Reserve Bank has formulated a scheme for the setting up of IFSC Banking Units

RBI/2014–15/533
DBR.IBD.BC. 14570/23.13.004/2014–15 April 1, 2015

Set­ting up of IFSC Bank­ing Units (IBUs)

Please refer to the Reserve Bank of India Noti­fi­ca­tion No. FEMA.339/2015-RB dat­ed March 02, 2015 (copy enclosed) under FEMA 1999 on For­eign Exchange Man­age­ment (Inter­na­tion­al Finan­cial Ser­vices Cen­tre) Reg­u­la­tions, 2015 set­ting out RBI reg­u­la­tions relat­ing to finan­cial insti­tu­tions set up in Inter­na­tion­al Finan­cial Ser­vices Cen­tres (IFSC). These reg­u­la­tions have been pub­lished in the Offi­cial Gazette of Gov­ern­ment of India on March 23, 2015 vide Noti­fi­ca­tion No. G.S.R. 218 (E) dat­ed March 2, 2015.

2. Pur­suant to the above Noti­fi­ca­tion, Reserve Bank has for­mu­lat­ed a scheme for the set­ting up of IFSC Bank­ing Units (IBUs) by banks in IFSCs. The broad con­tours of the scheme for Indi­an banks and for­eign banks already hav­ing pres­ence in India are detailed in Annex I and Annex II, respec­tive­ly. You may be aware that Gov­ern­ment of India has already announced set­ting up of an IFSC in Gujarat name­ly Gujarat Inter­na­tion­al Finance Tec-City (GIFT) in Gand­hi­na­gar, Gujarat. The guide­lines con­tained in this cir­cu­lar will be applic­a­ble to IBUs set up in GIFT as well as in oth­er IFSCs which may be set up in India.

3. Eli­gi­ble banks intend­ing to set up IBU may approach this depart­ment with an appli­ca­tion under Sec­tion 23 of the Bank­ing Reg­u­la­tion Act, 1949.

Yours faith­ful­ly

(Rajin­der Kumar)
Chief Gen­er­al Manager

---

ANNEX — I

Scheme for set­ting up of IFSC Bank­ing Units (IBU) by Indi­an Banks

The Reserve Bank has issued a noti­fi­ca­tion under FEMA vide Noti­fi­ca­tion No. FEMA.339/2015-RB dat­ed March 02, 2015 set­ting out RBI reg­u­la­tions relat­ing to finan­cial insti­tu­tions set up in Inter­na­tion­al Finan­cial Ser­vices Cen­tres (IFSC).The reg­u­la­to­ry and super­vi­so­ry frame­work gov­ern­ing IBUs set up in IFSCs by Indi­an banks is detailed below.

2. The scheme

2.1 Eli­gi­bil­i­ty criteria

Indi­an banks viz. banks in the pub­lic sec­tor and the pri­vate sec­tor autho­rised to deal in for­eign exchange will be eli­gi­ble to set up IBUs. Each of the eli­gi­ble banks would be per­mit­ted to estab­lish only one IBU in each IFSC.

2.2 Licens­ing

Eli­gi­ble banks inter­est­ed in set­ting up IBUs will be required to obtain pri­or per­mis­sion of the Reserve Bank for open­ing an IBU under Sec­tion 23 (1)(a) of the Bank­ing Reg­u­la­tion Act, 1949 (BR Act). For most reg­u­la­to­ry pur­pos­es, an IBU will be treat­ed on par with a for­eign branch of an Indi­an bank.

2.3 Cap­i­tal

With a view to enabling IBUs to start their oper­a­tions, the par­ent bank will be required to pro­vide a min­i­mum cap­i­tal of US$ 20 mil­lion or equiv­a­lent in any for­eign cur­ren­cy to its IBU. The IBU should main­tain the min­i­mum pre­scribed reg­u­la­to­ry cap­i­tal on an on-going basis as per reg­u­la­tions amend­ed from time to time.

2.4 Reserve requirements

The lia­bil­i­ties of the IBU are exempt from both CRR and SLR require­ments of Reserve Bank of India.

2.5 Resources and deployment

The sources for rais­ing funds, includ­ing bor­row­ing in for­eign cur­ren­cy, will be per­sons not res­i­dent in India and deploy­ment of the funds can be with both per­sons res­i­dent in India as well as per­sons not res­i­dent in India. How­ev­er, the deploy­ment of funds with per­sons res­i­dent in India shall be sub­ject to the pro­vi­sions of FEMA, 1999.

2.6 Per­mis­si­ble activ­i­ties of IBUs

The IBUs will be per­mit­ted to engage in the form of busi­ness men­tioned in Sec­tion 6(1) of the BR Act as giv­en below, sub­ject to the con­di­tions, if any, of the licence issued to them.

1. IBUs can under­take trans­ac­tions with non-res­i­dent enti­ties oth­er than indi­vid­ual / retail cus­tomers / HNIs.

2. All trans­ac­tions of IBUs shall be in cur­ren­cy oth­er than INR.

3. IBUs can deal with the Whol­ly Owned Sub­sidiaries / Joint Ven­tures of Indi­an com­pa­nies reg­is­tered abroad.

4. IBUs are allowed to have lia­bil­i­ties includ­ing bor­row­ing in for­eign cur­ren­cy only with orig­i­nal matu­ri­ty peri­od greater than one year. They can how­ev­er raise short term lia­bil­i­ties from banks sub­ject to lim­its as may be pre­scribed by the Reserve Bank.

5. IBUs are not allowed to open any cur­rent or sav­ings accounts. They can­not issue bear­er instru­ments or cheques. All pay­ment trans­ac­tions must be under­tak­en via bank transfers.

6. IBUs are per­mit­ted to under­take fac­tor­ing / for­fait­ing of export receivables.

7. IBUs are per­mit­ted to under­take trans­ac­tions in all types of deriv­a­tives and struc­tured prod­ucts with the pri­or approval of their Board of Direc­tors. IBUs deal­ing with such prod­ucts should have ade­quate knowl­edge, under­stand­ing, and risk man­age­ment capa­bil­i­ty for han­dling such products.

2.7 Pru­den­tial regulations

All pru­den­tial norms applic­a­ble to over­seas branch­es of Indi­an banks would apply to IBUs. Specif­i­cal­ly, these units would be required to fol­low the 90 days’ pay­ment delin­quen­cy norm for income recog­ni­tion, asset clas­si­fi­ca­tion and pro­vi­sion­ing as applic­a­ble to Indi­an banks. The bank’s board may set out appro­pri­ate cred­it risk man­age­ment pol­i­cy and expo­sure lim­its for their IBUs con­sis­tent with the reg­u­la­to­ry pre­scrip­tions of the RBI.

The IBUs would be required to adopt liq­uid­i­ty and inter­est rate risk man­age­ment poli­cies pre­scribed by the Reserve Bank in respect of over­seas branch­es of Indi­an banks and func­tion with­in the over­all risk man­age­ment and ALM frame­work of the bank sub­ject to mon­i­tor­ing by the board at pre­scribed intervals.

The bank’s board would be required to set com­pre­hen­sive overnight lim­its for each cur­ren­cy for these Units, which would be sep­a­rate from the open posi­tion lim­it of the par­ent bank.

2.8 Anti-Mon­ey Laun­der­ing measures

The IBUs will be required to scrupu­lous­ly fol­low “Know Your Cus­tomer (KYC)”, Com­bat­ing of Financ­ing of Ter­ror­ism (CFT) and oth­er anti-mon­ey laun­der­ing instruc­tions issued by the Reserve Bank from time to time. IBUs are pro­hib­it­ed from under­tak­ing cash transactions.

2.9 Reg­u­la­tion and Supervision

The IBUs will be reg­u­lat­ed and super­vised by the Reserve Bank of India.

2.10 Report­ing requirements

The IBUs will be required to fur­nish infor­ma­tion relat­ing to their oper­a­tions as pre­scribed by the Reserve Bank from time to time. These may take the form of off­site report­ing, audit­ed finan­cial state­ments for IBUs, etc.

2.11 Ring fenc­ing the activ­i­ties of IFSC Bank­ing Units

The IBUs would oper­ate and main­tain bal­ance sheet only in for­eign cur­ren­cy and will not be allowed to deal in Indi­an Rupees except for hav­ing a Spe­cial Rupee account out of con­vert­ible fund to defray their admin­is­tra­tive and statu­to­ry expens­es. Such operations/transactions of these units in INR would be through the Autho­rised Deal­ers (dis­tinct from IBU) which would be sub­ject to the extant For­eign Exchange reg­u­la­tions. IBUs are not allowed to par­tic­i­pate in the domes­tic call, notice, term, forex, mon­ey and oth­er onshore mar­kets and domes­tic pay­ment systems.

The IBUs will be required to main­tain sep­a­rate nos­tro accounts with cor­re­spon­dent banks which would be dis­tinct from nos­tro accounts main­tained by oth­er branch­es of the same bank.

2.12 Pri­or­i­ty sec­tor lending

The loans and advances of IBUs would not be reck­oned as part of the Net Bank Cred­it of the par­ent bank for com­put­ing pri­or­i­ty sec­tor lend­ing obligations.

2.13 Deposit insurance

Deposits of IBUs will not be cov­ered by deposit insurance.

2.14 Lender of Last Resort (LOLR)

No liq­uid­i­ty sup­port or LOLR sup­port will be avail­able to IBUs from the Reserve Bank of India.

---

ANNEX II

Scheme for set­ting up of IFSC Bank­ing Units (IBU) by for­eign banks already hav­ing a pres­ence in India

The Reserve Bank has issued a noti­fi­ca­tion under FEMA vide Noti­fi­ca­tion No. FEMA.339/2015/RB dat­ed March 02, 2015 set­ting out RBI reg­u­la­tions relat­ing to finan­cial insti­tu­tions set up in Inter­na­tion­al Finan­cial Ser­vices Cen­tres (IFSC). The reg­u­la­to­ry and super­vi­so­ry frame­work gov­ern­ing the IFSC Bank­ing Units (IBU) set up by for­eign banks is detailed below.

2. The scheme

2.1 Eli­gi­bil­i­ty criteria

Only for­eign banks already hav­ing pres­ence in India will be eli­gi­ble to set up IBUs. This shall not be treat­ed as a nor­mal branch expan­sion plan in India and there­fore, spe­cif­ic per­mis­sion from the home coun­try 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.

2.2 Licens­ing

The banks will be required to obtain pri­or per­mis­sion of the Reserve Bank for open­ing an IBU under Sec­tion 23 (1) (a) of the Bank­ing Reg­u­la­tion Act, 1949 (BR Act). The appli­ca­tions of for­eign banks will be con­sid­ered on the basis of extant guide­lines for set­ting up branch­es in India sub­ject to the addi­tion­al require­ment of the home coun­try regulator/s con­fir­ma­tion in writ­ing of their reg­u­la­to­ry com­fort for the bank’s pres­ence in the IFSC, hav­ing regard among oth­er things, to the pro­vi­sions of para­graphs 2.3 and 2.14 below.

2.3 Cap­i­tal

With a view to enabling IBUs to start their oper­a­tions, the par­ent bank would be required to pro­vide a min­i­mum cap­i­tal of US$ 20 mil­lion or equiv­a­lent in any cur­ren­cy, oth­er than INR, to the IBU. The IBUs should main­tain the min­i­mum pre­scribed reg­u­la­to­ry cap­i­tal on an on-going basis as per reg­u­la­tions amend­ed from time to time. The par­ent bank will be required to pro­vide a Let­ter of Com­fort for extend­ing finan­cial assis­tance, as and when required, in the form of cap­i­tal / liq­uid­i­ty sup­port to IBU.

2.4 Reserve requirements

The lia­bil­i­ties of the IBU are exempt from both CRR and SLR require­ments of Reserve Bank of India.

2.5 Resources and deployment

The sources for rais­ing funds, includ­ing bor­row­ing in for­eign cur­ren­cy, will be per­sons not res­i­dent in India and deploy­ment of the funds can be with both per­sons res­i­dent in India as well as per­sons not res­i­dent in India. How­ev­er, the deploy­ment of funds with per­sons res­i­dent in India shall be sub­ject to the pro­vi­sions of FEMA, 1999.

2.6 Per­mis­si­ble activ­i­ties of IBUs

The IBUs will be per­mit­ted to engage in the form of busi­ness men­tioned in Sec­tion 6(1) of the BR Act as giv­en below, sub­ject to the con­di­tions, if any, of the licence issued to them.

1. IBUs can under­take trans­ac­tions with non-res­i­dent enti­ties oth­er than indi­vid­ual / retail cus­tomers / HNIs.

2. All trans­ac­tions of IBUs shall be in cur­ren­cy oth­er than INR.

3. IBUs can deal with the Whol­ly Owned Sub­sidiaries / Joint Ven­tures of Indi­an com­pa­nies reg­is­tered abroad.

4. IBUs are allowed to have lia­bil­i­ties includ­ing bor­row­ing in for­eign cur­ren­cy only with orig­i­nal matu­ri­ty peri­od greater than one year. They can how­ev­er raise short term lia­bil­i­ties from banks sub­ject to lim­its as may be pre­scribed by the Reserve Bank.

5. IBUs are not allowed to open any cur­rent or sav­ings accounts. They can­not issue bear­er instru­ments or cheques. All pay­ment trans­ac­tions must be under­tak­en via bank transfers.

6. IBUs are per­mit­ted to under­take factoring/forfaiting of export receivables.

7. IBUs are per­mit­ted to under­take trans­ac­tions in all types of deriv­a­tives and struc­tured prod­ucts with the pri­or approval of their Board of Direc­tors. IBU deal­ing with such prod­ucts should have ade­quate knowl­edge, under­stand­ing, and risk man­age­ment capa­bil­i­ty for han­dling such products.

2.7 Pru­den­tial regulations

An IBU shall adopt pru­den­tial norms as pre­scribed by Reserve Bank of India. The bank’s board may set out appro­pri­ate cred­it risk man­age­ment pol­i­cy and expo­sure lim­its for their IBUs con­sis­tent with the reg­u­la­to­ry pre­scrip­tions of the Reserve Bank of India.

The IBUs will be required to adopt liq­uid­i­ty and inter­est rate risk man­age­ment poli­cies pre­scribed by the Reserve Bank and func­tion with­in the over­all risk man­age­ment and ALM frame­work of the bank sub­ject to mon­i­tor­ing by the board at pre­scribed intervals.

The bank’s board would be required to set com­pre­hen­sive overnight lim­its for each cur­ren­cy for these Units, which would be sep­a­rate from the open posi­tion lim­it of the oth­er branch/es of the for­eign bank hav­ing a pres­ence in India.

2.8 Anti-Mon­ey Laun­der­ing measures

The IBUs will be required to scrupu­lous­ly fol­low “Know Your Cus­tomer (KYC)”, Com­bat­ing of Financ­ing of Ter­ror­ism (CFT) and oth­er anti-mon­ey laun­der­ing instruc­tions issued by RBI from time to time, includ­ing the report­ing there­of, as pre­scribed by the Reserve Bank / oth­er agen­cies in India. IBUs are pro­hib­it­ed from under­tak­ing cash transactions.

2.9 Reg­u­la­tion and supervision

The IBUs of for­eign banks will be reg­u­lat­ed and super­vised by the Reserve Bank of India.

2.10 Report­ing requirements

The IBUs will be required to fur­nish infor­ma­tion relat­ing to their oper­a­tions as pre­scribed from time to time by the Reserve Bank. These may take the form of off­site report­ing, audit­ed finan­cial state­ments for the IBU, etc.

2.11 Ring fenc­ing the activ­i­ties of IFSC Bank­ing Units

The IBUs would oper­ate and main­tain bal­ance sheet only in for­eign cur­ren­cy and would not be allowed to deal in Indi­an Rupees except for hav­ing a Spe­cial Rupee account out of con­vert­ible fund to defray their admin­is­tra­tive and statu­to­ry expens­es. Such operations/transactions of these units in INR would be through the Autho­rised Deal­ers (dis­tinct from IBU) which would be sub­ject to the extant For­eign Exchange reg­u­la­tions. IBUs are not allowed to par­tic­i­pate in the domes­tic call, notice, term, forex, mon­ey and oth­er onshore mar­kets and domes­tic pay­ment systems.

The IBUs will be required to main­tain sep­a­rate nos­tro accounts with cor­re­spon­dent banks which would be dis­tinct from nos­tro accounts main­tained by oth­er branch­es of that for­eign bank in India.

2.12 Pri­or­i­ty sec­tor lending

The loans and advances of IBUs will not be reck­oned as part of the Net Bank Cred­it for com­put­ing pri­or­i­ty sec­tor lend­ing oblig­a­tions of the for­eign bank in India.

2.13 Deposit insurance

Deposits of IBUs will not be eli­gi­ble for deposit insur­ance in India.

2.14 Lender of Last Resort (LOLR)

No liq­uid­i­ty sup­port or LOLR sup­port will be avail­able to IBUs from the Reserve Bank of India.