The ongoing changes in the financial sector are leading to battles not only between technology companies and financial companies but also between different financial centres. Post-Brexit, there was a rush by many European countries to position themselves as pan Europe financial centre. The French voted for Paris, the Germans for Frankfurt and the Dutch for Amsterdam. In a recent speech Joachim Wuermeling of Bundesbank (the German Central Bank) spoke on the need to synergize the strengths of the three financial centres and build a financial cluster of Europe.
As we move from Europe to India, we see similar developments taking place. While Mumbai remains the numero uno financial centre with no competition in sight, the International Financial Service Centre Authority (IFSCA) is trying to shape an international financial centre in GIFT City, Gandhinagar (Gujarat). In 2019, the government had instituted IFSCA and appointed Injeti Srinivas as its chairperson.
Typically, the banking sector forms the core of any financial centre and then other financial services develop around the core. In November 2020, IFSCA issued the first set of banking regulations replacing RBI’s regulations which operated in the region since 2015. It specified the licensing conditions for establishing banks in the region, permissible activities, prudential norms, KYC and anti-money laundering norms and so on. IFSCA made amendments in the Banking regulation in July recently.
First, it has specified that parent Indian or Foreign banks that wish to establish banking units (BU) in the region will need a minimum capital of $20 million (equivalent to roughly Rs 150 crore) which needs to be maintained at all times. In the Nov-2020 regulations, IFSCA had allowed capital in equivalent other currency amounts but has amended the regulations in July 2021 to only allowing capital in US dollars given the wide uncertainty in currency markets. It also simplifies the capital norms.
In comparison, RBI specifies minimum capital of Rs 500 crore for universal banks and Rs 100 crore for small finance banks and payment banks. RBI licensed banks are free to open branches whereas IFSCA will permit only one business unit as a branch. It would have also been interesting if IFSCA also specified the maximum number of days it will take award the licence to eligible candidates. Such a policy would have given a strong signal to applicants.
Second, the parent bank will need to submit a no-objection certificate from its home regulator. Home regulator means the regulatory authority where the parent bank is incorporated, licenced or established. Given IFSCA seeks participation from banks which have a global footprint, the concept of home regulation is really important. This lesson was learnt during the global financial crisis when it was seen that though some of the banks lived globally but died locally creating confusion over rescue missions.
Third, and this is a related point to the second, is that the parent bank will need to submit an undertaking that it will stand ready to supply liquidity for its local operations. This is because there will be no lender of last resort support.
Fourth, the parent bank will have to ensure that the business unit complies with Basel-III norms on capital adequacy and along with it, maintain leverage & liquidity ratios. IFSCA had earlier given specified exposure ceilings for single and group borrowers but has revised it saying that these ceilings will be specified from time to time. The Cash Reserve Ratio (CRR) will only apply towards deposits raised by residents living in India or outside India.
Last, and the most important is the activities these business units can do in an IFSC. They are allowed to open Foreign Currency Accounts for residents in India or in abroad. These accounts can be current, savings or term deposits and can be in any foreign currency which is freely convertible. Such deposits will not be under deposit insurance. A business unit (BU) can give loans/trade finances, inter-bank borrowing and lending, participate in derivative transactions, investments etc. If a BU is registered with SEBI as a foreign portfolio investor, it can continue to be a FPI without the need for a separate registration.
Given this background, we have to wait and watch whether these measures will help usher banking activity in Gift City (the only IFSC as of now). We also have to see how and whether Mumbai and GIFT City complement each other’s activities. To be fair, the IFSCA regulations are not very different from the 2015 RBI regulations which applied in the region before IFSCA. The difference is IFSCA is gradually taking control of the banking and financial activity in the IFSC space which should lead to rise in activity in the region. Apart from banking, IFSCA has set up committees on insurance, positioning IFSCs as hub for offshore trading in the Indian rupee and financing & leasing for shipping and aircraft.
The Gift City project is also interesting as most financial centres emerge spontaneously in centres of trade and commerce and then policy takes over. In the case of Gift City, government is creating rules first and then hoping financial activity takes over.
Views are personal and do not represent the stand of this publication.
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