Banks will need RBI licence, capital of $20 mn to operate in GIFT city

MUMBAI: Indian and overseas banks that want to set up units in the upcoming Gujarat International Finance Tec-City or GIFT City will need a licence from the Reserve Bank of India and have to set aside a minimum capital of $20 million, the regulator said in its guidelines on international financial services centre.

The regulator has exempted them from reserve and mandated lending requirements and allowed banks to trade in all types of derivative and structured products with board approval. They can deal with wholly-owned subsidiaries or joint ventures of Indian companies registered abroad. GIFT City is being planned as a global financial services hub to rival Dubai and Singapore.

The offshore units will be exempted from cash reserve ratio ( CRR), statutory liquidity ratio (SLR) and priority sector lending requirements. The first is the proportion of deposits that banks need to park with the RBI, the second is the minimum they need to invest in government securities and the third relates to mandated lending to farmers, small businessmen, students and minorities. Each bank will be permitted to set up only one unit and it can deal in any currency other than rupees. The units can engage in business with non-resident entities but will be barred from dealing with individuals, retail customers and high networth individuals.

The guidelines come with some stiff conditions. The RBI has categorically said that it will not provide any liquidity support or be the lender of last resort for offshore units. The parent bank will have to make good any financial loss incurred by the branch, sources said.

"In case of a crunch, the liquidity support has to come from the parent bank," said Anish Thacker, partner at EY. "This may be an issue for domestic banks but conceptually, it is right for a foreign bank wanting to set up in the IFSC to do offshore transactions." The banking units will not be allowed to undertake cash transactions, issue bearer instruments or cheques and all transactions have to take place through bank transfers. They cannot open savings or current accounts and deposits of the banking units will not be eligible for insurance cover. They are allowed to borrow funds with a maturity of more than one year. However, they are barred from raising funds from Indian residents.

The absence of current account facilities could be a hurdle in transactions on stock exchanges that would run securities trading platforms in the financial centre.