Foreign currency loan book of banks in GIFT City crosses $50 billion mark

According to the latest data published by IFSCA as on January 1, the banks based out of IFSC, also known as International Banking Units(IBUs), have given loans worth $52 billion.

The International Financial Services Centre (IFSC), GIFT City, is fast emerging as a preferred destination for Indian companies to avail dollar loans with the total lending by banking units at the Gandhinagar-based special economic zone crossing the $50 billion mark.

As on January 1, 2024, banks, or International Banking Units (IBUs) in IFSC, have extended dollar loans of $52 billion, a surge of 180 percent in a span of just two years, according to the data published by IFSC Authority. As on March 31, 2022, IFSC IBUs had loan exposure of $18 billion.

Of the $52 billion of current exposure of IBUs, $22 billion is in the form of commercial loans, $11.7 billion in trade financing and $12 billion in Interbank placements, data showed.

This increase in the dollar loans from GIFT City is due to easy compliance norms and tax sops, say market participants.

“In GIFT City, Indian/ foreign banks are allowed to set up IBUs that are treated at par with foreign branches, thereby allowing better flexibility of operation,” said Siddharth Srivastava, partner, Khaitan & Co. “Investors in GIFT City are also extended several tax benefits and exemptions including tax holidays,” he said.

 Ease of doing business

Earlier if an Indian company had to take a dollar loan for its foreign subsidiary from an Indian bank, it had to go through multiple foreign branches of the same bank. This is because various parts of the process were being handled by different branches. For instance, the loan may be processed by the Singapore branch and underwritten from London and the actual cash is disbursed from a different jurisdiction.

Now, companies do not have to go through such hassles. Indian lenders, both public and private, have consolidated their processes and created essentially something akin to a single-window clearance system, say market participants.

“Earlier, for such loans, the company had to deal with multiple bank branches that would be spread around various time zones. Now, Indian lenders have consolidated the whole process into their Gift City branches and companies just have to deal with the Gift City branch for availing such loans. This simplification of the process has made Gift City a popular destination for dollar loans,” said Amar Kampani, CEO, Kampani Capital.

 Tax benefits

There are also attractive tax sops for entities borrowing from GIFT City by the way of the External Commercial Borrowing (ECB) route. These transactions are subject to up to 20 percent withholding tax if the transaction is done elsewhere but if the same is done at IFSC it is exempt from withholding tax, say experts.

“From a borrower perspective, the interest payment to IFSC banks is exempt from Indian withholding taxes, resulting in a reduction of the overall cost of borrowings,” said Jaiman Patel, partner, EY India.

Currently, there are 23 registered IBUs at GIFT City, including both domestic lenders such as State Bank of India, HDFC Bank, Federal Bank and foreign lenders such as Citi Bank. Market participants, however, say most of the dollar debt given from GIFT City is coming from Indian lenders and foreign ones are still not big players in the segment. “For foreign banks, GIFT City branch is a competing branch to say their Singapore or Hong Kong operations. Hence, their activity is not as much as Indian lenders which have consolidated their entire dollar loan operations at GIFT City,” said a market participant.