Offshore Banking Bangladesh

OFFSHORE BANKING

Offshore banking refers to the international banking business involving non resident foreign currency –denominated assets and liabilities. It refers to the banking operation that covers only non-residen non-residents ts and do not mix with the domestic domestic banking. An offshore offshore banking center is a place where purposeful attempt is made to attract international banking by offering many concessions in the from from of taxes and and levies being being imposed imposed at lower lower rates rates or not being charged charged.. A more important relaxation is the exemption of the offshore banks from restriction on operations. Offshore banking units in these centers can carry on their activities of deposit taking from and lending lending to internationa internationall enterprises enterprises or investors investors without without conflict conflict with the the domestic domestic fiscal and monetary policy. In short; offshore banking is international banking kept separate from domestic  banking coupled with freedom of functioning. Offshore banking is carried our in about ! centers throughout the world which offer the following benefits" #. . '. ).

$xempti $xemption on from minim minimum um reserve reserve re%uir re%uireme ements nts.. &reedo &reedom m from from contro controll on inter interest est rate rates. s. (aw of of non-ex non-exist istent ent taxe taxess and levi levies. es. $ntr $ntry y is rela relati tivel vely y easy easy** espec especia iall lly y for for larg largee inte intern rnat atio iona nall banks banks** in contr contras astt to the the situat situation ion in neighbo neighborin ring g countr countries ies** which which may strict strictly ly limit limit or prohib prohibit it the entry entry of  foreign banks. +. (icens (icensee fees fees are are gene general rally ly low low.. ,. lose lose proximi proximity ty to the important important loan loan outlets outlets or deposit deposit sources sources"" e g.* ahrain ahrain is an offshore base for petro- dollars. Offshore banking is and extension of the conce pt of $uro-urrency to $ast. /hey provide a link b etween &uro-currency markets and the final borrowers. /hey are providing essential time 0one links which are truly world-wide and ensure that the market operates ) hours a day. 1hile offshore banking is and integral part of $uro- market* what distinguishes them from the mainstream of $uro-markets is that they were especially set up by the host countries countries to promoter promoter international international banking. /he need for channelising channelising huge international money resources that O2$ come to possess following the oil crisis resulted in setting up of a number of offshore centers. /hese exist in almost all Asian countries like 3ingapore* 4ong 5ong* 5orea* 2hilippines* olombo and ahamas. Offshore banking units are branches of international banks or other subsidiaries or affiliates. /hey do not carry retail business* but generally provide wholesale banking services* namely. 2ro6ect financing* financing* syndicated syndicated loans* loans* issuer issuer of short-term short-term and medium medium term instruments instruments like negotiable certificates of deposits and capital notes* as well as merchant banking activities in foreig foreign n curren currency cy denomi denominat nated ed bonds bonds and e%uity e%uity shares shares.. /he deals deals are mostly mostly betwee between n  banking or with large borrowers of multinational corporations. 7ultinational corporations  prefer transaction in offshore financial financial centers because of certain apparent advantages" i) avoidance of high tax incidence; ii) freedom from exchange control; iii) maintenance of  secrecy of deals due to non- interference from government and regulatory authorities* and iv) deferring tax by floating floating subsidiary units in such such centers and delaying their remittance remittance of   profits to the parent company. company. 1hen it would be taxed.

Participation of the Indian Banks  Offshore banking may be a measure of showing the sophistication achieved by a bank in international finance. /hat the response from Indian banks to offshore banking is positive reveals the development of these banks in the last few years in the field of international  banking. A number of banks including 3tate ank of India* Indian Overseas ank. ank of  India and ank of aroda have set up offshore banking units for deposit taking and finial lending at places like ahrain* 4ong 5ong* olombo* ayman Islands* etc. Indian ank* ank Of aroda and 8nion ank of India have 6ointly floated a deposit taking company I8 international &inance (td. in 4ong 5ong to do both offshore and onshore banking

/he benefits that would be derived by the Indian anks from these ventures are" #. /hey would earn si0able profits as these ventures involve relatively law operating costs. . 1ith multi-currency deposit bases the banks would be able to serve better the needs of  their customers who have set up 6oint ventures abroad in the form of foreign currency finance. In the absence of facilities with the Indian banks such business would be diverted to other international banks. '. /he banks would be strengthening the balance of payments of the country through repatriation of profits from the venture. Offshore Banking entre in India A persistent plea has been made by financial experts to establish and offshore banking centre in India* 9eographically* India provides distinct advantage in attraction offshore banking units* because it has a stable economic and political performance a vast market* technical manpower which could find employment in these centers. /he geographical position is such that the Indian market would open a little before the /okyo market closes and close a little  before :ew ork open a little before thus providing for international money market dealers a vital time link. In an era where many Indian corporations are functioning abroad and many corporations are granted permission to seek overseas finance* the establishment of an offsho!re unit will help tap the resources easily. /he following benefits are expected from establishing an offshore banking centre in India.

#. $xporters would benefit in term of finer margins on loans and better foreign exchange rates available via and offshore banking units. /he benefits of multi currency operations which. /o and extent minimi0e currency fluctuation risk* will be an added advantage. .

3alaries paid by offshore banks and local expenditure incurred by them contribute to the welfare of the economy. &or smaller countries the benefit would be of grater  significance. &or a larger country like India. 4owever this may not form a significant  portion of the total income.

'. /his country 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  capita and li%uidity re%uirements. ). /he country can gain improved access to the international capital markets.

+. /he domestic financial system may become more efficient through increased competition and through exposure of the domestic banks to the practices of offshore banks. ,. /he offshore banking centre will provide opportunities to train the local staff which will in turn contribute to a faster growth of the domestic economy.  persistent <. /he offshore banking units would help channelise no –resident Indian investments. =. 3etting of and offshore banking centre would trigger enforced development off more advanced communication facilities which is must for its functioning. >. As the exporters could get cheaper finance from this centre* the expenditure on export interest subsidy can saved. #!. 3uch centre will add to the prestige of the country and establish India firmly on the world financial map. /he establishment of and offshore centre involves some cost to the host country" #. An offshore centre re%uires certain infrastructure in the form of good telecommunication system* education and training facilities* etc. /he host country may have to incur heavily on these if the facilities are non-existing. /he cost involved may not be 6ustified by the  benefits derived. . /he supervision and regulation of offshore banks may involve substantial costs. '. $ncouraging 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 operation* particularly in the absence of exchange control. ). Offshore banking provides scope for tax evasion by residents. &or example in 4ong 5ong* it was fund that residents place deposits with offshore banks and take loans of the same amount. /he interest on loan would be deductible expenditure for taxation while the income from interest on deposits is not taxed. +. Offshore banks ray prove to be deleterious competitions to the local banks and may inhibit their growth. ,. Offshore banks may increase demand for domestic resources like space ?land for office and housing@ and skill ?professionals@. 3ince the supply in the short run is inelastic* the increased demand may cause inconvenience to local residents. It may observed from the above discussion that the cost of having and offshore banking centre would be substantial to a country with limited resources and undeveloped infrastructure. &or a country of the si0e of India* the cost involved may not be significant. /here is* therefore* a strong case for India to develop and offshore banking centre for international banking centre of its own. ombay is suitable centre for establishing offshore banking in India. It has all the re%uirements –  goods infrastructure in the form of telecommunication and services* abundant and well-trained manpower and presence of many international banks* both Indian and foreign* already engaged in international banking. esides ombay is having and ideal location in the eastern time 0one. It is active along with 3ingapore and ahrain and has marginal overlap with (ondon and &rankfurt. /he setting up of the International anking entre in ombay would throw the door open for the free flow of international trade and without any strings attached. /he foreign loans or aid are generally available only with certain conditions* which can be avoided by utili0ing the funds from offshore bank.

Reco!!endations of Sodhani o!!ittee /he 3odhani ommittee on &oreign $xchange eforms ?#>>,@ has recommended allowing Indian banks and financial institutions to set up offshore banking units as it would prove to be cost-effective

Per!ission to operate Off"shore Banking !#. /he O8s. /hough located in your &oreign $xchange ranch - Bhaka and Agrabad ranch-hittagong * will operate through completely separate countries and maintain its own account relating to Offshore banking business separately. !. /he Operations of the 8nits shall be sub6ect to the relevant laws of angladesh except those in respect of which exemption are provided. !'. /he O8s wil be free to accept deposit from or to borrow from personsC institution not resident in angladesh including angladeshi nationals working abroad. /he O8s will also be free to accept deposit from or to borrow from /ype –A ?wholly foreign owned@ units in the $xport 2rocessing Dones in angladesh. /he O8s shall not accept deposits from personsCinstitutions resident in angladesh including /ype – ?Eoint Fenture@ and /ype –c ?1holly local owned@ units in the $xport 2rocessingC ones in angladesh. !). /he O8s shall carry on transaction in freely convertible foreign currencies i.e 83 Bollar* 2ound 3terling* Eapanese en* 3wiss &ranc* anadian Bollar* 3wedish 5roner* 3ingapore Bollar* 3outh 5orean 1on and &uro. !+. a@ /he O8s shall be free to make loansCadvances to persons institutions not resident in angladesh and also to make loansCadvance to /ype-A? wholly foreign owned@ units in the $xport 2rocessing Dones in angladesh.  b@ Industrial units outside the $xport 2rocessing Dones and type- and /ype- Industrial units within the $xport 2rocessing Dones in angladesh may avail term loans in foreign currencies from the O8s sub6ect to compliance with the guidelines Issued  by the oard of Investment for borrowing abroad by industrial units in angladesh. !,. anks functioning in angladesh may also maintain correspondent relation with O8s in the manner they maintain such accounts with their foreign correspondents. !<. /he O8s will submit reportsC returns to angladesh bank as and when asked for. /he  books and records of O8s shall have to be kept ready for inspection at any time by angladesh ank.

!=. /he O8s will be free to take out insurance abroad and not be sub6ect to local insurance laws. !>. /he O8s regardless of its locations in angladesh. 1ould get coverage under $2D Act.#>=!. #!. :tional redit and ommerce ank (imited* 4ead OffGice* <-= 7oti6heel ommercial Area* Bhaka-#!!! will be held liable to make payment of any liability created by the O8s. ##. /he O8s have been allowed exemption from the purview of provisions of the anking ompanies Act.#>># except those of 3ections '#* '* ',?@ * '< ))* )+* )> #!>?@* #!>?)@* #!>?<@* ##'*## and #. /he O8s have been allowed exemption from Article ',?#@ of angladesh ank Order.#><. #. Bate of commencement of O8s operations should be communicated to the angladesh ank within < ?seven@ days of such commencement. #'. /he operations of O8s shall not be closed without prior permission of the angladesh ank.