Module V

(C) Recent Developments in Foreign Capital Inflows

FOREIGN INSTITUTIONAL INVESTORS

Introduction
Foreign Portfolio Investors/Foreign Institutional Investors
(FPIs/FIIs) have been one of the biggest drivers of India’s
financial markets, having invested Rs. 2.59 trillion (US$
35.69 billion) in 2020-21 (as of March 24, 2021). Highly
developed primary and secondary markets have attracted
FIIs/FPIs to the country. Investment made by FIIs/FPIs in
India is regulated by the Securities and Exchange Board of
India (SEBI), while the ceiling on such investments is
maintained by the Reserve Bank of India (RBI).

Type of FIIs investing in India are as below:

 Hedge Funds
 Foreign Mutual Funds
 Sovereign Wealth Funds
 Pension Funds
 Trusts
 Asset Management Companies
 Endowments, University Funds, etc.
The total market capitalisation (M-cap) of all companies
listed on Bombay Stock Exchange (BSE) rose to a record-
level of Rs. 205.7 trillion (US$ 2.83 trillion) in 2020-21
from Rs. 113.4 trillion (US$ 1.56 trillion) in 2019-20.

Recent Developments/Investments
Some of the recent and significant FII/FPI developments
are as below:
 As of March 10, 2021, foreign portfolio investors
inflows into equities stood at US$ 36 billion in FY21.
 The net foreign direct investment inflows increased
to US$ 44 billion, until January 2021, up from US$
36.3 billion in January 2020.
 In December 2020, Embassy Office Parks REIT
('Embassy REIT'), India's first listed REIT and one of
Asia's largest by area, announced that through an
institutional placement of units, it has successfully
completed a unit capital raise of Rs. 36.8 billion (US$
501 million).
 On December 9, 2020, Indian stock markets achieved
a record high, as the approval of COVID-19 vaccines
strengthened investor sentiments. BSE Sensex
reached the 46,000-mark, rising over 1% during the
day, while the Nifty topped the 13,500-level for the
first-time.
 On March 21, 2021, domestic institutional investors
(DIIs) were the net buyers in the Indian equity
market and accounted for Rs. 559.62 crore (US$
77.07 million).
 Foreign investors invested Rs. 1.4 trillion (US$ 19
billion) in the Indian stock market in 2020.
  India's IPO fundraising is at a 13-year high due to
increased foreign funds and rising interest from small
investors, making it one of the hottest IPO markets in
2021. In 2021, Indian companies raised US$ 2.2
billion through initial public offerings (IPOs), the
highest since 2008, as indicated by data from
Refinitiv.
Government/Regulatory Initiatives
 In the Union Budget 2021-22, the finance bill
proposed amendments to allow foreign portfolio
investors (FPIs) to participate in debt financing of
emerging investment vehicles such as REITs and
InvITs. This move is aimed at enhancing funding for
infrastructure and real estate.
 From April 2020 to February 2021, the employees
provident fund organisation (EPFO) invested Rs.
27,532 crore (US$ 3.79 billion) in the stock market.
 In February 2021, the government announced that
the Securities and Exchange Board of India (SEBI), the
country's capital market regulator, will be the
designated regulator for gold exchanges, ensuring
greater transparency in gold transactions.
 In February 2021, SEBI eased the norms for large
companies to list on the stock exchange. According
to reports, this move will pave the way for LIC's
mega-float IPO. The minimum offer and public
holding requirements will be relaxed as a result,
 giving the Centre more time to comply with the
rules.
Road Ahead
India is being viewed as a potential opportunity by
investors with the economy having the capacity to grow
tremendously. Buoyed by strong support from the
Government, FII investment have been strong and is
expected to improve going forward.
"The midcap and smallcap space are providing investors
with an attractive opportunity for long term investment at
current valuations. This could be an apt time for investors
to build their midcap and smallcap portfolio while sticking
to their asset allocation," said Mr. Gaurav Garg, Head of
Research at CapitalVia Global Research Limited.

BofA Securities stated that “FII flows for industrials and

materials sectors could turn positive especially given their
underweight positioning and improving traction for Make
in India and government’s capex push.”
“India equities represent one of the fastest growth sectors
globally and the country is looked up at the top of the list
with China for investment returns over the next 12-24
months (2021-22),” said Mr. Nuno Fernandes from GW&K
Investment Management LLC in New York.
 (B) Recent Trends in NPAs
Measures taken by RBI and Government:
1. Debt Recovery Tribunals (DRTs)
1. To decrease the time required for settling cases.
Amendments to the SARFAESI Act: The Enforcement of
Security Interest and Recovery of Debts Laws and
Miscellaneous Provisions (Amendment) Bill, 2016
includes
1. The SARFAESI Act allows secured creditors to take
possession over collateral, against which a loan had
been provided, upon a default in repayment.
2. This process is undertaken with the assistance of the
District Magistrate, and does not require the
intervention of courts or tribunals.
3. The Bill provides that this process will have to be
completed within 30 days by the District Magistrate
4. Bill empowers the District Magistrate to assist banks in
taking over the management of a company, in case the
company is unable to repay loans.
5. Act creates a central registry to maintain records of
transactions related to secured assets.
2. 4R SOLUTION
1. Economic Survey 2016-17 gives 4R solution to solve
TBS problem – Recognize, Recapitalize (Eg
 Indradhanush), Resolution and Reform. Economic
Survey 2016-17 Volume II stress more upon last R i.e.
Reform.
3.INDRADHANUSH
1. Indradhanush framework for transforming the PSBs
represents the most comprehensive reform effort
undertaken since banking nationalization in the year
1970 to revamp the Public Sector Banks (PSBs) and
improve their overall performance by ABCDEFG.

1. A-Appointments: Based upon global best practices and

as per the guidelines in the companies act, separate
post of Chairman and Managing Director and the CEO
will get the designation of MD & CEO and there would
 be another person who would be appointed as non-
Executive Chairman of PSBs.
2. B-Bank Board Bureau: The BBB will be a body of
eminent professionals and officials, which will replace
the Appointments Board for appointment of Whole-
time Directors as well as non-Executive Chairman of
PSBs
3. C-Capitalization: As per finance ministry, the capital
requirement of extra capital for the next four years up
to FY 2019 is likely to be about Rs.1,80,000 crore out of
which 70000 crores will be provided by the GOI and
the rest PSBs will have to raise from the market.
4. D-DEstressing: PSBs and strengthening risk control
measures and NPAs disclosure.
5. E-Employment: GOI has said there will be no
interference from Government and Banks are
encouraged to take independent decisions keeping in
mind the commercial the organizational interests.
6. F-Framework of Accountability: New KPI(key
performance indicators) which would be linked with
performance and also the consideration of ESOPs for
top management PSBs.
7. G-Governance Reforms: For Example, Gyan Sangam, a
conclave of PSBs and financial institutions. Bank board
Bureau for transparent and meritorious appointments
in PSBs.
 4. BANKRUPTCY & INSOLVENCY CODE 2015
1. The Code creates time-bound processes for insolvency
resolution of companies and individuals. These
processes will be completed within 180 days. If
insolvency cannot be resolved, the assets of the
borrowers may be sold to repay creditors.
2. The National Company Law Tribunal (NCLT) will
adjudicate insolvency resolution for companies. The
Debt Recovery Tribunal (DRT) will adjudicate
insolvency resolution for individuals.
3. The Code creates an Insolvency and Bankruptcy Fund.
Other Major reforms
Payment and Postal Banks on recommendation
of Nachiket Mor Committee to acheive Financial
Inclusion and reduce banks burden.
Economic Survey 2016-17 suggests setting up of a
centralised Public Sector Asset Rehabilition
Agency (PARA)
the Agency will look after the largest, most difficult
Cases, and make Politically Tough Decisions to reduce
Debt
‘Scheme for Sustainable Structuring of Stressed Assets
(S4A) by RBI for resolution of large stressed assets.
 Startegic Debt Restructuring involves transferring
equity of the company to lenders also enable a change
in management control.
1. The Banking Regulation (Amendment) Bill, 2017
2. It seeks to amend the Banking Regulation Act, 1949 to
insert provisions for handling cases related to stressed
assets.
3. The central government may authorise the Reserve
Bank of India (RBI) to issue directions to banks for
initiating proceedings in case of a default in loan
repayment. These proceedings would be under the
Insolvency and Bankruptcy Code, 2016.
4. also be applicable to the State Bank of India, its
subsidiaries, and Regional Rural Banks.
Merging of SBI subsidiaries as well as other PSBs to
1. improve efficiency in service delivery
2. to become single biggest lender of bigger
infrastructure projects and
3. to achieve top ranking in global ranking.
Marginal Cost of Fund Based Lending Rate (MCLR)
The MCLR rate is the minimum rate below which the
banks are not allowed to lend, except in some case
allowed by the RBI. It is an internal reference rate for
the bank. The MCLR method was introduced in the
Indian financial system by the Reserve Bank of India in
 the year 2016. The MCLR system has replaced the base
rate system that was introduced in the year 2010.
Why MCLR was Introduced?
To effectively implement monetary policy, since MCLR
is more sensitive to policy rates like Repo rate and
Reverse Repo Rate.
Prior to the implementation of MCLR, different banks
are using different methods for calculating base rates.
Thus, MCLR aims at:
1. To improve the transmission of policy rates into the
lending rates of banks.
2. To bring transparency in the methodology followed by
banks for determining interest rates on advances.
3. To ensure availability of bank credit at interest rates
which are fair to borrowers as well as banks.
4. To enable banks to become more competitive and
enhance their long run value and contribution to
economic growth.
Calculation of MCLR
MCLR lending rate is dependent on all the sources of
bank borrowing. A bank borrows from multiple sources
like, fixed deposits, demand deposits, saving accounts,
current accounts. Apart from these, banks also invest
in equity, whose return are also considered while
calculating MCLR.
The formula prescribed by the Reserve Bank of India
for calculation of MCLR is given below:
Marginal cost of funds = Marginal borrowing cost x
92% + return on the net worth x 8%
Thus, marginal cost of borrowings has a weightage of
92% while return on net worth has 8% weightage in
the marginal cost of funds.
Here, the weight given to return on net worth is set
equivalent to the 8% of risk weighted assets prescribed
as Tier I capital for the bank.
The marginal cost of borrowing refers to the average
rates at which deposits of a similar maturity were
raised in the specified period.
Banks must also maintain a cash reserve ratio of 4%.
On this deposit, no interest is earned by the bank.
Under MCLR, banks can avail some allowance called
Negative Carry on CRR. Negative carry on account
of’ Cash reserve ratio (CRR)- Negative carry on the
mandatory CRR arises because the return on CRR
balances is nil. Negative carry on mandatory Statutory
Liquidity Ratio (SLR) balances may arise if the actual
return thereon is less than the cost of funds.
 Also, the operating costs must be considered and taken
care of. There are several expenses of a bank that
includes raising funds, opening branches, paying salary
to its employees etc. These are not charged to the
customers. Operating Cost associated with providing
the loan product, including cost of raising funds, but
excluding those costs which are separately recovered
by way of service charges.
Finally comes the discount or tenor premium. The reset
period for the interest rate is called the tenor. It is
directly proportional to the reset period i.e. the tenor
is higher if the reset period is higher. Tenor
Premium- The change in tenor premium cannot be
borrower specific or loan class specific. In other words,
the tenor premium will be uniform for all types of
loans for a given residual tenor.
Thus, MCLR depends on
1. Tenor premium,
2. Operating costs of the bank,
3. Negative carry on Cash Reserve Ratio, and
4. Marginal cost of funds.
Conclusion
1. Banks are the backbone of every economy. The banks
are the lifelines of the economy and play a catalytic
role in activating and sustaining economic growth,
 especially, in developing countries and India is no
exception.
2. The Indian banking sector is at a critical juncture in its
evolution. It is now clear that the slump in credit
growth and increase in stressed assets has affected the
profitability of all banks, and threatens the very
survival of some of them. To maintain impetus of
economic growth with achievement of SDGs we need
strong banking system.
3. Certain building blocks for the reorientation of the
banking structure with a view to addressing various
issues such as enhancing competition, financing higher
growth, providing specialized services and furthering
financial inclusion have been initiated but need to
focus on implementation.
4. Vision 2020 of banking system should incorporate
Transformed Banking models with emerging
technologies like IT revolution, Robotics, Artificial
Intelligence and FINTECH solutions to make banking
affordable and accessible.
5. In order to achieve more faster and inclusive growth
and to make major govt initiatives (–Make in india,
Financial Inclusion etc ) overhaul reforms in banking
sector is imperative.
 (A) Recent Changes in banking system
The Banking industry and financial institutions are vital
sectors of any economy. Development of these two
sections of the economy can impact the growth of the
country in an incredible way. In the era of “Digital India”,
the banking and financial services in India have undergone
a massive evolution and the phenomenon continues. The
change can be attributed to various components like new
regulatory policies and customer expectations. However,
the one element that has affected banking and financial
services the most is technological advancement.

The emergence of innovative financial technology has

revolutionized financial services in India as well as the
banking sector. It has resulted in the introduction and
advancement of several technology trends that have
contributed to the radical transformation, growth, and
advancement of these industries. The alliance between the
innovative technologies of the financial sector and banking
services has changed the conventional systems of handling
money, and this collaboration is expected to create a massive
shift with emerging trends in financial services.
Few Trends in Banking and Financial Services in
India That Are Changing the Entire Scenario
1. Digitization:
With the rapid growth of digital technology, it became
imperative for banking and financial services in India to keep
up with the changes and innovate digital solutions for the
tech-savvy customers. Besides the financial institutions,
insurance, healthcare, retail, trade, and commerce are some of
the major industries that are experiencing the enormous digital
shift. To stay competitive, it is necessary for the banking and
financial industry to take the leap on the digital bandwagon.
2. Enhanced Mobile banking

Mobile banking is one of the most dominant current trends

in banking systems. As per the definition, it is the use of a
smartphone to perform various banking procedures like
checking account balance, fund transfer, and bill payments,
without the need of visiting the branch. This trend has taken
over the traditional banking systems. In the coming years,
mobile banking is expected to become even more efficient
and effortless to keep up with the customer demands.
Mobile banking future trends hint at the acquisition of IoT
and Voice-Enabled Payment Services to become the reality of
tomorrow. These voice-enabled services can be found in
smart televisions, smart cars, smart homes, and smart
everything. Top industry leaders are collaborating to adopt
IoT-connected networks to create mobile banking
technologies that require users’ voice to operate.

3. UPI (Unified Payments Interface):

UPI or Unified Payments Interface has changed the way
payments are made. It is a real-time payment system that
enables instant inter-bank transactions with the use of a
mobile platform. In India, this payment system is considered
the future of retail banking. It is one of the fastest and most
secure payment gateways that is developed by National
Payments Corporation of India and regulated by the Reserve
Bank of India. The year 2016 saw the launch of this
revolutionary transactions system. This system makes funds
transfer available 24 hours, 365 days unlike other internet
banking systems.
4. Artificial Intelligence Robots:
Several private and nationalized banks in India have started to
adopt chatbots or Artificial intelligence robots for assistance
in customer support services. For now, the use of this
technology is at a nascent stage and evolution of these
chatbots is not too far away. Usage of chatbots is among the
many emerging trends in the Indian banking sector that is
expected to grow.
More chatbots with the higher level of intelligence are
forecasted to be adopted by the banks and financial
institutions for improved customer interaction personalized
solutions. The technology will alleviate the chances of human
error and create accurate solutions for the customers. Also, it
can recognize fraudulent behavior, collate surveys and
feedback and assist in financial decisions.
5. Digital-Only Banks:
It is a recent trend in the Indian financial system and cannot
be ignored. With the entire banking and financial services
industry jumping to digital channels, digital-only banks have
emerged to create paperless and branchless banking systems.
This is a new breed of banking institutions that are overtaking
the traditional models rapidly. These banks provide banking
facilities only through various IT platforms that can be
accessed on mobile, computers, and tablets. It provides most
of the basic services in the most simplified manner and gives
access to real-time data. The growing popularity of these
banks is said to be a real threat to traditional banks.

(D) Introduction of Crypto Currency

Cryptocurrency
A cryptocurrency, crypto-currency, or crypto is
a digital asset designed to work as a medium of
exchange wherein individual coin ownership records
are stored in a ledger existing in a form of a
computerized database using strong cryptography to
secure transaction records, to control the creation of
additional coins, and to verify the transfer of coin
ownership.
It typically does not exist in physical form (like paper
money) and is typically not issued by a central
authority.
Cryptocurrencies typically use decentralized
control as opposed to centralized digital
currency and central banking systems. When a
cryptocurrency is minted or created prior to issuance
or issued by a single issuer, it is generally considered
centralized.
When implemented with decentralized control, each
cryptocurrency works through distributed
ledger technology, typically a blockchain, that serves
as a public financial transaction database.
Bitcoin, first released as open-source software in
2009, is the first decentralized cryptocurrency.

According to Jan Lansky, a cryptocurrency is a system

that meets six conditions:
1.The system does not require a central authority; its
state is maintained through distributed consensus.
2.The system keeps an overview of cryptocurrency
units and their ownership.
3.The system defines whether new cryptocurrency
units can be created. If new cryptocurrency units
can be created, the system defines the
circumstances of their origin and how to determine
the ownership of these new units.
4.Ownership of cryptocurrency units can be proved
exclusively cryptographically.
5.The system allows transactions to be performed in
which ownership of the cryptographic units is
changed. A transaction statement can only be
issued by an entity proving the current ownership of
these units.
6.If two different instructions for changing the
ownership of the same cryptographic units
are simultaneously entered, the system performs at
most one of them.