FDI must be viewed as part of the process of financial integration —the integration of the financial sector, including banking, with the world economy. While integration in goods and services is seen to uniformly confer benefits on an economy, this does not hold true for financial integration. Nor is it true that financial integration is a precondition for growth. This basic principle must be kept in mind in any discussion of FDI in banking. For a variety of reasons, financial integration must happen in a calibrated way and in consonance with the ability of the domestic banking system to manage and withstand the process.
FDI in banking brings in competition, players with deep pockets and superior managerial practices. Hence, it can, in principle, conduce to superior efficiency. However, it could, at the same time, undermine stability in the banking system by taking away the best customers from domestic banks and leaving the riskier ones to them. For this reason, foreign bank entry could render banking systems vulnerable to crises. |
