No CAR relief for foreign banks: RBI

Twelve years after the Gujarat International Finance Tec-City (GIFT City) was mooted with a grand plan to develop it as India’s first international financial service centre (IFSC) capable of getting a good slice of the huge business the likes of Dubai and Singapore generate as IFSCs, regulatory hurdles continue to dog its progress.

The Reserve Bank of India (RBI) is learnt to have insisted that foreign banks setting up shop in GIFT City would have to maintain the same capital adequacy ratio (CAR) as the domestic banks are required to, since any exemption or special dispensation could pose a risk to the country’s financial sector and its balance of payments situation. The view was expressed by the central bank representative during a meeting with the finance ministry last week, official sources said.

CAR is the ratio of capital to risk-weighted assets, and is considered to be a measure for banks’ ability to protect depositors.

A higher CAR for a bank makes it safer for the financial system as it could absorb losses before becoming insolvent.

Under Basel III norms, the CAR required is 8% but the RBI has set it at 9% for commercial banks and 12% for public sector banks.

It is felt that a foreign bank opening a branch inside an IFSC would be incentivised if it’s not required to bring large amount of capital as per norms set by RBI.

Sources said that the GIFT City representatives argued that India needed to follow the Hong Kong model where foreign banks were during the initial stages exempted from maintaining CAR at par with domestic regulations of the autonomous territory and the norm has since been tightened.

“We have to offer something extra to foreign banks be able to lure them to India’s fledgling IFSC via a vis established IFSC ecosystems in Hong Kong and Singapore and other centers,” another source who attended the meeting said. He added that while the RBI’s stance was in sync with the tenets of law, the regulator actually needed to be creative to ensure that GIFT City is taken seriously by foreign financial institutions.

The meeting was attended by market regulator SEBI and revenue and economic affairs departments of the finance ministry. It was finally decided that the RBI Board would consider a lower CAR for the foreign banks in the under-development IFSC and present it at the next meeting on the subject with the ministry.

While the GIFT City was first proposed way back in June 2007, the requisite enabling regulatory frameworks were announced by Sebi, RBI and IRDA during March-April, 2015.

According to recent reports, about 17% of the total promised development has either finished or is under construction. “The GIFT City is fast becoming a self-sustaining brand. Now nobody can stop it. The whole project is about 62 million square feet of which development rights have been given for 10-11 million square feet. So the committed investments parked so far in the project will be about Rs 11,000 crore,” the Indian Express quoted Ray as saying.

Given the extent of offshore fund-raising by Indian corporate, IFSCs could emerge as a hub of foreign currency loan syndication. Similarly, the finance SEZ could help the country get a share of the large-scale rupee and equity derivatives trading taking place in centres like Singapore, Hong Kong and Dubai. According to a concept paper on finance SEZs prepared by the National Institute of Public Finance and Policy, global activity on rupee derivatives is estimated at $70 billion per day. It said Indian firms are losing Rs 2 lakh crore in revenues per year due to the shift of rupee derivatives trading to locations outside India. A substantial part of this trading can be captured by Indian firms, if appropriate regulatory and tax regime exists, it said.

The GIFT City provides a vastly relaxed regime of approvals required for setting up an IFSC unit. Further, the government has also waived off commodity transaction tax, dividend distribution tax and long term capital gains tax for these units. In the budget earlier this year, the government also extended the tax holiday to 10-years for 100% of the profit for IFSC units. Businesses operating out of IFSC also enjoy a wide range of concessions on indirect taxes as well.

According to the RBI regulations, only foreign banks already having presence in India will be eligible to set up IFSC banking units (IBUs). Also, this shall not be treated as a normal branch expansion plan in India and therefore specific permission from the regulator for setting up of an IBU will be required. Each of the eligible banks will be permitted to establish only one IBU in each IFSC. With a view to enabling IBUs to start their operations, the parent bank will be required to provide a minimim capital of $20 million or equivalent in any foreign currency to its IBUs.