Fund riders spoil the OBU party

Offshore banking units (OBUs) in special economic zones are facing troubled times. Viability of these units, which were set up with much fanfare by public and private banks over the last eight months, has come under a cloud owing to restrictions imposed by the Reserve Bank of India on their lending.

State Bank of India, Union Bank of India, Punjab National Bank, and ICICI Bank are among the prominent banks which have OBUs in Mumbai.

The central bank, in October, 2003, had banned OBUs from extending line of credit to the parent for onlending to exporters and corporates.

Further, the OBUs cannot lend more than 25 per cent of their liabilities to units located outside the special economic zone, that is, the domestic tariff area.

Earlier, OBUs could lend outside SEZs by way of external commercial borrowings as also short-term import credit.

An idea as to the adverse impact of the RBI restrictions on lending by the OBUs can gauged by the fact that in the Mumbai SEZ, around half-a-dozen OBUs are chasing the same set of clients. The consequence of this is that resources supply far outstrips the demand.

"Clients are taking advantage of the supply-demand mismatch. The pricing of loans has gone for a toss. Unless the RBI rectifies the situation, banks are unlikely to set up anymore OBUs," said a senior public sector banker.

OBUs virtually serve as foreign branches for local banks in India. These OBUs, inter alia, are exempt from cash reserve ratio, statutory liquidity ratio and give access to SEZ units and SEZ developers to international finances at international rates.

The OBUs operate and maintain balance sheet only in foreign currency and are not be allowed to deal in Indian currency except for having a special rupee account out of convertible fund to meet their daily expenses

In the Exim Policy 2002-07 speech, the Union commerce minister had announced that for the first time OBUs will be permitted to be set up in SEZs.

SEZs have come into existence with a view to provide internationally competitive and a hassle free environment for export production.

As per the government's policy, SEZs are specially delineated duty-free enclave and deemed to be a foreign territory for the purpose of trade operations and duties / tariffs to boost export-led growth.