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RBI Expands Reporting Requirements for Offshore Interest Rate Derivative Trades
Context:
The Reserve Bank of India (RBI) has directed foreign banks operating in the country to enhance their reporting of offshore trades involving rupee-denominated interest rate products.
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- This move aims to improve oversight of client positions and strengthen the central bank’s ability to monitor overseas financial flows.
- Currently, not all offshore transactions are reported, particularly those executed by foreign lenders with offshore clients outside of India’s market hours.
- The push for greater transparency comes amid a surge in offshore trading of Indian financial instruments.
- According to the most recent triennial survey conducted by the Bank for International Settlements, the daily average offshore dollar-rupee trading volume tripled to $46 billion in 2022.
Foreign Banks in India
- Historical Background: The presence of foreign banks in India dates back to the colonial era. After independence, their operations were restricted until the economic liberalisation policies of the 1990s allowed them to expand.
- Current Presence: As of recent data, there are 45 foreign banks operating in India, with a total of over 1,200 branches. They account for about 7% of the total assets in the Indian banking sector.
- Major Foreign Banks in India: Citibank, HSBC India Limited, Standard Chartered Bank, Deutsche Bank, etc.
Regulatory Framework
- Banking Regulation Act, 1949: This act provides the legal framework for the regulation and supervision of banks in India, including foreign banks. It requires foreign banks to obtain a license from the RBI to operate in India.
- Reserve Bank of India Act, 1934: Empowers the RBI to issue directives, rules, and guidelines for banks and financial institutions.
- Foreign Exchange Management Act, 1999 (FEMA): Regulates foreign exchange and cross-border transactions. Foreign banks do not require separate FEMA approval for opening branches but need RBI approval under the Banking Regulation Act.
Operational Modes
- Branch Model: Currently, most foreign banks operate through branches in India. However, they may be incentivised to convert to a wholly-owned subsidiary (WOS) model for better operational flexibility.
- Wholly-Owned Subsidiary (WOS): Foreign banks can set up WOSs, which are treated similarly to domestic banks, allowing them to open branches across India. A WOS requires a minimum net worth of ₹500 crore to convert from a branch model.
- Compliance with Indian Regulations: Foreign banks must comply with Indian banking regulations, including priority sector lending (PSL) requirements.
- These banks are required to allocate 40% of their Adjusted Net Bank Credit (ANBC) towards priority sectors, similar to domestic scheduled commercial banks.
- Restrictions on Expansion: To prevent domination by foreign banks, restrictions are placed if their capital and reserves exceed 20% of the banking system’s capital and reserves.
- Mergers and Acquisitions: WOSs of foreign banks can engage in mergers and acquisitions with private sector banks in India, subject to regulatory approvals and within the overall foreign investment limit of 74%.
