Why retail banking will see a big change in 2021

Come January 1, 2021, Indian high net worth individuals and foreign nationals can open foreign currency accounts in any freely convertible currency with banks operating units at Gujarat International Finance Tec-City, popularly known as GIFT City. Several Indian banks are gearing up to flag off the new wave of retail banking which is likely to bring them cheaper funds in the New Year.

Sources said many non-Indian residents (NRIs) and foreigners are keenly awaiting the launch of the new products, made available through India’s first global financial and IT services hub in Gandhinagar, located on the banks of the Sabarmati River.

This is going to herald a big-bang change in the conservative Indian banking sector, say senior bankers. Any Indian and foreign national, with a minimum net worth of $1 million, can open foreign currency accounts in any freely convertible currency at IFSC Banking Units (IBUs).

The fresh set of regulations by the newly set up regulator—International Financial Services Centres Authority (IFSCA)—are coming into effect after long deliberations. Under the International Financial Services Centres Authority (Banking) Regulations, 2020, the account holders can undertake any permissible current account or capital account transaction or any combination under the Liberalised Remittance Scheme (LRS) of the Reserve Bank of India (RBI).

“The concept was under consideration for long at the RBI, primarily because of the concerns over money laundering and aspects of asset stripping and capital gains taxation,” says Ashvin Parekh, managing partner, Ashvin Parekh Advisory Services LLP.

Just ahead of the launch, banks have now approached the RBI and sought some last-minute clarity on LRS restrictions. “As regards the offering to resident Indians, there is some confusion among banks. The question is whether the LRS restriction applies to banking in GIFT City. If it is applicable, then they can transfer only $250,000 per financial year. As per the rule, the total amount of foreign exchange purchased from or remitted through all sources in India during a financial year should be within the cumulative limit of $250,000,” says a senior banker.

The foreign currency accounts in India will help foreign nationals and entities make interest arbitrage as savings/current accounts in foreign countries barely carry any interest. On the flip side, it will be a cheap source of deposits for Indian banks (with 2-3% interest rate). It may also help ease the credit crunch in the domestic market.

Banks are, however, bothered about potential money laundering instances as sources of funds will remain the main concern for them. Some bankers said if robust systems are not in place, they will fall prey to illegal parking of laundered money and funds from criminal proceeds.

“Whether it’s corporate or retail accounts, authorised dealers (ADs) will keep a tab on money moving out of GIFT City into the domestic market. They will report to the RBI,” says Parekh.

“It’s more of convenience rather than any sudden surge in flow. Even today, money is flowing through NRE/NRO accounts. But the new retail accounts will make it much easier and faster,” he says.

Nearly five years after RBI allowed corporates to open foreign currency current accounts, the gates are now open for retail banking for foreign currency. As per the earlier rules, companies based in the GIFT City and NRIs could open foreign currency current accounts to facilitate their investment transactions. But there was no cheque book facility there, and every transaction through these accounts had to be bank transfers.

The new rules have clarified the permissible activities of IBUs including credit enhancement, credit insurance, and sale, purchase of portfolios, engage in factoring and forfaiting of export receivables and undertaking equipment leasing, including aircraft leasing, among others. It has also allowed the regulator to determine businesses that a banking unit may be permitted to conduct in Indian rupees with Indian residents and people staying outside the country, subject to settlement of the financial transaction in relation to such business in freely convertible foreign currency.

“For resident Indians, there was no option to keep foreign currency accounts except Resident Foreign Currency (RFC) Domestic accounts. Even RFC Domestic accounts were only for a limited period. The new facility will be definitely advantageous for resident Indians who earn in foreign currency and want to spend it abroad. On the other hand, the interest arbitrage opportunity will surely attract foreigners since they get a higher interest rate in GIFT City than what’s offered by foreign banks,” says a private banker.

“IBU branches can open any recognised foreign currencies. But banks are unlikely to offer all currencies. There won’t be any ATM facility, no cheque books or debit cards as of now. But banks may introduce cheque book facility and debit cards shortly. Operational guidelines are yet to be issued,” he adds.

Efforts to reach out to Tapan Ray, managing director and group CEO of GIFT City, were futile. An official from GIFT City said 14 banks, including State Bank of India, HDFC Bank, ICICI Bank, IndusInd Bank, Standard Chartered Bank, HSBC, and Citibank have opened IBUs at GIFT City. Most of them are gearing up to start retail banking operations now. So far, the IBUs were providing 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.

Banking being one of the major focus areas of IFSC, the new move is expected to drive and facilitate other constituent operations in GIFT City.

So far, the IBUs had only employed skeletal staff and were operating virtual banks from elsewhere. Now the regulator has made branch and staff mandatory. So banks are in the process of strengthening their operations with more staff inside GIFT City.

With GIFT City spreading its wings, Gandhinagar is making its presence felt in the international market as a global financial centre. In June, the Gujarat state government, which used to hold 50% stake in GIFT City, bought out the remaining 50% from the struggling Infrastructure Leasing & Financial Services (IL&FS). GIFT City, a first of its kind in India, is conceptualised as a global financial and IT services hub at par with financial centres in Tokyo, Dubai, Singapore, and London.