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Business News/ Industry / RBI sets rules on banking units in international financial centres
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RBI sets rules on banking units in international financial centres

Central bank allows local and foreign banks that are authorized to deal inforeign exchange to set up units

Each eligible bank would be permitted to establish only one banking unit in each IFSC, guidelines for which were issued by the Securities and Exchanges Board of India (Sebi) on 22 March. Photo: Pradeep Gaur/MintPremium
Each eligible bank would be permitted to establish only one banking unit in each IFSC, guidelines for which were issued by the Securities and Exchanges Board of India (Sebi) on 22 March. Photo: Pradeep Gaur/Mint

Mumbai: The Reserve Bank of India (RBI) on Wednesday allowed public and private sector banks in India that are authorized to deal in foreign exchange to set up banking units in the proposed international finance service centres (IFSC).

Each eligible bank would be permitted to establish only one banking unit in each IFSC, guidelines for which were issued by the Securities and Exchanges Board of India (Sebi) on 22 March.

Foreign banks that already have a presence in the country will also be permitted to set up an IFSC banking unit (IBU), RBI said, adding that an IBU will not be considered a part of a foreign bank’s regular branch expansion plans in the country.

Each of these IBUs (of local and foreign banks) will be supervised and regulated by RBI.

All prudential norms applicable to overseas branches of Indian banks would apply to IBUs. For instance, these units would be required to follow the 90-day recognition norm for bad loans and would need to make provisions against bad loans similar to those applicable across Indian banks.

The liquidity and interest rate risk management policies governing IBUs will be similar to those that are prescribed for the overseas branches of Indian banks.

The IBUs would be required to operate and maintain a balancesheet only in foreign currency and would not be allowed to deal in Indian rupees except for having a special rupee account for administrative and statutory expenses. Any operations/transactions in rupees would be through authorized dealers which shall be distinct from the IBU, and will be subject to existing foreign exchange regulations, said RBI.

IBUs are prohibited from undertaking cash transactions, as part of the anti-money laundering norms prescribed in the guidelines. They will also not be allowed to participate in the domestic call, notice, term, forex, money and other onshore markets and domestic payment systems, RBI said.

In terms of capital, local banks will need to provide $20 million to their respective IBUs as minimum capital. While the capital requirement is the same in case of foreign banks, the parent bank will be required to provide a letter of comfort for extending financial assistance, as and when required, in the form of capital or liquidity support to IBU.

The liabilities of IBUs will be exempt from both cash reserve ratio (CRR) and statutory liquidity ratio (SLR) requirements, the banking regulator said in its guidelines. The loans and advances of IBUs would not be taken into account when calculating the priority sector lending obligations of the parent bank, RBI added.

“The sources for raising funds, including borrowing in foreign currency, will be persons not resident in India and deployment of the funds can be with both persons resident in India as well as persons not resident in India. However, the deployment of funds with persons resident in India shall be subject to the provisions of FEMA (foreign exchange management), 1999," the guidelines said.

The business that IBUs can undertake will include transactions with non-resident entities other than individuals, retail customers or high networth individuals (HNIs). IBUs are not allowed to open any current or savings accounts. They cannot issue bearer instruments or cheques. All payment transactions must be undertaken via bank transfers, the banking regulator mandated.

Deposits of IBUs will not be eligible for deposit insurance in India.

IBUs are permitted to undertake transactions in all types of derivatives and structured products with the prior approval of their board of directors. “IBUs dealing with such products will need to have adequate knowledge, understanding, and risk management capability for handling such products," the RBI said.

The IBUs will be required to furnish information relating to their operations as prescribed from time to time by the Reserve Bank. These may take the form of offsite reporting, audited financial statements for the IBU, etc., RBI said.

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Published: 01 Apr 2015, 06:35 PM IST
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