Global Capital, Local Constraints: The Evolution of Foreign Banks in India

Foreign banks have had a long, magnetic, and often turbulent relationship with India. Their presence has alternated between phases of intense engagement and abrupt retreat, shaped by episodes of global financial stress, domestic regulatory change, and shifting strategic priorities in their home markets. Yet, despite this on‑again, off‑again pattern, foreign banks have played a central role in India’s financial evolution, bringing capital, technology, innovation, and global connectivity that have influenced the country’s banking structure for more than a century and a half.

The story begins in the late eighteenth century, when India’s first bank, the Bank of Hindostan, was established in 1770 by Alexander and Company, a Scottish agency house operating under the commercial framework of the English East India Company. In the early period of British rule, most banking institutions were created by the Company, its affiliates, or private agency houses and merchants, and their activities were largely confined to general banking services within India. The Oriental Banking Corporation (OBC) emerged as the only English bank with a Royal charter to operate in India in 1851, focusing on financing trade and currency exchange and offering a counterweight to the East India Company’s unpopular monopoly over opium billing and exchange transactions.

For some time, legal interpretations of Act 47 of George III were used to resist the establishment of chartered banks, as vested interests feared competition in lucrative remittance and exchange business. This changed in 1853, when authorities concluded that the Act did not prevent the Crown from granting charters to banks, paving the way for the creation of the Chartered Bank of India, Australia and China and the Mercantile Bank of India, London and China. Other countries soon followed Britain’s example, and banks from France, Germany, the Netherlands, Portugal, Russia, the United States, and Japan opened branches in Indian port cities, deepening India’s integration into global trade and finance. However, this first wave of foreign banking was fragile: wars, economic depressions, and balance‑sheet stress forced closures, reorganisations, and eventual takeovers. By the time of Independence, India hosted around fifteen foreign banks, mostly from Europe and the United States, which together accounted for roughly 14 per cent of deposits and credit in the banking system, but only one of the original chartered banks—today’s Standard Chartered—remained continuously active under its lineage.

After Independence, foreign banks continued to expand in India, largely unaffected by the major milestone events of bank nationalisation in 1969 and 1980. While public sector banks came to dominate branch networks and mass retail banking, foreign banks retained a niche as providers of specialised services and employers of an urban, elite workforce, often setting benchmarks in technology, risk management, and product innovation. The reform era initiated in the early 1990s, following the Narasimham Committee’s recommendations, opened a new chapter. As India liberalised its financial sector and progressively relaxed restrictions on trade and capital flows, foreign banks found fresh opportunities both to support their multinational clients and to partner with Indian corporates seeking to expand abroad. The introduction of the Foreign Exchange Management Act (FEMA) in 2000 and subsequent liberalisation of outward investment norms—eventually allowing Indian firms to invest up to 200 per cent of their net worth abroad—triggered a sharp increase in cross‑border mergers and acquisitions, which foreign banks actively financed and advised.

A major policy landmark arrived in 2005, when the Reserve Bank of India released a roadmap for the presence of foreign banks in India alongside guidelines on ownership and governance in private sector banks. This framework had a dual aim: to encourage consolidation and strengthening of domestic private banks, and to provide a calibrated path for foreign bank expansion. Foreign banks were allowed to acquire significant stakes in selected private banks, sometimes required to hold at least 15 per cent and permitted to go up to 74 per cent subject to regulatory approval, while domestic rules on “fit and proper” ownership were tightened. At the same time, new entrants could choose between operating as branches or as wholly owned subsidiaries (WOS) with minimum capital and strong governance, and existing players were offered a route to convert their branches into subsidiaries under principles of single‑mode presence and reciprocity. This policy spurred debate about how far foreign banks should shape India’s banking system, a debate that persisted even after later legal changes expanding voting rights in private banks.

The mid‑2000s saw many foreign banks reinforce their presence in India, drawn by its growth prospects and rising global profile. However, the Global Financial Crisis of 2008–09 dramatically altered the landscape. Faced with severe liquidity shortages, asset write‑downs, and elevated capital requirements at home, large multinational banks were compelled to shrink balance sheets, deleverage, and reconsider their commitments to emerging markets. New international regulatory standards, higher capital charges, and political expectations that they focus on domestic credit needs pushed many institutions to classify India as non‑core. Some curtailed their operations, sold business lines, or downsized local exposures; others exited commercial or retail banking altogether, retaining only less capital‑intensive investment banking and advisory activities. Ironically, while foreign banks were retrenching globally, India’s own financial system was relatively insulated from the worst excesses of the crisis thanks to conservative regulation of derivatives and complex structured products.

Nevertheless, the behaviour of foreign banks during and after the crisis reinforced long‑standing concerns among Indian regulators that such institutions can operate as “fair‑weather friends,” expanding aggressively in good times and retreating when global conditions worsen. This perception informed a series of regulatory responses, including stricter liquidity and capital rules and a push for local incorporation of systemically important foreign banks. A discussion paper in 2011 and a framework issued in 2013 formalised these expectations, particularly for banks entering after 2010 or for those whose global size and interconnectedness posed systemic risks. Over the next decade, India witnessed a string of exits and strategic retreats: Commerzbank surrendered its licence in 2008, UBS exited commercial banking in 2013, Morgan Stanley and HSBC stepped back from retail or wealth management, and others such as Barclays, RBS, FirstRand, and Deutsche Bank trimmed or closed selected business lines. During the pandemic period, additional exits and partial withdrawals by Abu Dhabi Commercial Bank, Westpac, FirstRand, BNP Paribas, and Citibank further reshaped the foreign banking landscape.

Yet the foreign presence did not vanish. In some cases, foreign‑owned franchises resurfaced through new ownership structures, as illustrated by Bank of America’s former retail business, which passed through ABN AMRO and RBS before landing with RBL Bank, carrying forward a legacy of systems and talent. As of 2022, forty‑four foreign banks operated in India, representing more than a third of all scheduled commercial banks, though their share of total loans and deposits remained modest at around 3.8 per cent and 5 per cent respectively. Domestic private sector banks had captured much of the growth in retail and SME lending, as well as a larger portion of system profitability. Only a few foreign institutions, such as Standard Chartered, appeared to have consistently found a sustainable mix of wholesale, retail, and treasury business suited to India’s evolving market.

The experience of DBS Bank highlights both the promise and challenges of the WOS model. Having operated in India as a branch since 1994, DBS became the first large foreign bank to convert into a wholly owned subsidiary in 2019 and soon after absorbed Lakshmi Vilas Bank, inheriting more than 500 branches across hundreds of cities. This move greatly expanded its footprint and positioned it to compete more effectively in mass retail and SME segments. However, it also imposed short‑term financial costs, including a notable decline in net profit due to integration expenses and stressed assets on the acquired balance sheet. The case illustrates that local incorporation and rapid scaling can enhance long‑term franchise value but require patience, strong capital, and careful risk management.

Where foreign banks continue to excel in India is in fee‑based activities and cross‑border financial services. They remain leaders in trade finance, foreign exchange, investment banking, and capital markets intermediation, and global players such as Barclays, JP Morgan, Morgan Stanley, Citi, Bank of America Securities, and Nomura rank among the top earners of merger and acquisition and global bond fees in the Indian market, in some instances earning more in India than in larger economies like China. Survey data show that foreign banks’ return on assets in India significantly exceeds that of Indian banks’ overseas branches, underlining that India remains an attractive and profitable destination despite regulatory complexity and competition. The contemporary phase of India’s engagement with foreign banks is therefore best understood as one of strategic recalibration: foreign institutions are not leaving en masse, but are selectively redefining their roles to focus on activities where their global networks and expertise offer the greatest advantage, while domestic private banks increasingly dominate traditional intermediation and retail banking. The future of this relationship will depend not only on India’s policy stance but also on the health and strategic orientation of foreign banks’ global parents in an increasingly uncertain world.