Tuesday, January 12, 2016

Setting up of IFSC Banking Units (IBUs)



RBI has formulated a scheme for the setting up of IFSC Banking Units (IBUs) by banks in International Financial Services Centres (IFSCs). You may be aware that Government of India has already announced setting up of an IFSC in Gujarat namely Gujarat International Finance Tec-City (GIFT) in Gandhinagar, Gujarat. The guidelines contained in this circular will be applicable to IBUs set up in GIFT as well as in other IFSCs which may be set up in India.

Scheme for setting up of IFSC Banking Units (IBU) by Indian Banks

Eligibility criteria
Indian banks authorised to deal in foreign exchange will be eligible to set up IBUs. Each of the eligible banks would be permitted to establish only one IBU in each IFSC.

Licensing
Eligible banks interested in setting up IBUs will be required to obtain prior permission of the RBI. For most regulatory purposes, an IBU will be treated on par with a foreign branch of an Indian bank.

Capital
The parent bank will provide a minimum capital of US$ 20 million or equivalent in any foreign currency to its IBU. The IBU should maintain the minimum prescribed regulatory capital on an on-going basis.

Reserve requirements
The liabilities of the IBU are exempt from both CRR and SLR.

Resources and deployment
Funds will be raised from persons not resident in India and can be deployed with both residents as well not residents subject to the provisions of FEMA, 1999.

Permissible activities of IBUs
The IBUs will be permitted to engage in the form of business as per the BR Act as given below, subject to the conditions of the licence.
i.      IBUs can undertake transactions with non-resident entities other than individual / retail customers / HNIs.
ii.    All transactions of IBUs shall be in currency other than INR.
iii.  IBUs can deal with the Wholly Owned Subsidiaries / Joint Ventures of Indian companies registered abroad.
iv. IBUs are allowed to have liabilities with original maturity period of more than one year only. They can, however raise short term liabilities subject to limits prescribed by the RBI. It has now been decided that RBI will not prescribe any limit for raising short-term liabilities from banks. However, the IBUs must maintain LCR as applicable to Indian banks on a stand alone basis and strictly follow the liquidity risk management guidelines issued by RBI to banks. Further, NSFR will also be applicable to the IBUs as and when it is applied to Indian banks. .(Circular dt 7/1/16)

v.     IBUs are not allowed to open any current or savings accounts. They cannot issue bearer instruments or cheques. All payment transactions must be undertaken via bank transfers. It has now been decided that the IBUs can open foreign currency current accounts of units operating in IFSCs and of non-resident institutional investors to facilitate their investment transactions.(Circular dt 7/1/16)
vi.  IBUs are permitted to undertake factoring / forfaiting of export receivables.
vii.IBUs are permitted to undertake transactions in all types of derivatives and structured products.

Prudential regulations
All prudential norms applicable to overseas branches of Indian banks would apply to IBUs.

The IBUs would be required to adopt liquidity and interest rate risk management policies prescribed by the RBI in respect of overseas branches of Indian banks 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 parent bank.

Anti-Money Laundering measures
The IBUs will be required to scrupulously follow KYC, CFT and other anti-money laundering instructions. IBUs are prohibited from undertaking cash transactions.

Regulation and Supervision
The IBUs will be regulated and supervised by the RBI of India.

Reporting requirements
The IBUs will be required to furnish information relating to their operations. These may take the form of offsite reporting, audited financial statements for IBUs, etc.

Ring fencing the activities of IFSC Banking Units
The IBUs would operate and maintain balance sheet only in foreign currency. They may have  a Special Rupee account out of convertible fund to defray their administrative and statutory expenses. Such transactions in INR would be through the Authorised Dealers (distinct from IBU). IBUs are not allowed to participate in the domestic call, notice, term, forex, money and other onshore markets and domestic payment systems.

The IBUs will 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.

Priority sector lending
The loans and advances of IBUs would not be reckoned as part of the Net Bank Credit of the parent bank for computing priority sector lending obligations.

Deposit insurance
Deposits of IBUs will not be covered by deposit insurance.

Lender of Last Resort (LOLR)
No liquidity support or LOLR support will be available to IBUs from the RBI.

With a view to providing greater flexibility to the IBUs in their business transactions, it has been decided that exposure ceiling for IBUs shall be 5 percent of the parent bank’s Tier-I capital in case of a single borrower and 10 percent of parent bank’s Tier-1 capital in the case of a borrower group. .(Circular dt 7/1/16)



Scheme for setting up of IBU by foreign banks already having a presence in India

Eligibility criteria
Only foreign banks having presence in India will be eligible to set up IBU. Specific permission from the home country regulator is required. Each of the eligible banks will be permitted to establish only one IBU in each IFSC.

Licensing
The banks will be required to obtain prior permission of the RBI under Section 23 of the Banking Regulation Act.

Capital         
Parent bank would be required to provide a minimum capital of US$ 20 million or equivalent in any currency. The IBUs should maintain the minimum prescribed regulatory capital on an on-going basis. 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.

Reserve requirements
The liabilities of the IBU are exempt from both CRR and SLR.

Resources and deployment
Funds will be raised from persons not resident in India and can be deployed with both residents as well not residents subject to the provisions of FEMA, 1999.

Permissible activities of IBUs
The IBUs will be permitted to engage in the form of business mentioned in the BR Act as given below, subject to the conditions of the licence.

i.      IBUs can undertake transactions with non-resident entities other than individual / retail customers / HNIs.
ii.    All transactions of IBUs shall be in currency other than INR.
iii.  IBUs can deal with the Wholly Owned Subsidiaries / Joint Ventures of Indian companies registered abroad.
iv.IBUs are allowed to have liabilities in foreign currency only with original maturity period greater than one year. They can however raise short term liabilities from banks subject to limits prescribed by the RBI. It has now been decided that RBI will not prescribe any limit for raising short-term liabilities from banks. However, the IBUs must maintain LCR as applicable to Indian banks on a stand alone basis and strictly follow the liquidity risk management guidelines issued by RBI to banks. Further, NSFR will also be applicable to the IBUs as and when it is applied to Indian banks. .(Circular dt 7/1/16)
v.    IBUs are not allowed to open any current or savings accounts. They cannot issue bearer instruments or cheques. All payment transactions must be undertaken via bank transfers. It has now been decided that the IBUs can open foreign currency current accounts of units operating in IFSCs and of non-resident institutional investors to facilitate their investment transactions.(Circular dt 7/1/16)
vi.  IBUs are permitted to undertake factoring/forfaiting of export receivables.
vii.IBUs are permitted to undertake transactions in all types of derivatives and structured products with the prior approval of their Board of Directors.

Prudential regulations
An IBU shall adopt prudential norms as prescribed by RBI.

The IBUs will be required to adopt liquidity and interest rate risk management policies prescribed by the RBI 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 branch/es of the foreign bank having a presence in India.

Anti-Money Laundering measures
Funds will be raised from persons not resident in India and can be deployed with both residents as well not residents subject to the provisions of FEMA, 1999.

Regulation and supervision
The IBUs of foreign banks will be regulated and supervised by the RBI.

Reporting requirements
The IBUs will be required to furnish information relating to their operations as prescribed from time to time by the RBI. These may take the form of offsite reporting, audited financial statements for the IBU, etc.

Ring fencing the activities of IFSC Banking Units
The IBUs would operate and maintain balance sheet only in foreign currency. They may have  a Special Rupee account out of convertible fund to defray their administrative and statutory expenses. Such transactions in INR would be through the Authorised Dealers (distinct from IBU). IBUs are not allowed to participate in the domestic call, notice, term, forex, money and other onshore markets and domestic payment systems.

The IBUs will 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.

Priority sector lending
The loans and advances of IBUs will not be reckoned as part of the Net Bank Credit for computing priority sector lending obligations of the foreign bank in India.

Deposit insurance
Deposits of IBUs will not be eligible for deposit insurance in India.

Lender of Last Resort (LOLR)
No liquidity support or LOLR support will be available to IBUs from the RBI.

With a view to providing greater flexibility to the IBUs in their business transactions, it has been decided that exposure ceiling for IBUs shall be 5 percent of the parent bank’s Tier-I capital in case of a single borrower and 10 percent of parent bank’s Tier-1 capital in the case of a borrower group. .(Circular dt 7/1/16)


Based on RBI Circular dt 01/04/15 and updated on 7/01/16. Please visit www.rbi.org.in for any further clarification if required…..   Poppy