Offshore Banking

Meaning of Offshore Banking:

Offshore banking refers to the international
banking business involving nonresident foreign
currencydenominated assets and liabilities. It
refers to the banking operations that cover
only nonresidents and do not mix with the
domestic banking.

Meaning of Offshore Banking

centre:
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 being imposed at
lower rates or not being charged,
moderate or light financial regulation,
secrecy in banking etc.

Meaning of Offshore Banking units

(OBUs): Offshore banking units in the
centre 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.

Offshore Banking
services
Offshore banking units are branches of international
banks or subsidiaries. They do not carry retail business,
but generally provide
project financing
wholesale banking services
syndicated loans
merchant banking activities
Deposit taking
Foreign exchange
Fund management
Investment management and investment custody
Letters of credit and trade finance

Presence of OBU
worldwide
Offshore banking is carried out in about 20
centres throughout the world which offer
the following benefits:
Exemption from minimum reserve
requirements i.e CRR, SLR..
Freedom from control on interest rates
Low or nonexistent taxes and levies
Entry is relatively easy
License fees are generally low.

Features of Offshore
Banking
Involves nonresident foreign
currencydenominated assets and
liabilities
Enjoy many concessions in taxations,
exchange control regulations and
other banking regulations
The markets operates 24 hours a day
Provide Wholesale banking services

Offshore banking is an extension of the

concept of Eurocurrency to East. These
centres exist in almost all Asian countries
like Singapore, Hongkong, Korea,
Philippines, Colombo and Bahamas.
MNCs prefer banking with OBUs due to tax
advantages, secrecy of transactions,
freedom from exchangecontrol etc.
Provides better access to international
capital markets

Participation of the
Indian banks
State Bank of India, Indian Overseas Bank, Bank of India and
Bank of Baroda, have set up offshore banking units at Bahrain,
Hong Kong, Colombo, Cayman Islands, and so on.
The benefits for the Indian banks from these ventures
are:
Sizeable profits as these ventures involve relatively low
operating costs.
With multicurrency 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.
The banks would strengthen the country's balance of
payments through repatriation of profits from the venture.

Regulation of offshore
banks
The quality of the regulation is monitored by supranational bodies such as the International Monetary
Fund(IMF). Banks are generally required to maintain
capital adequacy in accordance with international
standards. They must report at least quarterly to the
regulator on the current state of the business.
The tightening of anti-money laundering regulations
in many countries including most popular offshore
banking locations means that bankers are required, by
good faith, to report suspicion of money laundering to
the local police authority, regardless of banking
secrecy rules. There is more international co-operation
between police authorities.
In the US the Internal Revenue Service (IRS)
introduced Qualifying Intermediary requirements,

Following 9/11 the US introduced the USA PATRIOT Act,

which authorizes the US authorities to seize the assets of
a bank, where it is believed that the bank holds assets for
a suspected criminal. Similar measures have been
introduced in some other countries.
The European Union has introduced sharing of
information between certain jurisdictions, and enforced
this in respect of certain controlled centres, such as the
UK Offshore Islands, so that tax information is able to be
shared in respect of interest.
The Bank Secrecy Act requires that Taxpayers file an
FBAR for accounts outside of the United States that have
balances in excess of $10,000

The benefits of Offshore

Banking
Exporters would benefit in terms of finer margins
on loans and better foreign exchange rates
available via an offshore banking unit.
The benefits of multicurrency operations which,
to an extent, minimise currency fluctuation risk,
will be an added advantage.
Salaries paid by offshore banks and local
expenditure incurred by them contribute to the
economy's welfare. For smaller countries, the
benefit would be greater.
India 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 capital and liquidity

The country can gain improved access to the

international capital markets.
The offshore banking centres will provide
opportunities to train the local staff which will, in
turn, contribute to faster economic growth.
The offshore banking units would help
channelise nonresident Indian investments.
Setting up offshore banking centres would
trigger enforced development of more advanced
communication facilities a must for their
functioning.

Establishing offshore centres also

comes with a price/ Disadvantages

The supervision and regulation of offshore

banks may involve substantial costs.
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 operations,
particularly in the absence of exchange
control.

 Offshore banking provides scope for tax

evasion by residents. For instance, in Hong
Kong, 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, while the income from interest on
deposits is not taxed.
Offshore banks may prove to be harmful
competitors to the local banks and may
inhibit their growth.