Offshore banking refers to the international banking business involving non-resident foreign currency denominated assets and liabilities. It refers to banking operations that cover only non-residents and do not mix with domestic banking.
An offshore banking centre is a place where deliberate attempt is made to attract international banking by offering many concessions in the form of taxes and levies being imposed at lower rates or not charged. A more important relaxation is the exemption of the offshore banks from restrictions on operations.
Off-shore banks in these centres can carry on their activities of deposit taking from and lending to international enterprises or investors without conflict with the domestic fiscal and monetary policy. In short, offshore banking is international banking kept separate from domestic banking coupled with freedom of functioning.
Benefits of Offshore Banking
Offshore banking is carried out in about 20 centers throughout the world which offer the following benefits:
1. Exemption from minimum reserve requirements;
2. Freedom from control on interest rates;
3. Low or non-existent taxes and levies;
4. Entry is relatively easy, especially for large international banks, in contrast to the situation in neighbouring countries, which may strictly limit or prohibit the entry of foreign banks;
5. Licence fees are generally low; and
6. Close proximity to the important loan outlets or deposit sources, e.g., Bahrain is an offshore base for petrodollars.
Offshore banking may be a measure for showing the sophistication achieved by a bank in international finance. That the response from Indian banks to off-shore 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 State Bank of India, Indian Overseas Bank, Bank of India and Bank of Baroda have set up offshore banking units for deposit taking and final lending at places like Bahrain. Hong Kong, Colombo, Cayman Islands etc. Indian Bank, Bank of Baroda and Union Bank of India have jointly floated a deposit taking company, IBU International Finance Limited in Hong-Kong to do both off-shore and onshore banking.
The benefits that would be derived by the Indian banks from these ventures
1. They would earn sizable profits as these ventures involve relatively low operating costs.
2. With multi-currency deposit bases, the banks would be anie to serve better the needs of their customers who have set up joint 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.
3. The banks would be strengthening the balance of payments of the country through repatriation of profits from these ventures.