A Study on Growth of Offshore Banks in India presented on April 2016

1. A STUDY ON FACTORS
INFLUENCING THE GROWTH OF
OFFSHORE BANKING IN INDIA

2. Introduction
Offshore Banking Units (OBUs) are primarily in
the business of accepting deposits in non-
resident currency and lending it in terms of
loans to corporate and other financial
institutions.

3. Benefits of Offshore Banking
• Huge inflow of foreign exchange
• Higher interest rate on deposits
• No reserve requirement
• Interest rates are not controlled
• Income generated in forms of license fees
• Enhances the country’s image
• Infrastructure development

4. Criticisms of Offshore Banking
• Encourage shady dealing and financial crimes
due to lax policies
• Money laundering
• Tax evasion
• Capital flights
• Volatility in foreign exchange market
• Loss in government revenue
• Increased inequalities

6. Evolution of Offshore Banking in India
• The Sodhani Committee on Foreign Exchange
Reforms (1996) has recommended offshore
banking in India.
• The establishment of offshore centers in India
was foreseen when the Foreign Exchange
Regulation Act (FERA) was replaced by the
Foreign Exchange Management Act, 1999
(FEMA). Article 10 of FEMA included offshore
banking units as one of the authorities to whom
the RBI could delegate powers for dealing in
foreign exchange.

7. Beginning of offshore banking in India was by
permitting for the first time OBUs to be set up in SEZs.

8. Participation of the Indian Banks
• State Bank of India
• India Overseas Bank
• Bank Of India
• Bank of Baroda
• ICICI Bank

9. Offshore Banking Centres in India
• Exporters would benefit in terms of finer margins on
loans and better foreign exchange rates available via
an offshore banking unit.
• The benefits of multi-currency operations which, to an
extent, minimize currency fluctuation risk.
• Salaries paid by offshore banks and local expenditure
incurred by them contribute to the economy's welfare.
• India may earn revenue in the form of license fees,
profit taxes imposed on the banks operating in the
area.
• Benefit of banks' funds in the form of capital &ndnd
liquidity requirements.

10. Offshore Banking Centres in India
• The country can gain improved access to the international
capital markets.
• The domestic financial system may become more efficient
through increased competition and exposure of the
domestic banks to the practices of offshore banks.
• The offshore banking centres will provide opportunities to
train the local staff which will, in turn, contribute to faster
economic growth.
• The offshore banking units would help channelize non-
resident Indian investments.
• Setting up offshore banking centres would trigger enforced
development of more advanced communication facilities

11. Objective of the study
• To identify and analyze the factors that
contribute to the growth of offshore banking
• To devise the strategy for sustainable
development of SEZ through offshore banking

12. Research Methodology
The data collected is from secondary source.
Data related to different factors are collected
from sources like reports, research papers,
thesis, journals, news articles and books. In
depth study of each factor is done to analyze
its role in the growth of Offshore Banking.

13. ANALYSIS

14. Identified factor 1: Capital Account
Convertibility
• Keeping the principle of globalization, former deputy
Governor S.S.Tarapore suggested CAC can allow
unrestricted transfer of capital and can also lead to free
exchange of currency at lower rates.
• To achieve CAC certain pre-conditions are to be fulfilled
(i.e. a country has to be more responsible with its economy
and probably it should not be the case like Greece).
• Pre-conditions are:
1. According to Tarapore Committee the Fiscal Deficit to
GDP ratio has to be brought down to 3.5%. The data
confirms India has achieved a quite comfortable position as
far as Fiscal deficit is concern.

15. Identified factor 1: Capital Account
Convertibility
2. As per Tarapore Committee, the Inflation rate should
remain between 3-5% for average 3 years period. Inflation
has been around 5 to 6% in last few years. The trend shows
that India may achieve a targeted inflation rate in the years
to come.
3. Low and sustainable Current Account Deficit. India has
fairly improved on reducing CAD.
4. Low levels of Non Performing Assets.
• Thus, moving towards more capital account convertibility
India can take advantage of huge inflows in offshore banks.
Of the pre-conditions required for full capital account
convertibility India has better prospects in terms of first
three factors due to reduction in fiscal deficit to GDP ratio,
inflation and current account deficit.

16. Identified factor 2: Infrastructure and
Manpower:
Functioning of offshore banking requires
strong infrastructure support which can be
well provided by SEZs. SEZs like Adani Ports
have world class infrastructure which can be
utilized for setting OBUs, strong information
technology and telecommunication will
accelerate the growth of OBUs in SEZ areas.
Cities like Mumbai have well trained
manpower in banking and finance which will
be an added advantage

17. Identified factor 3: Increase in the
number High Net Worth Individuals
• India shows the highest growth of HNWIs in the world with 26.3% in terms of
population and 28.2% in terms of wealth.
• HNWIs would like to hedge their dollar denominated assets, for which OBUs are
options, This increase number of HNWIs will definitely use banking facilities of OBUs.
Source: https://www.worldwealthreport.com/reports/population/asia_pacific/india

18. Identified factor 4: Geographical
Location
Geographically, India provides distinct advantages in
attracting offshore banking units, because it has a
stable economic and political performance, a vast
market, technical manpower that could find
employment in these centres. Another advantage is
that the Indian market would open a little before the
Tokyo market closes, and close before New York
opens, thus providing a vital time link for international
money market dealers. In an era where many Indian
corporations are functioning abroad and many
corporations are granted permission to seek overseas
finance, establishing an offshore unit will help tap the
resources.

19. Identified factor 5: Special Economic
Zones
• India has only 196 SEZs operational of 523 approved SEZs
Source: https://factly.in/the-special-economic-zones-in-india-fact-sheet
Utilizing SEZs effectively by setting up more OBUs will give more financial
freedom to foreign entities operating in SEZs.

20. Conclusions
• India can act as a strong center for OBUs if all the above factors viz.
more opening up of Capital Account, developing Infrastructure,
training manpower, advantage of increasing number of HNWIs in
numbers as well as in wealth, Geographic Location and Developing
SEZ in terms of infrastructure (as being the reason for the slow
growth of SEZs).
• OBUs can definitely make SEZs more relevant as the capital flows
for the multinational corporations moving to India under the Prime
Minister Hon’ble Narendra Modi’s flagship program of Make in
India will be smoother. However, constraints in terms of delay in
implementation of GST and Land Acquisition Bill can be barriers to
this development.
• Increase in OBUs can lead to the sustainable development of
Special Economic Zones.

21. Sustainable Development in relation
to SEZ through Offshore Banks
• Sustainable growth concept advanced by the
Brundtland report was defined as “development
that meets the needs of the present without
compromising the ability of the future
generations to meet their needs.”
• Sustainable development extends the traditional
concept of economic development. It aims at
ensuring a pattern of development that will not
damage the reasonably foreseeable interests and
needs of future generations.

22. Sustainable Development in relation
to SEZ through Offshore Bank

23. THANK YOU