The establishment of IFSC Banking Units (IBUs) is governed by the International Financial Services Centres Authority (IFSCA). IBUs are specialized banking branches set up within an International Financial Services Centre (IFSC), such as GIFT City, Gujarat, with the objective of providing banking services to global clients and conducting offshore transactions.
Key Guidelines for Setting Up an IBU
1. Eligibility Criteria
- Indian banks, both public and private sector, authorized to deal in foreign exchange are eligible to set up an IBU.
- Each eligible bank is permitted to establish only one IBU per IFSC.
2. Licensing
- Banks must obtain prior approval or a license from the IFSCA before commencing IBU operations.
3. Capital Requirements
- A minimum capital of USD 20 million (or equivalent in other foreign currency) must be maintained at all times.
- This capital is to be provided by the parent bank and is to be maintained separately for the IBU.
4. Reserve Requirements
- The liabilities of an IBU are exempt from the Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR) requirements as prescribed by the Reserve Bank of India (RBI).
5. Prudential Norms
- IBUs are required to adhere to the prudential norms issued by the RBI, covering areas such as asset classification, provisioning, and capital adequacy.
6. Risk Management
- IBUs must establish robust risk management frameworks that include:
- Credit risk policies
- Exposure limits
- These policies should align with the overall risk management framework of the parent bank.
7. Liquidity and Interest Rate Risk
- IBUs are required to implement liquidity and interest rate risk management policies in line with RBI guidelines.
- The units should function within the parent bank’s integrated risk management architecture.
8. Reporting Requirements
- IBUs must comply with regulatory reporting norms, including submission of:
- Liquidity Coverage Ratio (LCR) returns
- Reports on IBU operations and exposures
- Other prescribed data sets
9. Restrictions on Certain Transactions
- IBUs are not permitted to release foreign exchange for transactions involving residents of Nepal or Bhutan, in accordance with regulatory restrictions.
10. Nostro Account Usage
- IBUs may utilize Nostro accounts maintained by the parent bank or its foreign branches for transactional purposes.
11. Resource Mobilization and Deployment
- Sources of Funds:
- IBUs may raise funds from non-resident persons and overseas branches of Indian banks, including borrowing in foreign currency.
- Deployment of Funds:
- Funds can be deployed to both residents and non-residents.
- Deployment to residents in India must comply with the provisions of the Foreign Exchange Management Act, 1999 (FEMA).
Regulatory Framework to Establish IFSC Banking Units in India (Expanded)
Establishing an IFSC Banking Unit (IBU) in India is subject to a well-defined regulatory framework laid down by the International Financial Services Centres Authority (IFSCA) in coordination with the Reserve Bank of India (RBI). IBUs are offshore banking branches situated in an IFSC, such as GIFT City, with the objective of providing financial services to global clients.
12. Prudential Norms
a. RBI Guidelines:
IBUs must adopt prudential norms as prescribed by the RBI. The parent bank of the IBU (hereinafter referred to as “the bank”) is required to comply with the prudential requirements outlined in Para 21 of RBI’s Master Direction/DBR.FSD.No.101/24.01.041/2015-16 dated May 26, 2016.
b. Risk Control and Exposure Limits:
- With the approval of the bank’s Board, the IBU shall implement robust risk control measures.
- Prudential exposure limits must be established for each trading client, factoring in parameters such as net worth, business turnover, and other risk indicators.
c. Applicability of Overseas Norms:
- All prudential norms applicable to overseas branches of Indian banks are also applicable to IBUs.
- IBUs must adhere to the 90-day payment delinquency norm for income recognition, asset classification, and provisioning.
d. Exposure Ceilings:
- Single borrower limit: 5% of the parent bank’s Tier 1 capital
- Borrower group limit: 10% of the parent bank’s Tier 1 capital
e. Anti-Money Laundering (AML) Measures:
- IBUs must strictly follow KYC, CFT, and other AML guidelines as issued by the RBI and relevant regulatory agencies.
- Cash transactions are prohibited for IBUs.
13. Regulation and Supervision
- IBUs will be regulated and supervised by the Reserve Bank of India, in coordination with IFSCA.
14. Ring-Fencing of IBU Activities
- IBUs shall maintain their balance sheets exclusively in foreign currency.
- Dealing in Indian Rupees is not permitted, except for:
- Operating a Special Rupee Account funded from convertible currency, strictly for administrative and statutory expenses.
- These INR transactions must be routed through Authorised Dealer branches, separate from the IBU, and shall comply with applicable Foreign Exchange Management Act (FEMA) regulations.
- IBUs are prohibited from participating in:
- Domestic call/notice/term money markets
- Onshore foreign exchange and money markets
- Domestic payment systems
15. Nostro Accounts
- IBUs are required to maintain separate Nostro accounts with correspondent banks.
- These accounts must be distinct from those maintained by other branches of the parent bank.
16. Priority Sector Lending
- The loans and advances of an IBU will not be counted as part of the Net Bank Credit (NBC) of the parent bank.
- Accordingly, they are excluded from the computation of Priority Sector Lending (PSL) obligations.
17. Deposit Insurance
- Deposits held with IBUs are not covered under any deposit insurance schemes, including those of the Deposit Insurance and Credit Guarantee Corporation (DICGC).
18. Lender of Last Resort (LOLR)
- The Reserve Bank of India will not extend LOLR or liquidity support to IBUs under any circumstances.
19. Eligibility of Foreign Banks to Set Up IBUs
- Only foreign banks with an existing presence in India are eligible to set up an IBU.
- The establishment of an IBU is not treated as a regular branch expansion, and therefore:
- Requires specific approval from the home country regulator.
- Each eligible foreign bank may set up only one IBU per IFSC.
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