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The Government of India has introduced the Special Economic
Zone (SEZ) scheme with a view to providing an internationally
competitive and a hassle free environment for export
production. As per the Government's policy, SEZs will
be a specially delineated duty free enclave and deemed
to be a foreign territory for the purpose of trade operations
and duties / tariffs so as to usher in export-led growth
of the economy.
It
was also indicated by the Union Commerce Minister in
his speech announcing the Exim Policy for 2002-07 that
for the first time, Offshore Banking Units (OBUs) would
be permitted to be set up in SEZs. These units would
be virtually foreign branches of Indian banks but located
in India. These OBUs, inter alia, would be exempt from
CRR, SLR and give access to SEZ units and SEZ developers
to international finances at international rates.
2.
The Scheme
2.1
Eligibility Criteria
Banks
operating in India viz. public sector, private sector
and foreign banks authorised to deal in foreign exchange
are eligible to set up OBUs. Such banks having overseas
branches and experience of running OBUs would be given
preference. Each of the eligible banks would be permitted
to establish only one OBU which would essentially carry
on wholesale banking operations.
2.2
Licensing
Banks
would be required to obtain prior permission of the
RBI for opening an OBU in a SEZ under Section 23(1)(a)
of the Banking regulation Act, 1949. Given the unique
nature of business of the OBUs, Reserve Bank would stipulate
certain licensing conditions such as dealing only in
foreign currencies, restrictions on dealing with Indian
rupee, access to domestic money market, etc. on the
functioning of the OBUs. The parent bank's application
for branch licence should itself state that it proposes
to conduct business at the OBU branch in foreign currency
only.
No
separate authorisation with respect to the OBU branch
would be issued under FEMA. As currently in vogue with
respect to designating a specific branch for conducting
foreign exchange business, the parent bank may designate
the branch in SEZ as an OBU branch. A separate Notification
No. FEMA71/2002-RB dated September 7, 2002 issued by
the Exchange Control Department (ECD) of RBI on OBUs
is enclosed.
2.3
Capital
Since
OBUs would be branches of Indian banks, no separate
assigned capital for such branches would be required.
However, with a view to enabling them to start their
operations, the parent bank would be required to provide
a minimum of US$ 10 million to its OBU.
2.4
Reserve Requirements
2.4.1
CRR
RBI
would grant exemption from CRR requirements to the parent
bank with reference to its OBU branch under Section
42(7) of the RBI Act, 1934.
2.4.2
SLR
Banks
are required to maintain SLR under Section 24(1) of
the Banking Regulation Act, 1949 in respect of their
OBU branches. However, in case of necessity, request
from individual banks for exemption will be considered
for a specified period under Section 53 of the B.R.Act,
1949.
2.5
Resources and deployment
The
sources for raising foreign currency funds would be
only external. Funds can also be raised from those resident
sources to the extent such residents are permitted under
the existing exchange control regulations to invest/maintain
foreign currency accounts abroad. Deployment of funds
would be restricted to lending to units located in the
SEZ and SEZ developers. Foreign currency requirements
of corporates in the domestic area can also be met by
the OBUs. If funds are lent to residents in the Domestic
Tariff Area (DTA), existing exchange control regulations
would apply to the beneficiaries in DTA.
2.6
Permissible Activities of OBUs
OBUs
would be permitted to engage in the form of business
mentioned in Section 6(1) of the BR Act, 1949 as stipulated
in the enclosed ECD Notification no. FEMA71/2002-RB
dated September 7, 2002 and subject to the conditions
of the licence issued to the OBU branches.
2.7
Prudential Regulations
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. The OBUs may
follow the credit risk management policy and exposure
limits set out by their parent banks duly approved by
their Boards.
The
OBUs would be required to adopt liquidity and interest
rate risk management policies prescribed by RBI in respect
of overseas branches of Indian banks as well as within
the overall risk management and ALM framework of the
bank subject to monitoring by the Board at prescribed
intervals.
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.
2.8
Anti-Money Laundering Measures
The
OBUs would be required to scrupulously follow "Know
Your Customer (KYC)" and other anti-money laundering
instructions issued by RBI from time to time. Further,
with a view to ensuring that anti-money laundering instructions
are strictly compiled with by the OBUs, they are prohibited
from undertaking cash transactions, and transactions
with individuals.
2.9
Regulation and Supervision
OBUs
will be regulated and supervised by RBI through its
Exchange Control Department, Department of Banking Operations
and Development and Department of Banking Supervision.
2.10
Reporting requirements
OBUs
will be required to furnish information relating to
their operations as are prescribed from time to time
by RBI.
2.11
Ring fencing the activities of OBUs
The
OBUs would operate and maintain balance sheet only in
foreign currency and would not be allowed to deal in
Indian Rupees except for having a special Rupee account
out of convertible fund to meet their day to day expenses.
These branches would be prohibited to participate in
domestic call, notice, tem, etc. money market and payment
system. Operations of the OBUs in rupees would be minimal
in nature, and any such operations in the domestic area
would be through the Authorised Dealer (distinct from
OBUs) which would be subject to the current exchange
control regulations in force.
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. The Ads dealing with OBUs would be subject
to ECD regulations.
2.12
Priority sector lending
The
loans and advances of OBUs would not be reckoned as
net bank credit for computing priority sector lending
obligations.
2.13
Deposit insurance
Deposits
of OBUs will not be covered by deposit insurance.
2.14
Choice of SEZ
OBUs
would be permitted in SEZs approved by Government of
India, where according to Government policy, OBUs can
be set up.
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