Setting up of IFSC Banking Units (IBUs) by Foreign Banks

This article focuses on the IBUs by Foreign Banks which will be able to provide foreign currency financing requirements of the Indian corpor

Introduction:

Pursuant to the Reserve Bank of India’s (RBI) notification under FEMA 1999 on Foreign Exchange Management (International Financial Services Centre) Regulations, 2015 setting out RBI regulations relating to financial institutions set up in International Financial Services Centres (IFSC), RBI formulated a scheme for the setting up of IFSC Banking Units (IBUs) by Indian banks and foreign banks already having presence in India.
The IFSC banking units will be able to provide foreign currency financing requirements of the Indian corporates as well for overseas entities. The Branch will operate as an offshore branch.

Eligible banks interested in setting up IBUs will be required to obtain prior permission of the Reserve Bank for opening an IBU under Section 23 (1)(a) of the Banking Regulation Act, 1949 (BR Act). For regulatory purposes, an IBU is treated on par with a foreign branch of an Indian bank.

Foreign Banks

Presently, the foreign banks would be able to carry out following Business through IBU at GIFT IFSC:
  • Foreign currency loans to non-residents {Foreign Corporates & Wholly Owned Subsidiaries (WOS)/Joint Ventures (JV) of Indian Corporate}
  • Provide ECBs to Indian entities seeking foreign currency funds as permitted under FEMA
  • Project Finance for Foreign Corporates & WOS/JVs of Indian Corporates
  • Provide corporate banking facilities to various units in SEZ & IFSC
  • Factoring & forfaiting services as part of the trade finance requirements to WOS/JVs of Indian corporates abroad and foreign corporates & Letter of Credit and Bank Guarantee for oversees transactions (Inward & Outward)
  • FOREX Transactions (Buying & Selling of various currency)
  • Bulk deposits from Foreign Corporates / WOS of Indian Corporates
  • Market borrowings such as inter-bank borrowings, debt issuance etc.
  • Derivatives and structured products – swaps, futures, etc.
  • Providing trade loans to correspondent banks

Eligibility criteria:

Only foreign banks already having presence in India will be eligible to setup IBUs. This shall not be treated as a normal branch expansion plan in India and therefore, specific permission from the home country regulator for setting up of an IBU will be required. Each of the eligible banks will be permitted to establish only one IBU in each IFSC.


Licensing Requirement:

The banks will be required to obtain prior permission of the Reserve Bank for opening an IBU under Section 23(1) (a) of the Banking Regulation Act, 1949 (BR Act) .The applications of foreign banks will be considered based on extant guide-lines for setting up branches in India subject to the additional requirement of the home country regulator/s confirmation in writing of their regulatory comfort for the bank’s presence in the IFSC.


Minimum Capital Required:

With a view to enabling IBUs to start their operations, the parent bank will be required to provide a minimum capital of USD 20 million or equivalent in any foreign currency to its IBU which should be maintained at all times. However, the minimum prescribed regulatory capital, including for the exposures of the IBU, shall be maintained on an on-going basis at the parent level as per regulations in the home country and the IBU shall submit a certificate to this effect obtained from the parent on a half-yearly basis to RBI (International Banking Division, DBR, CO, RBI). 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 / liquidity support to IBU.


Prudential Regulations:
  • IBU are required to adopt prudential norms as prescribed by RBI. The bank’s board can set out appropriate credit risk management policy and exposure limits for their IBUs consistent with the regulatory prescriptions of the Reserve Bank of India.
  • The IBUs will be required to adopt liquidity and interest rate risk management policies prescribed by the Reserve Bank and function 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 Units, which would be separate from the open position limit of the other branches of the foreign bank having a presence in India.

Application process:
  • Identify the office space in Gujarat International Finance Tec-City (GIFT) IFSC
  • Application to SEZ Development commissioner for SEZ approval
  • Application to RBI for setting up IFSC Banking UNIT

Anti-Money Laundering Measures:

The IBUs are required to follow Know Your Customer’ (KYC), Combating of Financing of Terrorism (CFT), and other anti-money laundering instructions issued by RBI from time to time, including reporting the same, as prescribed by the Reserve Bank/ other agencies in India. IBUs are also prohibited from undertaking cash transactions.


Corporate Banking Services Available at the at GIFT IFSC:

IBUs can provide a wide range of Corporate Banking services as below:

1. Foreign currency transactions
: Enabling in opening of foreign currency current accounts for offshore / foreign currency transactions by institutional clients.

Benefits: Ability to transact in foreign currency in the offshore markets from the IFSC

2. Deployment of funds
:
  • Deployment of funds to Indian Residents: Provide ECBs to the Indian entities seeking foreign currency funds as permitted under the FEMA regulations
  • Deployment of funds to non-residents (other than individual/retail customers/ HNIs): The IBUs will be able to meet the foreign currency requirements of WOS/JVs of Indian corporates abroad and Foreign Corporates.
  • IBUs will be allowed to provide:
  • Foreign currency loans
  • Project finance, loan syndication
  •  Trade finance – import/export finance, buyers credit Buying & Selling of various currency, Providing trade loans to correspondent banks
  • Benefits: Ability to meet the foreign currency requirements of the corporates in India, foreign subsidiaries of Indian corporates (subject to FEMA provisions) as well as foreign companies.


3. Factoring/Forfaiting of trade receivables: Provide factoring & forfaiting services as part of the trade finance requirements to the non-resident entities such as WOS/JVs of Indian corporates abroad and foreign corporates.

Benefits: Ability to tap the growing trade activities in the region

4. Raising funds from Non-Residents
: IBUs will be able to source (or borrow) funds in foreign currency in order to meet the requirements of both Indian residents (as per FEMA) and non-residents.

Benefits: Ability to source funds from non-residents looking to invest in the subcontinent.

5. Dealing in derivative & structured products
: Deal in derivatives and structured products based on single or basket of securities, options, indices, debt securities, swaps, etc. in the foreign and IFSC markets IBUs will be able to deal with Currency Derivatives listed on the exchanges in Foreign and IFSC markets. Benefits: Ability to provide products to hedge the risk exposure of a portfolio


Means for long-term borrowings:

Means for long-term borrowings (more than one year) will be mostly through:
  • Borrowings from foreign banks & other IBUs
  • Debt issuance in IFSC & international bond markets
  • Bulk deposits from foreign corporates/ WOS of Indian corporates registered abroad
  • Current account balance from institutional clients
  • Market borrowings such as inter-bank borrowings, debt issuance etc.
  • The IBUs will also be allowed to raise short term liabilities (less than a year) from foreign banks and IBUs
  • Ability to source funds from non-residents looking to invest in the subcontinent


Ring fencing the activities of IFSC Banking Unit:

The IBUs 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 defray their administrative and statutory expenses. Such operations / transactions of these units in INR would be through the Authorised Dealers (distinct from IBU) which would be subject to the extant Foreign Exchange regulations. IBUs are not allowed to participate in the domestic call, notice, term, forex, money and other onshore markets and domestic payment system.