Banks can now go international without overseas branches

MUMBAI: The time has arrived for banks to go international in their financial dealings, without the need to set up foreign branches. The Reserve Bank of India (RBI) has unveiled norms for setting up offshore banking units (OBUs) within special economic zones (SEZs) in various parts of the country.
For setting up such a unit, banks would need a minimum investment of $10m (Rs 48.3 crore). Since OBUs would be branches of banks operating in the country, no separate assigned capital would be required. OBUs will be regulated and supervised by the exchange control department of the RBI.
No separate authorisation would be issued under the Foreign Exchange Management Act (Fema). Banks may designate their branch in any of the SEZ as an OBU. All commercial banks (PSU, private and foreign) operating in India will be allowed to set up only one OBU, which would essentially undertake wholesale banking operations and deal only in foreign currency. The major benefits: The RBI would grant exemption from cash reserve ratio (CRR) requirements to the parent bank with regard to the OBU. Banks would be required to maintain SLR for OBU branches. However, the central bank will consider an exemption from SLR, upon request for the same from the banks. However, deposits of OBUs will not be covered by deposit insurance.
The loans and advances of OBUs would not be reckoned as net bank credit for computing priority sector lending obligations. “Banks having overseas branches and experience of running OBUs would be given preference,� said an RBI circular. Prior permission from the RBI will be needed for launching an OBU. OFUs would be able to raise funds from only foreign sources. “Funds can also be raised from those resident sources to the extent such residents are permitted under the existing exchange control regulations to maintain foreign currency accounts abroad,� said the RBI circular.
Such funds would be deployed for lending to SEZ units. “Foreign currency requirement of corporates in the domestic area can also be met by the OBUs,� said the RBI. “If funds are advanced to residents in the domestic tariff area (DTA), the existing exchange control regulations would apply to the beneficiaries in DTA,� it added. Since OBUs are basically set up to manage the funding needs of units within SEZs and encourage export growth, the RBI will stipulate licensing requirements such as dealing only in foreign currencies, restrictions on dealing in Indian rupee and access to domestic money market.
OBUs can deal in rupees only through a special rupee account out of convertible fund to meet their day-to-day expenses. These branches would be prohibited to participate in domestic money market (call, notice and term) and payment system. “Operations of the OBUs in rupees would be minimal in nature,� said the RBI. The OBUs would be required to maintain separate nostro accounts with correspondent banks which would be distinct from nostro accounts maintained by other branches of the same bank.
All prudential norms applicable to overseas branches of Indian banks would apply to the OBUs. The OBUs would be required to follow the best international practice of 90 days payment delinquency norm for income recognition, asset classification and provisioning. This is against the current 180-day norms for commercial banks. The parent bank will need to set up the credit risk management policy and exposure limits for the OBU. For liquidity and interest rate risk management norms, they will need to follow the current norms set by the RBI for overseas branches of domestic banks.
The bank’s board would be required to set comprehensive overnight limits for each currency for these branches, which would be separate from the open position limit of the parent bank. So, it would not be affected by the parent bank touching its currency limits.
In a bid to avoid the misuse of these branches for money laundering, the OBUs would be required to follow “know your customer� norms and other anti-money laundering instructions of the central bank. Further, with a view to ensure that anti-money laundering instructions are strictly complied with by the OBUs, they are prohibited from undertaking cash transactions and transactions with individuals.