Financial experts have been pleading to establish an offshore banking centre in India.

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. The question is: Will these offshore banking units fulfil Mr Murasoli Maran's cherished goals? ONE of the significant features of the Exim Policy is the proposal to permit offshore banking units (or overseas banking units) in Special Economic Zones (SEZs). Offshore banking refers to the international banking business involving non-resident foreign currency-denominated assets and liabilities. It refers to the banking operations that cover only non-residents, and does not include domestic banking. An offshore banking centre is a place where deliberate attempt is made to attract international banking by offering many concessions in the form of taxes and levies imposed at lower rates. A more important relaxation is the exemption of the offshore banks from restrictions on operations. Offshore banking units in these centres can carry on their activities with international enterprises or investors without conflicting with the domestic fiscal and monetary policy. Offshore banking centres offer the following benefits: Exemption from minimum reserve requirements. Freedom from control on interest rates. Low or non-existent taxes and levies. Entry is relatively easy, especially for large international banks, in contrast to the situation in neighbouring countries that may strictly limit or prohibit the entry of foreign banks. Licence fees are generally low. Close proximity to the important loan outlets or deposit sources; for instance, Bahrain is an offshore base for petro-dollars. Offshore banking is an extension of the euro-currency concept to the East, which provides a link between euro-currency markets and the final borrowers. They provide essential time zone links that are truly world-wide, and ensure that the market operates 24 hours a day. While offshore banking is an integral part of the euro-market, what distinguishes it from the mainstream euro market is that it was specially set up by host countries to promote international banking. Offshore banking units are branches of international banks or other subsidiaries or affiliates. They do not carry retail business, but generally provide wholesale banking services — project financing, syndicated loans, issue of short-term and medium term instruments, such as negotiable certificates of deposits and capital notes — as well as merchant banking activities in foreign currency denominated bonds and equity shares. The deals are mostly between banks or with large borrowers or multinational corporations. MNCs prefer transacting in offshore financial centres because of certain apparent advantages: Avoidance of high tax incidence; freedom from exchange control; maintenance of secrecy of deals due to non-interference from government and regulatory authorities; and deferring tax by floating subsidiary units in such centres and delaying their remittance of profits to the parent company, when it would be taxed.

 The domestic financial system may become more efficient through increased competition and exposure of the domestic banks to the practices of offshore banks. technical manpower that could find employment in these centres. because it has a stable economic and political performance.  The country can gain improved access to the international capital markets.Participation of the Indian banks Few Indian banks. . however. Bank of Baroda and Union Bank of India jointly floated a deposit taking company. this may not form a significant portion of the total income. in Hong Kong for both offshore and onshore banking. For a larger country such as India. Indian Bank. Indian Overseas Bank. thus providing a vital time link for international money market dealers.  India may earn revenue in the form of licence fees. a vast market. The benefits for the Indian banks from these ventures are:  Sizeable profits — as these ventures involve relatively low operating costs. such as State Bank of India. Offshore banking centre in India Financial experts have been pleading to establish an offshore banking centre in India. to an extent. It may also get the benefit of banks' funds in the form of capital and liquidity requirements. in turn.  Setting up offshore banking centres would trigger enforced development of more advanced communication facilities — a must for their functioning. India provides distinct advantages in attracting offshore banking units. and close before New York opens. and so on.  The offshore banking centres will provide opportunities to train the local staff which will. In an era where many Indian corporations are functioning abroad. the banks would be able to serve better the needs of their customers who have set up joint ventures abroad in the form of foreign currency finance. But establishing offshore centres also comes with a price:  The supervision and regulation of offshore banks may involve substantial costs.  The banks would strengthen the country's balance of payments through repatriation of profits from the venture. Cayman Islands. establishing an offshore unit will help tap the resources:  Exporters would benefit in terms of finer margins on loans and better foreign exchange rates available via an offshore banking unit. have set up offshore banking units for deposit taking and final lending at Bahrain.  Salaries paid by offshore banks and local expenditure incurred by them contribute to the economy's welfare. Geographically. and many corporations are granted permission to seek overseas finance. profit taxes imposed on the banks operating in the area. For smaller countries. Hong Kong. Bank of India and Bank of Baroda. the benefit would be greater. contribute to faster economic growth. Colombo.  The offshore banking units would help channelise non-resident Indian investments.  With multi-currency deposit bases. IBU International Finance. Another advantage is that the Indian market would open a little before the Tokyo market closes. minimise currency fluctuation risk. The benefits of multi-currency operations which. will be an added advantage.

(The author is Associate Professor in International Finance at the PSG Institute of Management. The question is: Will these offshore banking units fulfil Mr Maran's cherished goals? The RBI is expected to bring out regulations regarding setting up these units in India. it was found that residents place deposits with offshore banks and take loans of the same amount. The interest on loan would be a deductible expenditure for taxation.) Send this article to Friends by E-Mail . both Indian and foreign. Mumbai was considered suitable for establishing offshore banking here. For instance. The Sodhani Committee on Foreign Exchange Reforms (1996) has recommended allowing Indian banks and financial As against the general recommendation of permitting offshore banking units only at Mumbai. particularly in the absence of exchange control.  Offshore banking provides scope for tax evasion by residents. Encouraging offshore banking may result in the diminution in autonomy of domestic monetary policy. the present proposal is to permit them at Special Economic Zones. 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. Coimbatore. in Hong Kong. while the income from interest on deposits is not taxed. since it is difficult to draw a line always between the offshore and onshore operations.  Offshore banks may prove to be harmful competitors to the local banks and may inhibit their growth. already engaged in international banking. A lot depends on how far these regulations are liberal and pragmatic. The city has all the requirements — goods infrastructure in the form of telecommunications and services. This is a wise move since both offshore banking centres and SEZs have many things in common as regards administration and purpose. abundant and well-trained manpower and presence of many international banks. 1999 (FEMA). The establishment of offshore centres in India was foreseen when the Foreign Exchange Regulation Act (FERA) was replaced by the Foreign Exchange Management Act. For long.