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IN what Mr Murasoli Maran, Union Commerce Minister, termed as a "very significant decision," Indian banks are to be allowed to open overseas banking units (OBU) in 13 Special Economic Zones (SEZ) in the Exim policy announced today. These units will be free from statutory pre-emptions such as cash reserve ratio (CRR) and statutory liquidity ratio (SLR). These overseas banking units are expected to provide finance at international rates to units in the SEZ.
Bankers say that the main advantage of setting up these OBUs in India is that they will not require the assignment of separate capital, as would normally be the case, if these units had been opened abroad.
This would help Indian banks, particularly when they have constraints on raising capital and are subject to rigorous regulation and supervision by overseas central banks in foreign destinations.
The possibility of tax concessions for OBUs is also as an encouraging feature, according to bankers.
Bankers are, however, sceptical about the impact of setting up these units in SEZs.
Firstly, they say, the concept of offshore/overseas banking unit was attractive in the 1980s when the forex regime was a controlled one.
Given the increasingly liberal approach in the move towards capital account convertibility, these units are no longer that attractive.
Secondly, the business volumes generated in these kinds of enclaves (in the export processing zones, for instance) have not been very attractive.
Some banks have in the past been reluctant to open such outfits. They cite the experience of being saddled with bad loans when the units in such zones suffer the consequences of a downturn in the export market.
Bankers say that they may not open a new unit, but may relocate an existing branch or reclassify an existing unit in the earmarked economic zone as an overseas banking unit.
Thirdly, they say, the waiver of CRR and SLR requirements may not make a significant difference since these units will predominantly be lending units and having relatively lower deposits - which are mainly margin amounts placed by borrowers.
They will, however, enjoy the relief in the case of their overseas borrowings.
But borrowing abroad at competitive rates would be linked to the credit worthiness and financial strength of the Indian banks as well as the sovereign rating enjoyed by the country.
How much difference the setting up of these units can make remains to be seen. And as for fulfilling their mandate in procuring "international rates" for exporters, bankers have a ready riposte.
"Exporters are already getting funds at between 8 to 8.5 per cent which is 3-4 percentage points lower than the prime lending rates of most public sector banks," says a top official in a public sector bank.
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