Moving from the scenario that was dominated by nationalized banks, Indian commercial banking system has witnessed a rapid spread of Foreign Banks (FBs). The operations of FBs have received a considerable boost during the post-reform era beginning with the year 1993, providing opportunities for players to shape up and prepare for their growth. This paper is an attempt to determine the profitability of FBs operating in India, using the data for the period from 1996-97 to 2004-05. The study uses multi-discriminant function analysis to identify the variables discriminating the high profitability bank groups from the low profitability groups.

Foreign Banks (FBs) in India have been operating for more than a century and a half. Over a period, the FBs have become an important internal module of the Indian financial and banking system. In the era of financial sector reforms, the need for the expanded role and operation of FBs has gained further backing. At the end of March 2005, India had 33 FBs from a large number of countries cutting across Europe, the US and the Far East, having as many as 275 offices operating across the country. India had already committed to the World Trade Organization to permit 12 branches of FBs in a year, subject to the prevailing prudential consideration, to enter or augment their presence in India, and hence their profitability assumes greater significance, as the profitability denotes the efficiency with which a bank deploys its funds. In this context, an attempt has been made to extend the multi-discriminant model to the profitability of FBs operating in India.

The study covers a period of ten years from 1996-97 to 2005-06. The required information relating to FBs for the study period was collected from the publications of the Indian Banks' Association. Thirty One FBs were selected for the study out of the 33 banks so as to include all banks with similar periods of operations. Multi-discriminant function analysis was used to identify the ratios which contributed significantly to the differences in the profitability of the FBs classified into two groupshigh profitability group and low profitability group.

Profitability is viewed in qualitative terms and hence measured on non-metric scale, while the variables—spread, burden and financial leverage—being quantitative are measured in metric term. Thus, the dependent relationship is that of one non-metric dependent variable and several metric independent variables, which conform to the application of multi-discriminant analysis. The dependent variable, profitability, has been defined in terms of Operating Income divided by Total Assets, which is considered the most preferred measure of profitability.

Bank Management Journal, Foreign Banks, Commercial Banking Systems, Indian Financial System, Discriminant Function Analysis, Canonical Discriminant Functions, Financial Sector Reforms, Earning Assets, Discriminant Models, World Trade Organization, WTO.