SECTION V

BANKING SECTOR - FOREIGN LIABILITIES AND ASSETS

Indian banking sector comprises Indian commercial banks and branches of foreign banks operating in India. The data on the foreign liabilities and assets of almost all the banks were collected for the present census.

The year 1996-97 witnessed strong deposit growth and lower credit expansion in the banking sector in their domestic activities, which reflected in their foreign activities also. Foreign liabilities of the banking sector showed moderate increase of 5.1 per cent during 1992-97 and 2.1 per cent during 1996-97. They increased from Rs.47,007 crore as on March 31, 1992 to Rs.59,081 crore as on March 31, 1996 and further to Rs. 60,328 crore on March 31, 1997. However, foreign assets of the banking sector increased steeply by 34.0 per cent from Rs. 6,039 crore as on March 31, 1992 to Rs.26,115 crore as on March 31, 1997. As a result, the net liabilities of the banking sector decreased marginally from Rs. 40,968 crore as on March 31, 1992 to Rs. 42,774 crore as on March 31, 1996 and further substantially to 34,213 crore as on March 31, 1997 (Table 5.1). During 1992-97, the net liabilities of the banking sector declined by 3.5 per cent and during 1996-97 by 20.0 per cent.

A. FOREIGN LIABILITIES

The component-wise data on foreign liabilities of banking sector are given in Table 5.2. The gross foreign liabilities of the banking sector in India increased by 5.1 per cent per annum during 1992-97 and 2.1 per cent during 1996-97. The major constituent of the liabilities of the banking sector was the outstanding balances in the Foreign Currency Non-Resident (FCNR) accounts (FCNR (A) and FCNR (B) taken together) which increased from Rs.30,576 crore as on March 31, 1992 to Rs.34,274 crore as on March 31, 1996 and further to Rs.35,184 crore as on March 31, 1997. The increase was entirely on account of FCNR (B) scheme where the exchange risk is to be borne by the banks accepting the deposits; the FCNR (A) scheme, where the exchange risk was borne by the Reserve Bank, was withdrawn in phases from 1994.

Other major constituent of foreign liabilities of the banking sector was the balances held in NRE accounts which stood at Rs.7,540 crore as on March 31, 1992 which increased by 18.9 per cent per annum to Rs.17,886 crore as on March 31, 1997. During 1996-97, the growth of the NRE deposits was more pronounced at 33.0 per cent. The growth of the FCNR and NRE deposits was not uniform across the banks in India. The private sector banks outperformed the public sector banks, particularly the weak ones, reflecting competitive environment in the Indian banking industry.

The balances in vostro accounts which was another component of the liabilities of the banking sector, increased from Rs.548 crore as on March 31, 1992 to Rs.1,697 crore as on March 31, 1996 but declined to Rs.1,137 crore as on March 31 1997. The borrowings from abroad by banks in India increased from Rs.5,316 crore at end-March 1992 to Rs.6,367 crore at end-March 1996 but declined drastically to Rs.1,657 crore at end -March 1997.

As regards the shares of the constituents of foreign liabilities of the banking sector were concerned, balances in FCNR accounts accounted for the highest share of 58.3 per cent followed by balance in NRE accounts at 29.6 per cent. The borrowings from abroad formed only 2.7 per cent, whereas the balances in vostro accounts were 1.9 per cent of the total. Other foreign liabilities formed 7.4 per cent of the total (Table 5.2).

After the initiation of policy measures relating to financial sector reforms since 1991, the Indian banking sector has undergone significant transformation in their style of functioning. The banking sector has been given sufficient operational freedom to adapt to the changing environment in an efficient manner. The asset portfolio of the banking system may reflect the changes in their manner of functioning and criteria of operations.

The foreign assets of the banking sector increased substantially during the period in tandem with the globalisation and market integration of Indian economy. The balances held abroad increased from Rs.4,302 crore as on March 31, 1992 to Rs.8,017 crore as on March 31, 1996 and further increased by 77.3 per cent to Rs.14,216 crore as on March 31, 1997. Investment abroad by banking sector increased steeply from Rs.127 crore in 1992 to Rs.2,169 crore as on March 31, 1997 which showed an increase of 76.4 per cent per annum during the period. Other banking assets included the debit balances in vostro account and also the Head Office fund of the Indian bank branches abroad. These balances increased by 41.9 per cent per annum from Rs.1,553 crore as on March 31, 1992 to Rs.8,805 crore as on March 31, 1997 (Table 5.2).

Among the foreign assets of the banking sector, balances held abroad constituted 54.4 per cent of the total, where as investment abroad constituted 8.3 per cent and other assets of the Indian banks constituted 33.7 per cent as on March 31, 1997.

Insurance sector comprises Life Insurance Corporation of India (LIC) which undertakes life insurance business and the General Insurance Corporation (GIC) Group i.e., GIC and its subsidiaries, which are doing other than life insurance business. During the recent years, the insurance sector attracted more foreign liabilities on account of increase in insurance business abroad. The foreign liabilities of the insurance sector as a whole increased from Rs.799 crore as on March 31, 1992 to Rs.853 crore as on March 31, 1996 and further to Rs.968 crore as on March 31, 1997. While the liabilities of the LIC increased from Rs.276 crore as on March 31, 1992 to Rs.510 crore as on March 31, 1997, the liabilities of the GIC Group declined to Rs.458 crore from Rs.523 crore during the period (Table 6.1).

As on March 31, 1997, the foreign assets of the insurance sector were valued at Rs.1,510 crore as against Rs.1,512 crore a year ago which showed a marginal decline during the year. As on March 31, 1992, these assets were placed at Rs.821 crore. While the assets of the LIC increased from Rs.297 crore to Rs.498 crore during 1992-97, the assets of the GIC group increased significantly by 14.1 per cent from Rs.524 crore to Rs.1,012 crore during the period. As a result, the net assets of the insurance sector increased substantially from Rs.22 crore as on March 31, 1992 to Rs.659 crore as on March 31, 1996 which declined to Rs.542 crore as on March 31, 1997. The decline during 1996-97 was mainly on account of decline in net assets of the LIC and GIC group (Table 6.1).

The share of LIC in the total foreign liabilities of the insurance sector increased from 34.5 per cent as on March 31, 1992 to 49.8 per cent as on March 31, 1996 and further to 52.7 per cent as on March 31, 1997. Correspondingly, the share of GIC group declined from 65.5 per cent to 47.3 per cent during 1992-97. However, on the assets side of the insurance sector, the trend was reverse. While the share of the LIC in the total assets of the insurance sector declined from 36.2 per cent to 33.0 per cent during 1992-97, that of the GIC group increased from 63.8 per cent to 67.0 per cent during the period (Table 6.1).

The total foreign liabilities of the LIC were placed at Rs.510 crore as on March 31, 1997. These comprised acturial reserves payable, (Rs.482 crore), payments on annuities (Rs.1 crore), and other liabilities (Rs.27 crore). The share of acturial reserves payable was 92.4 per cent as on March 31, 1992, which increased to 94.6 per cent as on March 31, 1996, but declined fractionally to 94.5 per cent as on the reference date.

The foreign assets of the LIC comprised deposits in foreign territories (Rs.7 crore), investment in foreign government securities (Rs.338 crore), investment in shares and bonds (Rs.25 crore), balances in accounts held abroad (Rs.37 crore), and other assets (Rs.91 crore) as on March 31, 1997. The share of investment in foreign government securities by the LIC increased from 47.8 per cent of the total assets as on March 31, 1992 to 65.9 per cent as on March 31, 1996 which further increased to 67.9 per cent as on the reference date. However, the share of balances in accounts held abroad declined significantly from 29.0 per cent to 11.7 per cent and further to 7.4 per cent during the period under review (Table 6.2).

The foreign liabilities of the LIC were mainly owed to the UK (43.5 per cent), Fiji Islands (37.6 per cent), Mauritius (18.0 per cent), and Myanmar as on March 31, 1997 (Table 6.4). The foreign assets of the LIC were held in these four countries in addition to Sri Lanka (Table 6.5). Major portion of the assets of the LIC were held in the UK (43.4 per cent), followed by Fiji Islands (35.5 per cent), and Mauritius (18.7 per cent).

The foreign liabilities of the GIC group comprised unexpired risk, outstanding claims, reinsurance business and other liabilities. While the share of unexpired risk increased from 23.5 per cent as on March 31, 1992 to 35.6 per cent as on March 31, 1997, reinsurance business declined from 36.1 per cent to 24.2 per cent during the period. The share of outstanding claims increased gradually from 31.9 per cent in 1992 to 34.1 per cent in 1996 and further to 34.3 per cent as on March 31, 1997 (Table 6.3).

The assets of the GIC group consist of investment in shares and bonds, investment in foreign government securities, reinsurance business, balances in accounts held abroad, and other assets like outstanding premium, interest, dividend on investment abroad, etc. The share of investments in shares and bonds increased from a 4.8 per cent at end-March 1992 to 58.8 per cent at end-March 1996 which fractionally declined to 58.6 per cent as on March 31, 1997. However, the share of reinsurance business declined from 39.7 per cent in 1992 to 6.4 per cent as on March 31, 1996 and further to 5.5 per cent as on March 31, 1997. The balances in accounts held abroad also declined from 34.0 per cent to 21.6 per cent during 1992-97 (Table 6.3).

The foreign liabilities of the GIC group, as at the end of March 1997 amounted to Rs.458 crore, which increased by 7.0 per cent from their level as observed a year ago (Rs.428 crore). The UK accounted for the major share of foreign liabilities of GIC group at 19.2 per cent, closely followed by Japan at 18.6 per cent. The other important countries accounting significant portion of liabilities of GIC group were Hong Kong (10.0 per cent), Germany (5.2 per cent) and Kuwait (4.6 per cent) (Table 6.6).

The foreign assets of the GIC group were mainly held in Singapore, the UK, Japan, Malaysia, Hong Kong, Fiji Islands, Australia, etc. Of the total foreign assets of the GIC group, Singapore accounted for 51.8 per cent as onCMarch 31, 1997, followed by the UK (9.2 per cent), Japan (6.7 per cent) and Malaysia (6.0 per cent). The share of foreign assets held in other countries was less than 4 per cent (Table 6.7).

The Indian economy witnessed significant growth in various sectors, including the external sector during 1996-97 and the real GDP grew distinctly by 7.5 per cent during the year as compared to 7.3 per cent growth achieved during the previous year. A surge in invisible earnings and a strong resumption of capital flows witnessed during the year, facilitated stable foreign exchange market. The net foreign investment inflows during the year increased by 25.4 per cent to US $ 6,133 million from US $ 4,892 million during the previous year. In tandem with the growth of capital inflows into the country, the foreign liabilities of the country increased by 9.3 per cent during 1992-97 and 8.1 per cent during 1996-97. The increase was mainly accounted for by the non-official sector liabilities, which rose by 15.0 per cent during 1992-97 and 17.4 per cent during 1996-97. Of the non-official sector liabilities, corporate sector liabilities increased by 20.3 per cent during 1992-97 and 23.9 per cent during 1996-97, which was mainly on account of surge in ECBs, coupled with foreign investment attracted by the corporate units during the year. While Indian industries were attracting more and more foreign investment for their all-round development, Indian companies have also joined the stream of confluence into the tidal wave of global consolidation. Banking sector has also consolidated their business in the global market as the policy initiation towards financial sector reforms was in favour of globalisation. Further, the financial sector reforms process undertaken all over the world has opened up the Indian banking industry to investors abroad which resulted in expanding their portfolio. Though the insurance sector in India is yet to be opened up to the foreign participation, its net foreign assets have increased considerably during the census period.

The assets of the official sector increased significantly due to significant surge in foreign exchange reserves, which increased from US $ 21,687 million at end-March 1996 to US $ 26,423 million as at the end of March 1997. The increase was mainly due to improvement in exports of merchandise and invisible receipts and also the net inflow of foreign capital. The increase in the gross foreign liabilities of the country during the census period was offset by significant increase in foreign assets of the country and as a result, the net foreign liabilities were at a sustainable level at 28.6 per cent of the GDP in rupee terms as on March 31, 1997.

The census covered the following items for the purpose of estimating India’s foreign liabilities and assets.

Foreign liabilities resulting from ownership of real assets/property of non-residents have been excluded from the scope of the census. Therefore, the census covered all foreign liabilities of financial nature.

As in the case of foreign liabilities, the real assets/property situated abroad and owned by residents in India have not been included in the census.

The definition of Foreign Direct Investment (FDI) varies across the countries. The IMF has provided certain guidelines as a part of its efforts to bring about uniformity in the reporting of international transactions by the member-countries. According to fifth edition of the Balance of Payments Manual of the IMF, a direct investment enterprise is defined as an incorporated or unincorporated enterprise in which a direct investor, who is a resident in another economy, owns 10 per cent or more of the ordinary shares or voting power. Direct investment also includes, preference shares, debentures and deposits, if any, of those individual investors, who hold 10 per cent or more of the equity capital. In addition to this, direct investment also includes net foreign liabilities of the branches of foreign companies operating in India. If a direct investor has less than 10 per cent equity or voting power, but has an effective voice in the management of the company, such units are also included in the direct investment category.

The portfolio investment includes the value of ordinary shares held by non-residents, if such holding is less than 10 per cent of the total equity capital per investor. The value of preference shares, debentures, and deposits of portfolio investor has been treated as part of the portfolio investment. In addition, the net purchases of the FIIs, both in the primary and secondary markets, are also included in the portfolio investment.

Government of India has started giving approval for floating GDRs/ADRs/FCCBs by the corporate units in 1992. Since then, these instruments have been attracting the foreign investors and constituted about 25 per cent of the total portfolio investment in India during 1996-97. Though the GDRs/ADRs are issued in the name of depositories, the holders of them have not been easily identified as the GDRs/ ADRs are traded in the secondary market. Therefore, according to IMF classification, GDRs/ADRs are included in the portfolio investment.

Direct investment and portfolio investment are also considered for working out retained earnings, i.e. the proportionate share in the free reserves and surplus which is ascribable to nonresidents in accordance with their equity holdings.

The information on the FDI and portfolio investment have been collected country-wise. Although, the country-wise details have been reported by most of the units, in the case of Non-Resident Indian investment, some companies were not in a position to give complete country-wise information. In such cases, the FDI and portfolio investment are included under ‘other countries’. In respect of GDRs/ADRs, though country-wise details were called for from corporate units, the coverage was not encouraging. Therefore, data from internal sources were added in respect of GDRs/ADRs.

The data presented in this article have been classified into two sectors, viz., (i) Official Sector, and (ii) Non-Official Sector. The data relating to Government of India and the Reserve Bank are covered under the official sector. Non-official sector comprised corporate sector, banking sector, and insurance sector. For the purpose of this article, all PSUs are treated as part of the corporate sector. Like-wise, financial institutions such as Unit Trust of India, Exim Bank, etc., have also been treated under corporate sector.

The standard industrial classification has been adopted in this article and is determined by the major activity as reported by the concerned company for its classification. The industries are broadly divided into plantations, mining, petroleum, manufacturing, trading, construction and turnkey projects, transport, utilities, and services. Under the manufacturing sector, the industries are further classified into food & beverages, textile products, transport equipments, machinery and machine tools, metal and metal products, electrical, electronic goods and machinery, chemicals and allied products and others. Under the services sector, telecommunication services, software development services, technical engineering and consultancy services, tours and travel services, cold storage and warehousing services, media advertising and entertainment services, transport services, and financial services are included. In recent years, a number of companies have diversified their activities. In such cases, the classification is based on the major activity of the company concerned.