FDI in Financial Services: Banking, Insurance and Asset Management

February 23, 2024

FDI in Financial Services: Banking, Insurance and Asset Management

This article has been written by Ms. Geetu, a 2nd Year student of Geeta Institute of Law, Panipat.

This article is all about the foreign direct investment (FDI) and how it works in different sectors of the financial service including banking, insurance, and asset management. The foreign direct investment as the name suggests itself means the form of investment in which the investor invests his/her income or have an interest in an enterprise resides in a country other than that of the investor’s own country.

What is FDI?

FDI is a short form for the term Foreign Direct Investment, which means a person or company can have an access to make an investment directly in an enterprise in the foreign country or any country other than that of the investor’s own.

Definition of FDI

According to the IMF and OECD definitions, direct investment reflects the aim of obtaining a lasting interest by a resident entity of one economy (direct investor) in an enterprise that is resident in another economy (the direct investment enterprise). The “lasting interest” implies the existence of a long-term relationship between the direct investor and the direct investment enterprise and a significant degree of influence on the management of the latter.

Routes of FDI

The routes of FDI can be classified into two parts that are Automatic route and Government route.

Automatic Route of FDI: This allows the Foreign Direct Investment to enter any other country without any prior permission either of the Government or the reserve bank of India (RBI).

Government Route of FDI: Such a method requires a prior approval of the government.

Which are the sectors where FDI is not allowed in India, under the Automatic Route as well as Government Route?

FDI is prohibited under Government as well as Automatic Route for the following sectors:

Retail Trading
Atomic Energy
Lottery Business
Gambling and Betting
Housing and Real Estate business
Agriculture (excluding Floriculture, Horticulture, Development of Seeds, Animal Husbandry, Pisciculture and Cultivation of Vegetables, Mushrooms etc. under controlled conditions and services related to agro and allied sectors).

Plantations (Other than Tea plantations).

FDI in Financial Services

Foreign Direct Investment (FDI) is introduced in the financial sector by the state authorities to support the development of the Financial sector or the Financial market by setting up regulations and institutions.

The State authority’s mission concerning financial sector

The mission of the state authorities concerning financial sector is

To safeguard the stability of the financial system.
to support the development of the Financial sector or the Financial market by setting up regulations and institutions.
To attract other country’s foreign investors that may bring additional financing and help accelerate investment process.

In this Article we will mainly focus on the three Financial Sectors and those are the banking sector, insurance and the areas of asset management.

Foreign Direct Investment (FDI) in Banking Sector

Foreign Direct Investment or we can say FDI in the Banking sector can be defined as when a person or a company invest in the banking sector of any other country, means there is a direct investment from a foreign country in the banking sector of any other country.

Problems of Indian Banking sectors

Poor marketing stratergies.
Financial marketing conditions are dynamic.
Lack in effective management.
Financial matters are not stable.
Non performing areas or property.

Benefits of Foreign Direct Investment (FDI) in Banking Sector

FDI in the banking sector brings several benefits.

Firstly, it increases the availability of funds for lending and investment, which can stimulate economic growth.
Secondly, it introduces new technologies and practices that can improve efficiency and customer service in the banking industry.
Thirdly, FDI can enhance competition in the sector, leading to better services and lower costs for consumers.
Lastly, it can promote knowledge transfer and skill development through collaborations between domestic and foreign banks. Overall, FDI in the banking sector can contribute to the development and stability of the financial system.

Foreign Direct Investment (FDI) in Insurance Sector

An investment that is invested in the handle and incorporation with another company through business in the different company in the sector of insurance is the Foreign Direct Investment (FDI) in Insurance Sector.

Impact of Foreign Direct Insurance FDI in Insurance Sector

According to the year 2018, the permissible rate of increment in the limit of FDI in the insurance sector is shifted to 49% from 26% to strengthen the country’s fundamental infrastructure.
As per the increment in the FDI in the insurance sector, it was claimed that around 71.49% of the life insurance market creates equal opportunities for competing with the Life Insurance Corporation of India.
Enhanced inflow capital of the insurance sector provides better manpower opportunities, better operation conditions, and improved infrastructure of the insurance companies.
As the limit of FDI in the insurance sector increased, the inflow of capital raised from 20,000-26,000 crores to 40,000-60,000 crores which can rejuvenate the insurance sector of India.

Effects of FDI in the insurance sector on GDP

The sole purpose behind the increase of foreign investment is to assist private companies in accelerating their growth, which results in the expansion of their business for achieving their presence in India.
India has faced an Insurance penetration during the pandemic which placed the GDP at 3.7%.
Due to the pandemic, the growth of life insurance companies was found to have declined by 11-12% which is 15-20% now.
The reason was that the pandemic pushed the customer to save their cash instead of investing in life insurance policies.

Foreign Direct Investment (FDI) in Asset Management

FDI stands for Foreign Direct Investment. In the context of asset management, it refers to investments made by foreign individuals or companies into the asset management industry. It can help attract capital and expertise from abroad, boosting the industry’s growth.

FDI in asset management is when foreign investors invest in companies that manage assets like stocks, bonds, and real estate. It can bring in new funds, expertise, and access to international markets. This helps the asset management industry expand and diversify its offerings. It’s a way for countries to attract foreign investment and strengthen their financial sectors.

Benefits of Foreign Direct Investment (FDI) in Asset Management

Foreign Direct Investment (FDI) in asset management brings several benefits.

Firstly, it attracts capital from foreign investors, increasing the pool of funds available for investment. This can lead to greater liquidity and opportunities for growth in the asset management industry.
Secondly, FDI brings in expertise and knowledge from foreign investors, enhancing the overall capabilities of asset management firms. It can also facilitate the transfer of best practices and innovative strategies.
Lastly, FDI in asset management can help diversify investment portfolios by providing access to international markets and a broader range of investment options. Overall, FDI in asset management promotes economic growth, fosters innovation, and strengthens the financial sector.

Example of Foreign Direct Investment (FDI) in Asset Management

One example of FDI in asset management is when a foreign investment company establishes a subsidiary or acquires a stake in a domestic asset management firm. For instance, a U.S.-based asset management company might invest in a Chinese asset management firm to gain access to the Chinese market and tap into its growing economy. This FDI allows the foreign company to leverage the local expertise and expand its investment offerings to both domestic and international clients. It’s a win-win situation that benefits both the foreign investor and the domestic asset management firm.

Conclusion

It can be concluded from the above Article that that FDI is the commonly called name and the short form of the term Foreign Direct Investment which means when a person or any company of a country directly invest in the company of any other country which will lead the economy grow and movement of money between two countries. We have studied in this article about the Foreign Direct Investment in different sectors and those are the banking sector, insurance sector and the asset management of different companies. There are two routes of Foreign Direct Investment (FDI) those are Automatic route of FDI and Government route of FDI.

References

This Article was originally published on https://unacademy.com/content/railway-exam/study-material/general-awareness/fdi-in-insurance-threat-or-opportunity/ website. The link for the same is herein.
Foreign Direct Investment (FDI) in India, Niti Bhasin,2012.
This Article was originally published on https://www.oecd.org/cfe/leed/37049585.pdf website. The link for the same is herein.
This Article was originally published on https://www.bis.org/publ/cgfs25.pdf website. The link for the same is herein.

February 23, 2024