The new engine of retail banking has lost steam before its roll-out. As the two regulators—the Reserve Bank of India (RBI) and the Gandhinagar-headquartered International Financial Services Centres Authority (IFSCA)—opted for divergent views, banks have now gone slow on launching the long-awaited foreign currency accounts for Indian high net worth individuals (HNIs) and foreign nationals.

After lining up several products to offer foreign currency accounts in any freely convertible currency to Indian HNIs and foreign nationals, through the International Financial Services Centre (IFSC) in Gandhinagar, banks are now unsure of their success under the present operational framework provided by the RBI, senior bankers close to the development told Fortune India.

Some wonder if the RBI has taken the fizz out of the mega plan chalked out by the IFSCA, the regulator of all financial services in IFSCs. As of now, Gujarat International Finance Tec-City, popularly known as GIFT City, is the only operating IFSC in the country.

In January, several Indian banks, mostly private, operating units at GIFT City, were gearing up to flag off foreign currency accounts. They were awaiting some clarifications from the regulators—the RBI, and the IFSCA. The banks were also looking at ways to sidestep potential legal hassles.

An RBI circular on February 16 said it had reviewed the existing guidelines on the Liberalised Remittance Scheme (LRS) and decided to permit resident individuals to make remittances under LRS to IFSCs set up in India under the Special Economic Zone Act, 2005. The RBI said this was done with a view to deepen the financial markets in IFSCs and provide an opportunity to resident individuals to diversify their portfolio.

According to the changed rules, authorised dealer (AD) category-I banks may allow resident individuals to make remittances under LRS to IFSCs in India, subject to a few conditions. For one, resident individuals may open a non-interest-bearing foreign currency account (FCA) in IFSCs, for making the permissible investments under LRS. Any funds lying idle in the account for a period of 15 days will be immediately repatriated to the domestic rupee account of the investor in India. Secondly, the resident individuals should not settle any domestic transactions with other residents through these accounts held in IFSC. The rules also stipulate that the remittance should be made only for making investments in IFSCs in securities other than those issued by entities/companies which are resident in India, but outside the IFSC.

The RBI has also asked the banks to strictly ensure compliance with all other terms and conditions, including reporting requirements prescribed under the scheme while allowing such remittances. The circular said people resident in India (outside IFSC) entering into any transaction with a person/entity in IFSC will only be governed by regulations/directions and rules issued by the RBI and the government under the Foreign Exchange Management Act (FEMA), 1999. Flouting of FEMA provisions by those residing in India will be dealt with by the RBI in accordance with the existing provisions on compounding of contraventions under FEMA, said the RBI circular.

Just ahead of the launch, banks had approached the regulators and sought relaxation on the permissible investment cap of $250,000. However, the RBI has not provided any additional leeway.

As part of the bi-monthly monetary policy statement on February 5, the RBI said that it had decided to permit resident individuals to make remittances to IFSCs established in India under the new scheme. Since remittances towards current account transactions like travel, education, gifts and capital account transactions like purchase of immovable property are not relevant with respect to IFSCs in India, remittances will be permitted only for making investments in securities issued by the non-resident entities in IFSCs.

Ashvin Parekh, managing partner, Ashvin Parekh Advisory Services LLP, told Fortune India that the government has already accepted the concerns raised by the RBI. “I totally subscribe to the RBI view. There are serious concerns over money laundering. The onus lies with the bank. Look at the example of HSBC’s Iran transactions, where the bank was finally penalised. If someone uses this route for money transfer for, say, purchase of arms, that is a big security issue for the government. One has to look at the aspects of asset stripping and capital gains taxation as well,” he said.

Parekh however rejected the insinuation that there is a rift between the two regulators.

“It’s not attractive for residents as they can open only non-interest-bearing accounts. Another important issue bothering banks is how to handle the legal implications arising out of countries where the investors originate from,” said a senior banker, who was ready to roll out the products. “When it comes to foreign investors, jurisdiction is one of the prime reasons,” he added.

The LRS is an existing scheme by which Indian individuals can send money abroad for their travel or children’s education and any expenditure one may incur abroad on one's frequent visits. Under the LRS, one can remit up to $250,000 a year. It can also be used to buy a capital asset or invest in financial instruments like equity shares or mutual funds.

Parekh said LRS is widely used by parents of kids studying abroad. “You can use LRS for sending money for any purpose—foreign travel, buying properties or securities. But you should tell authorised dealers what is the purpose of sending money. When you repatriate funds, there will be questions too,” he said.

Through the new circular, the RBI has opened the prospect of LRS by allowing individuals to send money to the IFSC, which was not allowed earlier. Indians can now hold a foreign currency denominated account in an IFSC, thanks to the circular. But the rules have restricted its use to making investments in financial instruments offered by any institution at the IFSC.

On December 14, 2020, Fortune India had reported how several Indian banks were gearing up to flag off the new wave of retail banking which could fetch cheaper funds in the New Year.

Many non-resident Indians (NRIs) and foreigners were keenly waiting for the launch. Earlier, rules had stipulated that any Indian and foreign national, with a minimum net worth of $1 million, could open foreign currency accounts in any freely convertible currency at IFSC Banking Units (IBUs).

More than two dozen banks, including State Bank of India (SBI), HDFC Bank, ICICI Bank, Standard Chartered, HSBC, RBL and Citibank, have opened IBUs at GIFT City. Most of them were gearing up to start their retail banking operations. So far, these business units were providing the bank access to international financial markets and undertaking a complete range of products to clients with foreign currency funding requirements, including external commercial borrowings and trade finances.

Banks are also likely to go slow on recruiting more staff and operating a full-fledged branch at GIFT City. For the moment, foreign currency accounts at GIFT City seem some way off.

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