Advisory service ban hits banks

Banks are losing out on fee income as the Reserve Bank of India (RBI) is dragging its feet on allowing them to advice customers on investing overseas under the $1,00,000 scheme.

The regulatory ban on banks from providing overseas investment advisory services has translated into gains for brokerage houses and non-banking finance companies (NBFCs).

Meanwhile, the banks have ended up as mere fund remittance agencies for investing in financial products and real estate overseas.

More than four years ago, the RBI had permitted resident Indians to remit money overseas. In the 2007-08 annual policy announcement, the central bank raised the ceiling on the amount that resident individuals can invest abroad annually, to $1,00,000.

The banks' wealth management divisions wanted to cash in on this business, but have been unable to do so.

"We cannot solicit any business. The regulations are still unclear. We had sought clarity from the regulator on whether we could advice clients on investing in foreign mutual funds, structured capital products with capital guarantees and portfolio management. However, the RBI has clearly stated we can only accept deposits and not solicit any business,'' said a senior banker.

The RBI is concerned that it would be blamed in the event of huge losses suffered by investors due to the market movements, as it regulates the banking activity.

Even in the case of capital-guaranteed investment products, investors could run into large losses if the rupee appreciates sharply as the guarantee would be in one of the foreign currencies and not the Indian currency.

"The guidelines that were announced when individuals were permitted to remit upto $25,000 per calendar year still holds good,'' said a senior RBI official.

Within the permissible ceiling, resident individuals are free to invest in any assets as well as open, maintain and hold foreign currency accounts with banks outside India for making remittances without RBI's approval.

Private travel, business travel, gift remittances, donations, studies and medical treatment are already permitted under the Foreign Exchange Management Act (FEMA).

"The RBI is not a regulator when it comes to regulating investments in mutual funds, stock markets and commodity markets. It is therefore playing safe and not permitting any structured products as fingers will point towards it in case the investors suffer losses,'' said a foreign banker.