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OFFSHORE BANKING

Offshore banking refers to the international banking business involving non resident foreign
currency denominated assets and liabilities. It refers to the banking operation that covers only
non-residents and do not mix with the domestic banking. An offshore banking center is a place
where purposeful attempt is made to attract international banking by offering many concessions
in the from of taxes and levies being imposed at lower rates or not being charged. A more
important relaxation is the exemption of the offshore banks from restriction on operations.
Offshore banking units in these centers can carry on their activities of deposit taking from and
lending to international enterprises or investors without conflict with the domestic fiscal and
monetary policy. In short; offshore banking is international banking kept separate from domestic
banking coupled with freedom of functioning.
Offshore banking is carried our in about 20 centers throughout the world which offer the
following benefits:
1.
2.
3.
4.

Exemption from minimum reserve requirements.


Freedom from control on interest rates.
Law of non-existent taxes and levies.
Entry is relatively easy, especially for large international banks, in contrast to the
situation in neighboring countries, which may strictly limit or prohibit the entry of
foreign banks.
5. License fees are generally low.
6. Close proximity to the important loan outlets or deposit sources: e g., Bahrain is an
offshore base for petro- dollars.
Offshore banking is and extension of the concept of Euro-Currency to East.
They provide a link between Furo-currency markets and the final borrowers.
They are providing essential time zone links which are truly world-wide and ensure that the
market operates 24 hours a day. While offshore banking is and integral part of Euro- market,
what distinguishes them from the mainstream of Euro-markets is that they were especially set
up by the host countries to promoter international banking. The need for channelising huge
international money resources that OPEC come to possess following the oil crisis resulted in
setting up of a number of offshore centers. These exist in almost all Asian countries like
Singapore, Hong Kong, Korea, Philippines, Colombo and Bahamas.
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, namely.
Project financing, syndicated loans, issuer of short-term and medium term instruments like
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
banking or with large borrowers of multinational corporations. Multinational corporations
prefer transaction in offshore financial centers because of certain apparent advantages:
i) avoidance of high tax incidence; ii) freedom from exchange control; iii) maintenance of
secrecy of deals due to non- interference from government and regulatory authorities, and
iv) deferring tax by floating subsidiary units in such centers and delaying their remittance of
profits to the parent company. When it would be taxed.

Participation of the Indian Banks


Offshore banking may be a measure of showing the sophistication achieved by a bank in
international finance. That the response from Indian banks to offshore banking is positive
reveals the development of these banks in the last few years in the field of international
banking. A number of banks including State Bank of India, Indian Overseas Bank. Bank of
India and Bank of Baroda have set up offshore banking units for deposit taking and finial
lending at places like Bahrain, Hong Kong, Colombo, Cayman Islands, etc. Indian Bank,
Bank Of Baroda and Union Bank of India have jointly floated a deposit taking company IBU
international Finance Ltd. in Hong Kong to do both offshore and onshore banking
The benefits that would be derived by the Indian Banks from these ventures are:
1. They would earn sizable profits as these ventures involve relatively law operating costs.
2. With multi-currency deposit bases 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. In the absence of facilities with the Indian banks such business would be
diverted to other international banks.
3. The banks would be strengthening the balance of payments of the country through
repatriation of profits from the venture.
Offshore Banking Centre in India
A persistent plea has been made by financial experts to establish and offshore banking centre
in India, Geographically, India provides distinct advantage in attraction offshore banking
units, because it has a stable economic and political performance a vast market, technical
manpower which could find employment in these centers. The geographical position is such
that the Indian market would open a little before the Tokyo market closes and close a little
before New York open a little before thus providing for international money market dealers a
vital time link.
In an era where many Indian corporations are functioning abroad and many corporations are
granted permission to seek overseas finance, the establishment of an offsho0re unit will help
tap the resources easily.
The following benefits are expected from establishing an offshore banking centre in India.
1. Exporters would benefit in term of finer margins on loans and better foreign exchange
rates available via and offshore banking units. The benefits of multi currency operations
which. To and extent minimize currency fluctuation risk, will be an added advantage.
2.

Salaries paid by offshore banks and local expenditure incurred by them contribute to the
welfare of the economy. For smaller countries the benefit would be of grater
significance. For a larger country like India. However this may not form a significant
portion of the total income.

3. This country may earn revenue in the form of license fees, profit taxes imposed on the
banks operating in the area. It may also get the benefit of banks funds in the form of
capita and liquidity requirements.
4. The country can gain improved access to the international capital markets.

5. The domestic financial system may become more efficient through increased competition
and through exposure of the domestic banks to the practices of offshore banks.
6. The offshore banking centre will provide opportunities to train the local staff which will
in turn contribute to a faster growth of the domestic economy.
persistent
7. The offshore banking units would help channelise no resident Indian investments.
8. Setting of and offshore banking centre would trigger enforced development off more
advanced communication facilities which is must for its functioning.
9. As the exporters could get cheaper finance from this centre, the expenditure on export
interest subsidy can saved.
10. Such centre will add to the prestige of the country and establish India firmly on the world
financial map.
The establishment of and offshore centre involves some cost to the host country:
1. An offshore centre requires certain infrastructure in the form of good telecommunication
system, education and training facilities, etc. The host country may have to incur heavily
on these if the facilities are non-existing. The cost involved may not be justified by the
benefits derived.
2. The supervision and regulation of offshore banks may involve substantial costs.
3. Encouraging offshore banking may result in the diminution in autonomy of domestic
monetary policy, since it is difficult to draw a line always between the offshore and
onshore operation, particularly in the absence of exchange control.
4. Offshore banking provides scope for tax evasion by residents. For example in Hong
Kong, it was fund that residents place deposits with offshore banks and take loans of the
same amount. The interest on loan would be deductible expenditure for taxation while the
income from interest on deposits is not taxed.
5. Offshore banks ray prove to be deleterious competitions to the local banks and may
inhibit their growth.
6. Offshore banks may increase demand for domestic resources like space (land for office
and housing) and skill (professionals). Since the supply in the short run is inelastic, the
increased demand may cause inconvenience to local residents.
It may observed from the above discussion that the cost of having and offshore banking centre
would be substantial to a country with limited resources and undeveloped infrastructure. For a
country of the size of India, the cost involved may not be significant. There is, therefore, a strong
case for India to develop and offshore banking centre for international banking centre of its own.
Bombay is suitable centre for establishing offshore banking in India. It has all the requirements
goods infrastructure in the form of telecommunication and services, abundant and well-trained
manpower and presence of many international banks, both Indian and foreign, already engaged
in international banking. Besides Bombay is having and ideal location in the eastern time zone. It
is active along with Singapore and Bahrain and has marginal overlap with London and Frankfurt.
The setting up of the International Banking Centre in Bombay would throw the door open for the
free flow of international trade and without any strings attached. The foreign loans or aid are
generally available only with certain conditions, which can be avoided by utilizing the funds
from offshore bank.

Recommendations of Sodhani Committee


The Sodhani Committee on Foreign Exchange Reforms (1996) has recommended allowing
Indian banks and financial institutions to set up offshore banking units as it would prove to be
cost-effective

Permission to operate Off-shore Banking


01. The OBUs. Though located in your Foreign Exchange Branch - Dhaka and Agrabad
Branch-Chittagong , will operate through completely separate countries and maintain its
own account relating to Offshore banking business separately.
02. The Operations of the Units shall be subject to the relevant laws of Bangladesh except
those in respect of which exemption are provided.
03. The OBUs wil be free to accept deposit from or to borrow from persons/ institution not
resident in Bangladesh including Bangladeshi nationals working abroad. The OBUs will
also be free to accept deposit from or to borrow from Type A (wholly foreign owned)
units in the Export Processing Zones in Bangladesh. The OBUs shall not accept deposits
from persons/institutions resident in Bangladesh including Type B (Joint Venture) and
Type c (Wholly local owned) units in the Export Processing/ ones in Bangladesh.
04. The OBUs shall carry on transaction in freely convertible foreign currencies i.e US
Dollar, Pound Sterling, Japanese Yen, Swiss Franc, Canadian Dollar, Swedish Kroner,
Singapore Dollar, South Korean Won and Furo.
05. a) The OBUs shall be free to make loans/advances to persons institutions not resident in
Bangladesh and also to make loans/advance to Type-A( wholly foreign owned) units
in the Export Processing Zones in Bangladesh.
b) Industrial units outside the Export Processing Zones and type-B and Type-C Industrial
units within the Export Processing Zones in Bangladesh may avail term loans in
foreign currencies from the OBUs subject to compliance with the guidelines Issued
by the Board of Investment for borrowing abroad by industrial units in Bangladesh.
06. Banks functioning in Bangladesh may also maintain correspondent relation with OBUs in
the manner they maintain such accounts with their foreign correspondents.
07. The OBUs will submit reports/ returns to Bangladesh bank as and when asked for. The
books and records of OBUs shall have to be kept ready for inspection at any time by
Bangladesh Bank.

08. The OBUs will be free to take out insurance abroad and not be subject to local insurance
laws.
09. The OBUs regardless of its locations in Bangladesh. Would get coverage under EPZ Act.1980.
10. Ntional Credit and Commerce Bank Limited, Head Off\ice, 7-8 Motijheel Commercial
Area, Dhaka-1000 will be held liable to make payment of any liability created by the
OBUs.
11. The OBUs have been allowed exemption from the purview of provisions of the Banking
Companies Act.1991 except those of Sections 31, 32, 36(2) , 37 44, 45, 49 109(2),
109(4), 109(7), 113,121 and 122. The OBUs have been allowed exemption from Article
36(1) of Bangladesh Bank Order.1972.
12. Date of commencement of OBUs operations should be communicated to the Bangladesh
Bank within 7 (seven) days of such commencement.
13. The operations of OBUs shall not be closed without prior permission of the Bangladesh
Bank.

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