System of Nomenclature (HSN) for use in all international trade-related transactions Provides framework for seeking environmental clearances Law regulating labour in factories

Customs Act, 1962 Customs Tariff Act, 1975

Environment Protection Act, 1986 Factories Act, 1948

Key Challenges for the Indian Economy

Inflation: India is currently experiencing high inflation with food price rises hovering around 17% and Wholesale Price Index around 9.9% in Feb 2010. Inflationary concerns will force the Reserve Bank of India (RBI) to tighten monetary supply. This in turn will raise interest rates and impact banks adversely. Inclusive growth: There are concerns that the benefits of economic growth are not reaching the poor due to inadequate delivery mechanisms. Financial inclusion is one of the key challenges for the economy and banks need to ensure that low, affordable and cost-effective banking reaches the poor. Infrastructure development: India currently lacks the infrastructure required to attract foreign capital vis--vis countries like China. While infrastructural development requires huge capital, private sector participation and favourable regulatory regime can help raise investment demand. Banks need to act as conduit to attract more investment in infrastructure. Withdrawal of stimulus: The economic recovery in India in 2009 was aided by the economic stimulus provided by government through interest rate subvention, reduction in excise duty etc. The fiscal deficit moved up to 6.7% of the GDP which is unsustainable in the mediumterm. Withdrawal of stimulus will impact the economy through rise in prices and reduction in demand. The banking sector will also face the impact in their core business of lending.

Banking Overview
The major participants of the Indian financial system are the commercial banks, the financial institutions (FIs), encompassing term-lending institutions, investment institutions, specialized financial institutions and the state-level development banks, Non-Bank Financial Companies (NBFCs) and other market intermediaries such as the stock brokers and money-lenders. The commercial banks and certain variants of NBFCs are among the oldest of the market participants. The FIs, on the other hand, are relatively new entities in the financial market place.

Historical perspective
Bank of Hindustan, set up in 1870, was the earliest Indian Bank . Banking in India on modern lines started with the establishment of three presidency banks under Presidency Bank's act 1876 i.e. Bank of Calcutta, Bank of Bombay and Bank of Madras. In 1921, all presidency banks were amalgamated to form the Imperial Bank of India. Imperial bank carried out limited central banking functions also prior to establishment of RBI. It engaged in all types of commercial banking business except dealing in foreign exchange. Resrve Bank of India Act was passed in 1934 & Reserve Bank of India (RBI) was constituted as an apex bank without major government ownership. Banking Regulations Act was passed in 1949. This regulation brought Reserve Bank of India under government control. Under the act, RBI got wide ranging powers for supervision & control of banks. The Act also vested licensing powers & the authority to conduct inspections in RBI. In 1955, RBI acquired control of the Imperial Bank of India, which was renamed as State Bank of India. In 1959, SBI took over control of eight private banks floated in the erstwhile princely states, making them as its 100% subsidiaries. RBI was empowered in 1960, to force compulsory merger of weak banks with the strong ones. The total number of banks was thus reduced from 566 in 1951 to 85 in 1969. In July 1969, government nationalised 14 banks having deposits of Rs.50 crores & above. In 1980, government acquired 6 more banks with deposits of more than Rs.200 crores. Nationalisation of banks was to make them play the role of catalytic agents for economic growth. The Narsimham Committee report suggested wide ranging reforms for the banking sector in 1992 to introduce internationally accepted banking practices. he amendment of Banking Regulation Act in 1993 saw the entry of new private sector banks. Banking Segment in India functions under the umbrella of Reserve Bank of India - the regulatory, central bank. This segment broadly consists of

1. Commercial Banks 2. 2. Co-operative Banks

Commercial Banks
The commercial banking structure in India consists of: Scheduled Commercial Banks Unscheduled Banks Scheduled commercial Banks constitute those banks which have been included in the Second Schedule of Reserve Bank of India(RBI) Act, 1934. RBI in turn includes only those banks in this schedule which satisfy the criteria laid down vide section 42 (60 of the Act. Some co-operative banks are scheduled commercial banks albeit not all co-operative banks are. Being a part of the second schedule confers some benefits to the bank in terms of access to accomodation by RBI during the times of liquidity constraints. At the same time, however, this status also subjects the bank certain conditions and obligation towards the reserve regulations of RBI. For the purpose of assessment of performance of banks, the Reserve Bank of India categorise them as public sector banks, old private sector banks, new private sector banks and foreign banks.

This sub sector can broadly be classified into:

1. Public sector 2. Private sector 3. Foreign banks

Public sector banks have either the Government of India or Reserve Bank of India as the majority shareholder. This segment comprises of:

Public Sector Bank

State Bank Of India (SBI)And Its Subsidiaries

Other Nationalized Banks

STATE BANK OF INDIA

Top Management Shri.O. P. Bhatt, Chairman, State Bank of India Shri S.K. Bhattacharyya, MD & CC&RO, State Bank of India Corporate Office State Bank Bhavan, P. B. No. 12 Madame Cama Road, Mumbai 400 021 Tel No: 022-22022426 (EPBX) Fax No: 022-22831647, 22040073, 22851391, 22852708 The State Bank of India has been, over the years, the flagship of Indian banking. State Bank of India is the largest bank in India in terms of profits, assets, deposits, branches and employees. With a network of over 9,000 branches in India and 51 foreign offices in 32 countries, the Bank commands about one-fifth of the total deposits and loans in all scheduled commercial banks in the country. State Bank of India is the successor to Imperial Bank of India. The latter was established in 1921 with the amalgamation of three Presidency Banks of Bombay, Bengal and Madras. State Bank of India came into being on 1.7.1955 through the State Bank of India Act, 1955. The Banks of erstwhile princely states of India joined the State Bank Group as subsidiaries under the State Bank of India (Subsidiary Banks) Act 1959. Over the years, the Bank has expanded rapidly . The Reserve Bank of India is the single largest shareholder of the Bank (with 59.73% stockholding followed by 14.1% NRI/FIIs, 11.8% financial institutions, 11.1% individuals and remaining with mutual funds and corporates). SBI's shares and bonds are listed for trading on all the major Indian stock exchanges. Its GDR is listed on the Luxembourg Stock Exchange. With a view to inculcating transparency in banking transactions and for providing information to customers, the Bank launched a Citizen's Charter in the form of the Code of Fair Banking Practices together with the General Terms and Conditions of Service. Appropriately named, 'Towards Excellence' Code reflects the Bank's commitment to provide service of the highest order and serves as a document of self-discipline. ASSOCIATE BANKS State Bank of India has the following seven Associate Banks (ABs) with controlling interest ranging from 75% to 100%. State Bank of Bikaner and Jaipur (SBBJ) State Bank of Hyderabad (SBH) State Bank of Indore (SBIr) State Bank of Mysore (SBM) State Bank of Patiala (SBP) State Bank of Saurashtra (SBS) State Bank of Travancore (SBT)

Public Sector Banks- Links to all Nationalised Bank

1. Allahabad Bank 2. Andhra Bank 3. Bank of Baroda 4. Bank of India 5. Bank of Maharashtra 6. Canara Bank 7. Central Bank of India 8.Corporation Bank 9. Dena Bank 10. Indian Bank 11. Indian Overseas Bank 12. Oriental Bank of Commerce 13. Punjab and Sind Bank 14. Punjab National Bank 15. Syndicate Bank 16. UCO Bank 17. Union Bank of India 18. United Bank of India 19. Vijaya Bank

Private sector New Private Banks

1. Bank of Punjab Ltd. (since merged with Centurian Bank) 2. Centurian Bank of Punjab (since merged with HDFC Bank) 3. Development Credit Bank Ltd. 4. HDFC Bank Ltd. 5. ICICI Bank Ltd. 6. IndusInd Bank Ltd. 7. Kotak Mahindra Bank Ltd. 8. Axis Bank (earlier UTI Bank) 9. Yes Bank Ltd

Old Private Banks

1.Bank of Rajasthan Ltd. 2. Catholic Syrian Bank Ltd. 3. City Union Bank Ltd 4. Dhanalakshmi Bank Ltd. 5 Federal Bank Ltd 6. ING Vysya Bank Ltd 7. Jammu and Kashmir Bank Ltd 8 Karnataka Bank Ltd. 9. Karur Vysya Bank Ltd 10. Lakshmi Vilas Bank Ltd

Cooperative Banks In India

There are two main categories of the co-operative banks. (a) short term lending oriented co-operative Banks - within this category there are three sub categories of banks viz state cooperative banks, District co-operative banks and Primary Agricultural co-operative societies. (b) long term lending oriented co-operative Banks - within the second category there are land development banks at three levels state level, district level and village level.

The co-operative banking structure in India is divided into following main 5 categories 1. Primary Urban Co-op Banks: 2. Primary Agricultural Credit Societies: 3. District Central Co-op Banks: 4, State Co-operative Banks: 5. Land Development Banks

Foreign Banks in India

Though all the foreign banks have their global websites, but only following foreign banks have India specific pages or websites which is more than just providing contact addresses. ABN-AMRO Bank N.V. Abu Dhabi Commercial Bank Ltd. American Express Bank Ltd. Barclays Bank PLC BNP Paribas Citibank N.A. DBS Bank Ltd Deutsche Bank AG HSBC Ltd Standard Chartered Bank State Bank of Mauritius Ltd.