OFFSHORE BANKING

An offshore bank is a bank located outside the country of residence of the depositor, typically in a low tax jurisdiction (or tax haven) that provides financial and legal advantages. These advantages typically include:  

 

greater privacy (see also bank secrecy, a principle born with the 1934 Swiss Banking Act) low or no taxation (i.e. tax havens) easy access to deposits (at least in terms of regulation) protection against local political or financial instability.

TYPES:

Primary OFC·S Secondary OFC·S Booking OFC·S..

Advantages of Offshore Banking :
y Offshore banks provide access to politically and economically stable jurisdictions. This may be an advantage for those resident in areas where there is a risk of political turmoil who fear their assets may be frozen, seized or disappear. However, developed countries with regulated banking systems offer the same advantages in terms of stability. y Some offshore banks may operate with a lower cost base and can provide higher interest rates than the legal rate in the home country due to lower overheads and a lack of governement intervention. Advocates of offshore banking often characterise government regulation as a form of tax on domestic banks, reducing interest rates on deposits.

y Offshore finance is one of the few industries. have been accused of helping various organized . trusts or foundations. 2001. along with tourism. y Some offshore banks offer banking services that may not be available from domestic banks such as anonymous bank accounts. that geographically remote island nations can competitively engage in. y Interest is generally paid by offshore banks without tax deducted. through money laundering. and can help redistribute world finance from the developed to the developing world. higher or lower rate loans based on risk and investment opportunities not available elsewhere. or who do not pay tax until the tax return is agreed. offshore banks and tax havens. Following September 11. It can help developing countries source investment and create growth in their economies. y Offshore banking is often linked to other services. along with clearing houses. This is an advantage to individuals who do not pay tax on worldwide income. such as offshore companies. or who feel that they can illegally evade tax by hiding the interest income. Disadvantages of Offshore Banking y Offshore banking has been associated with the underground economy and organized crime. which may have specific tax advantages for some individuals.

so physical access and access to information can be difficult. and can increase problems in financial disturbance. This ´Hot moneyµ is aided by offshore accounts. The tax burden in developed countries thus falls disproportionately on middle-income groups. as previously sheltered income is brought back into the mainstream economy.crime gangs. Accounts can be set up online. and other state or nonstate actors. by phone or by mail. y Offshore jurisdictions are often remote. . y Offshore banking is usually more accessible to those on higher incomes. terrorist groups. Yet in a world with global telecommunications this is rarely a problem. y The existence of offshore banking encourages tax evasion. Activities of offshore banking. y Developing countries can suffer due to the speed at which money can be transferred in and out of their economy as ´hot moneyµ. by providing tax evaders with an attractive place to deposit their hidden income. tax cuts have tended to result in a higher proportion of the tax take being paid by high-income groups. because of the costs of establishing and maintaining offshore accounts. Historically.

because of Stable economic & political performance . India provides distinct advantages in attracting offshore banking units.y Wholesale banking: includes syndicated loans. taking of deposits. Offshore banking also borrows funds from major Eurocurrency market and lends or invests the same in other countries. project loans and such other high value loans to MNCs and banks. issue of securities. y Routing banking: many transactions are routed through offshore banks for advantages of tax saving or for escaping the regulations. issue process of foreign currency bonds and equities. Offshore Banking in INDIA Financial expert have been pleading to establish an offshore banking centre in India Geographically. OTC in derivatives & management of customers financial assets. thus offshore banks is engaged in wide range of transactions: foreign currency loans which includes syndicated loans. y Merchant banking: arranging external funds.

Vast market. beginning of offshore banking in India is permitted for the first time offshore banking units (OBUs) to be set up in special economic zones (SEZs). y The OBUs would be treated as foreign branches of India located in India. In 1996 the sodhani committee on foreign exchange reforms. The establishment of offshore banking in India was foreseen when the Foreign Exchange Regulation Act (FERA) was replaced by Foreign Exchange Management Act (FEMA).Vital time linked for international money market dealers. recommended offshore banking in India. y OBUs will be regulated and supervised by RBI. State Bank of India & ICICI Bank have opened the first offshore banking units (OBU) in India at the SEEPZ special economic zone. Hence. Balance sheet of banks .Technical manpower. y SEZs will be deemed to be a foreign territory for the purpose of trade operation and duties so as to led the growth of the economy. Mumbai. in 1999. It has limited mandate in India. Which would carry out mainly wholesale banking operation.

where liability deposits & borrowings. and they have higher yield than cash. Securities: cash is not an earning asset but 4% of cash may be sufficient to maintain liquidity.Basically banks balance sheets are different from companies. y ASSETS: Cash: cash represents only 2% to 4% of assets that·s because banks like to lend money to and earn interest. A bank can typically earn a higher interest rate on loans than on securities. . so its always prudent for a bank to keep securities on hand in case they need to free up soma liquidity. Items such as inventory. Loans therefore contain risk. Investment grade securities are liquid. Loans (advances): loans represent the majority of banks assets. accounts receivable. Thus banks keep most of its money tied up in loans and investment. Cash is necessary only for liquidity purpose. then bank may suffer loss. which is called ´earning assetsµ. Assets contains loan & investment. other wise it erodes value of money against inflation and interest. SLR requirement in India is of such kind. If banks make bad loans to customer r businesses. or payable are regular and significant in case of banks.

represents only small fraction of assets. This is the next important source of funds.Deposits constitute over 60% of bankers· funds.e. Borrowings: banks borrow from market as well as from central banks. A bank can generate large revenues with very few hard assets. y Liabilities: Deposits: main source of funds for banks is deposits it highlights the bankers business i.Other assets: it includes property and equipment. ¶intermediation·. Banks have stipulated minimum capital. Capital: capital is also known as shareholders equity. ASSET LIABILITY MANAGEMENT Asset liability management is an integrated strategy of managing balance sheet having regard to its size & quality that income from interest are maximized with the overall risk preference of the bank the mismatch and changes in the level of asset & liabilities can cause both liquidity & interest rate risk . Promoters should also be part of the risk. Bank owners contribute to bank capital. This is to ensure that banks do not just play with depositor·s funds.

. 4. This also implies that ALM encompasses costing and pricing policies in comprehensive sense. In 1980s volatility of interest rates in USA and Europe caused the focus to broaden to include the issue of interest rate risk. ALM IN INDIA The introduction of ASSET LIABILITY MANAGEMENT (ALM) in the Public Sectors Banks (PSBs) has been suggested by several experts. The bank management is now expected to target required profit levels and ensure minimization of risk to acceptable levels to retain the interest of investors in their banks. ALM began to extend beyond the bank treasury to cover the loan and deposit functions. The induction of credit risk into the issue of determining adequacy of the capital further enlarged the scope of ALM in later 1980s. 2. 3.ALM function and its growing importance 1. In the current decade earning a proper return of bank equity and hence maximization of its market value has meant that ALM covers the management of the entire balance sheet of a bank.

It is suggested that the PSB·s should introduce ALM which would focus on liquidity management. y Setting up ALM decision ² making processes i.e. The above requirements are already met by the new private sector banks. To begin with as the RBI·s monetary and credit policy of October 1997 recommends an adequate system of ALM to incorporate comprehensive risk management should be introduced in the PSB·s. The turmoil in domestic and international markets during the last few months and impending changes in the country financial system are a grim warning to our banks management to gear up their balance sheet managements in a single heave. interest rate risk management and spread management. But the knowledge new systems and organizational changes that are called for to manage it particularly the new banking risks are still lagging. For example:- . ALM committee. Broadly there are 3 requirements to implement ALM in these banks. They are as follows:y Developing a better understanding of ALM concepts.Since liberalization the banks have been given a large amount of freedom to manage their balance sheets. y Introducing an ALM information system.

If payments are late for a short time a loan is classified as past due. on which repayments or interest payments are not being made on time. 2. It is from the interest payments than a bank makes its profits. NON PERFORMING ASSET y Non-performing assets. Changes in interest rate by them to manage interest rate risk. Once a payment becomes really late (usually 90 days) the loan classified as non-performing. y Banks usually treat assets as non-performing if they are not serviced for some time. These banks have their balance sheets available at the close of every day. .made by a bank or finance company. are loans.1. Their maturity mismatches are based on data provided by their MIS. also called non-performing loans. y A loan is an asset for a bank as the interest payments and the repayment of the principal create a stream of cash flows. 3.

thereby adding a new dimension to the risk profile of banks balance sheets. or a combination of the two.y A high level of non-performing assets compared to similar lenders may be a sign of problems. Even in . However this needs to be looked at in the context of the type of lending being done. Some banks lend to higher risk customers than others and therefore tend to have a higher proportion of non-performing debt. in an individual foreign currency. either spot or forward. even if it eventually has to write off the nonperforming loans. increasing spreads. A mortgage lender will almost certainly have lower non-performing assets than a credit card specialist. but will make up for this by charging borrowers higher interest rates. but the latter will have higher spreads and may well make a bigger profit on the same assets. The banks are also exposed to interest rate risk which arises from the maturity mismatching of foreign currency position. EFFECT OF FOREIGN EXCHANGE EXPOSURE ON BANKS BALANCE SHEET: The risk inherent in running open foreign exchange positions have been heightened in recent years by the pronounced volatility in forex rates. Forex risk is the risk that a bank may suffer losses as a result of adverse exchange rate movements during a period in which it has an open position. as may an sudden increase.

FOREX RISK MANAGEMENT MEASURES: 1. middle and back offices. Set appropriate limits for open position and gaps. Banks also face risk called time ² zone risk or Herstatt risk which arises out of time ² lag in settlements of one currency in one center and the settlement of another currency in another time ² zone. The top management should also adopt the VaR (Value at Risk) approach to measure the risk associated with the exposures. In the Forex business banks also face the risk of default of the counterparties or settlement risk.cases where spot and forward position in individual currencies are balanced the maturity pattern of forward transactions may produce mismatches. Maturity and Position (MAP) and Interest Rate Sensitivity (SIR) for measurement of forex risk exposures. Reserve Bank of India has recently introduced two statements i.e. 2. . While such type of risk crystallization does not cause principal loss banks may have to undertake fresh transaction in cash. Clear ² cut and well ² defined division of responsibility between front. spot market for replacing the failed transaction. As a result banks may suffer losses as a result of changes in premia / discount of the currencies concerned.

Bank of India and Bank of Baroda have set up offshore banking units for deposit taking and lending at Bahrain. IBU International Finance in Hong Kong for both offshore and onshore banking. 2. Indian Overseas Bank. What are the benefits of offshore banking? . All these risk give sensitivity to the following factors: 1. QUESTIONAIRE 1.Banks should use these statements for periodical monitoring of forex risk exposures. Colombo. PARTICIPATION OF INDIAN BANKS IN OFFSHORE BANKING A few Indian banks such as State Bank of India. Profit Sensitivity: As interest rate risk and open position risk can generate uncertainty of profits. banks suffer in their revenue. Indian Banks taking company. Asset Value Sensitivity: Foreign currency denominated loans and deposits are affected by value change and thus can sanities originally balanced positions. Cayman Island and so on. Hong Kong.

The most important of those are bank secrecy / confidentiality and exemption from taxes on gains. How do I get an offshore bank account? Very easily. 4. Income generated in form of interest on deposits is not taxed by the income tax. politically and economically safe environment. 3. Opening such an account provides a powerful tool for keeping money secure and making it exempted from taxes. Open an HSBC Offshore Bank Account In Sterling. Customers also get possibility to invest globally. safety. The account is protected from creditors. Perhaps the most important benefit that offshore banking provides is that the account is strictly private. US dollars or Euros in minutes. Can I avoid taxes with offshore banking? . The confidentiality of all operations conducted through the account is protected by the legislation. It is to some extent a defense tool.Offshore banking services provide wide range of benefits and opens up distinct opportunities. Why to go offshore? Offshore banking centers open wide range of opportunities for its users: access to innovative banking products. 2. tax authorities and other interested parties. Benefits of going offshore are discussed here. anonymity. Using an offshore bank account provides opportunities that are not available to domestic banking users.

otherwise it will be considered as tax evasion. you should report them. 5. Some offshore jurisdictions exempt all incomes from all taxes. 6. then your offshore incomes shall not be taxed. So you must check your country·s legislation: if your countries authorities do not tax income generated from foreign sources. nobody is arrested for having offshore bank account. Is offshore banking safe and secure? Offshore jurisdictions are politically stable countries with strong economies and developed financial sector. In other words using offshore banking is legal. but if they do (like US does). but using offshore banking for illegal operations. if the country·s legislation requires that. Is offshore banking legal? Answer to this question is quite simple: it is legal.Most offshore banking centers are at the same time tax havens (low or no tax jurisdictions). such as tax evasion is illegal. your home country may be taxing foreign generated income. What can be illegal is when a person holds offshore bank account. Financial sector is tightly regulated to eliminate risk of bank . while others exempt only those incomes that were generated by sources outside the jurisdiction. receives an income and does not report this income in his home country. Although offshore banking centers do not tax your incomes. Opening offshore bank account is absolutely legal service provided by a financial institution that is licensed in full compliance with the legislation of a tax haven.

Which banks provide offshore bank accounts? Offshore bank accounts are provided by both local banks operating at offshore banking centers and also by reputable international banking institutions. If you are resident of UK and want to go offshore. US dollars or Euros in minutes. Which one is the best tax haven? What country is the best option? It is difficult to answer this question. Degree of bank secrecy varies from one jurisdiction to another. The answer varies according to your priorities. therefore if you are interested primarily in bank secrecy. and Isle of Man).failures and ensure a good image of a jurisdiction making offshore banking highly secure. you should check the legislation first to be sure to what extent your personal information is protected. Guernsey. 7. Actually you can open an HSBC Offshore Bank Account In Sterling. so it is up to you which one to choose. 8. 9. Simple answer is: ´it dependsµ. then Panama may be a good choice. Is my information kept anonymous and confidential? Most financial institutions in offshore banking centers provide anonymity to their clients. . We provide here description for major tax havens. If it is bank secrecy. then you may want to choose services provided by Channel Islands (Jersey. It depends what exactly you are looking for. Generally bank secrecy is ensured by a country·s legislation. such as HSBC and Barclays.

Is offshore banking really linked with criminal affairs and criminal financing? Despite the fact that offshore banking provides bank secrecy. Such approach makes tax haven authorities interested in to reduce or completely eliminate illegal transaction and makes very hard for criminals to engage in money laundering. this sector is strictly regulated and supervised business and this leaves very small space for criminal affairs. There are a few organizations like Financial Action Task Force (FATF). Opening an offshore bank account is not as simple as it may seem at the first sight. So it is very important that the bank your choice has good reputation and is incorporated in a tax haven that has good reputation. This makes it almost impossible to transfer funds banking institutions from jurisdiction that is in the black list. Basel Committee and the Offshore Group of Banking Supervisors (OGBS) that impose strict regulations on offshore banking sector of a tax haven.10. Tax havens that do not comply with the regulations imposed by these organizations risk to see themselves in a black list. . high degrees of privacy and confidentiality.

ACKNOWLEDGEMENT We express our sincere thanks to our esteem institution GURU NANAK KHALSA COLLEGE for this opportunity given to us. We wish to express our sincere thanks to all our professors and to our subject Professor PRIYA .

THAPAR for being the constant source of inspiration in completing the project.org/wiki/Offshor e_bank . It is our foremost duty to all those who has supported us and our group members who have helped us in completing our project. REFERENCE  INTERNET: y http://en.wikipedia.

co m/ y www. .y http://www.offshorebankingtoday.com NAMES ROLL NO.  BOOKS y : International banking and finance.google.

NIKITA. MORE 18 25 M.VIJAY 20 DHANASHRI GAURAV 14 . KAMBLE CONTENTS RAHUL. PAREKH 29 SR NO PALLAVI.

OFFSHORE BANKING 1 TYPES 2 ADVANTAGES OF OFFSHORE BANKING 3 4 5 6 7 8 9 10 11 DISADVANTAGES OF OFFSHORE BANKING ACTIVITIES OF OFFSHORE BANKING OFFSHORE BANKING IN INDIA BALANCE SHEET OF BANKS ASSET LIABILITY MANAGEMENT NON PERFORMING ASSET FOREX RISK MANAGEMENT MEASURES QUESTIONAIRE .

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