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ET in the Classroom

ET in the Classroom

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Published by Amit Kapadia

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Published by: Amit Kapadia on Nov 02, 2012
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05/13/2014

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ET in the classroom: Offshore Banking Unit

ET Bureau Jun 1, 2010, 03.02am IST

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Tags: SEZs| RBI| Offshore Banking Unit| OBUs| India

What is offshore banking unit? Offshore banking unit (OBU) is the branch of an Indian bank located in a special economic zone (SEZ), with a special set of rules aimed at facilitating exports from the region. As laws define it, it's a "deemed foreign branch" of the parent bank situated within India, and it undertakes international banking business involving foreign currency denominated assets and liabilities. The concept comes from the practice prevalent in several global financial centres. Here an OBU can accept foreign currency for business but not domestic deposits from local residents. This was conceived to prevent competition between local and offshore banking sectors. What was the need for OBUs? In addition to providing power, tax and other incentives to SEZs, policymakers felt a need to provide SEZ developers access to global money markets at international rates. So in 2002, RBI instituted OBUs, which would be virtually foreign branches of Indian banks. These would be exempt from CRR, SLR and few other regulatory requirements. RBI regulations make it mandatory for OBUs to deal in foreign exchange, source their foreign currency funds externally, follow all prudential norms applicable to overseas branches and are entitled for IT exemptions. Thus in many respects, they are free from the monetary controls of the country. What price, freedom from regulations? In the eight years that they have been operational, concerns have been raised that, funding by OBUs to SEZs would lead to increase in external debt of India. Also, some have suggested that OBUs as vehicles for extending dollar loans have no use as long as they are restricted to doing business only in the zones in which are they located. This would create an unnecessary regulatory arbitrage like booking business because there is some arbitrage advantage on offer. Anyways, ground realities could not be more different. Hardly a handful of banks have set up their OBUs, so the argument looks very far fetched. SEZ, itself as a concept has been struggling, given the issues that SEZ developers have faced over acquiring land from farmers. What is the future of OBUs? Most international financial centres still house OBUs, so saying they are not required may be incorrect. However, some analysts have said OBUs are losing relevance at a time of increasing globalisation. They say OBUs will be of no use after the economy opens up fully and the rupee is fully convertible. These experts argue for one or two OBUs, instead of having several of them spread across the country.

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