Offshore.docx

Meaning: Universal banking is a multipurpose and multi functional financial superstore providing both banking and financial services. A universal bank may undertake multifarious services under one roof, which includes: a)

Receiving money on current or deposit accounts and lending of money for

trade, industries, exports, agriculture etc. b)

Mortgage financing; project financing infrastructure lending, asset

securitisation, leasing, factory etc. c)

Remittance of funds, custodial services, credit/debit cards, collection of

cheque/bills etc. d)

Corporate advisory services, insurance depository service, merchant

banking (brokerage, underwriting new debt and equity shares) foreign exchange operations. Therefore in universal banking under one roof, corporate can get loans and avail, other financial services, while individuals can bank and borrow. The few objectives of universal banking are as follows:  To help in bringing harmony in the role of financial institutions and banks.  To offer world-class financial services to the clients by using information technology and cross selling.  To reduce per customer cost.  To increase per customer revenue.  To take benefit of economies of scale.  To compete with international banks by expanding business beyond the national boundaries.

RBI Guidelines: According to RBI guidelines of April 2001, financial institutions have an option to convert into a bank provided they ensure compliance with following provisions. Reserve provisions (CRR/SLR): A financial institution will have to comply with CRR and SLR provisions after its conversion into a universal banking. Permissible activities: In case an activity, which is not permissible for a bank under section 6(1) of B.R.Act 1949, is presently undertaken by financial institution, such activity will have to be stopped after its conversion into a universal banking. Composition of board: The section 10(A) of B.R. Act 1949 requires that at least 51% of that total number of directors should have special knowledge and experience. This provision has to be complied with constituting the board after transformation from financial institution to a bank.

Benefits of universal banking The benefits of universal banking are as follows: Benefits

To Organization

To Customers

To Shareholders

1. To the organization: When a bank diversifies its activities as a universal bank it can use its existing expertise in one type of financial service in providing the other types. So, it entails less cost in performing all the functions by one entity instead of separate specialized bodies. A bank possesses information on the risk characteristics of its clients, which it can use to pursue other activities with the same clients.

A bank has an existing network of branches, which can acts as shops for selling products like insurance. This way a big bank can reach the remotest client without having to recourse to an agent. Many financial services are interlinked activities, e.g. insurance and lending. A bank can use its instruments in one activity to exploit the other, e.g. in case of project lending to the same firm which has purchased insurance from the bank. 2. To the customers: Universal banking being a one-stop shops for all varied services, some a lot of transaction costs and increases the speed of economic activity. The wide range of financial products and services offered by universal banks are preferred by the customers than the specialized banks due to comprehensive service provided by these banks. 3. To the shareholders: One manifestation of universal banking is a bank holding stakes in a firm. When a lender has a stake in the firm he is in a better position to monitor the firm to safeguard his interest, which sends a good signal about the financial health the firm to the investors. This situation is beneficial from investor’s point of view. All these benefits have to be weighed out against the problems. The main

drawbacks are that: a. Universal banking leads to a loss in economies of specialization. b. Problem of the bank indulging in too many risky activities. To account for this, appropriate regulation can be devised, which will ultimately benefit all the participants in the market, including the banks themselves. In spite of these problems, there is a lot of interest expressed by banks and financial institutions in universal banking. In India, too a lot of opportunities are there to be exploited. Banks mainly the financial institutions are aware of it, and most of the groups have plans to diversify in big way. Even though there might

not be profits forthcoming in the short run due to the switching costs incurred in moving to a new business.

Introduction: offshore banking refers to the banking business related to borrowing and lending funds abroad and meeting the special needs of international investors. An offshore bank is a bank located outside the resident country of the depositor. These banks are not subject to domestic monetary and fiscal regulations. Moreover offshore banks are also exempted from the regulations, which govern the branches of foreign banks. Rather they are situated in a low tax jurisdiction that provides, financial and legal advantages. These advantages may include strong privacy, low or no taxation protection against local political or financial instability. Services/functions The important functions or financial services, which offshore banking units can provide, are:  Deposit taking  Project financing  Syndication of loans  Issuing short-term instruments like negotiable certificates to deposits.  Carry merchant banking activities in foreign currency denominated bonds.  Electronic funds transfer  Foreign exchange  Letter of credit and trade finance  Investment management and investment custody  Trustee services  Corporate administration Although every bank does not provide each service. Banks try to polarize between retail services (which are low cost) and private banking (which tries to bring personalized suite of services to the client).

Benefits/advantages

The main advantages of offshore banking are: Advantages

Tax Benefits

Economic And Political Stability

Payment of Higher Interest Rates

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Special Banking Services

Development Of nation/ Remote areas

Economic and political stability: Offshore banking provides economically

politically stable jurisdictions especially for those resident in areas where there is a risk of political turmoil, and who fear their assets may be seized or disappear. Although, developed economies with regulated banking system offer same advantages in terms of stability. 

Payment of higher interest rates: Some of these banks which function at a

lower cost base provide higher interest rates than the legal rates prevailing in their home countries due to lack of government intervention and lower overheads.

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Tax benefits: Generally the interest paid by offshore banks is without tax

deduction. This acts as a benefit for individuals who do not pay tax on worldwide income, or who do not pay tax until the tax return is agreed. 

Special banking services: Certain offshore banks offer special banking services

not offered else where such as anonymous bank accounts, higher or lower rate loans based on risk and investment opportunities. 

Development of remote areas/nation: offshore banking helps even

geographically remote nations to generate investment and create growth in their economies. Disadvantages There are some limitations of offshore banking are as follows:

Disadvantages

Involved in Crime 

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Encourages Tax evasion

Difficult Physical access

Financial Disturbance

Involved in crime: Off shore banking has been found associated with the

underground economy and organized crime through money lending. After

September 11,2001 these banks have been accused of helping various organized crime gangs, terrorist groups. 

Encourages tax evasion: Offshore banks encourages tax evasion by giving

people seeking tax evasion an attractive place to deposit their hidden income. 

Difficult physical access: As offshore banks are often remotely situated

therefore the physical access is difficult. Access to information can be difficult, however in a global tele communication networks this does not seen to be a big problem as information can be set up on line, by phone or by mail. 

Developing countries may face financial disturbance: sometimes developing

countries may face problem due to speed at which money can be transferred in and out of their economy. This “hot money” coming from offshore accounts can be definitely increase problems of financial and economic disturbance in developing countries.

Introduction: The coming up of middle class with substantial purchasing power in India during the last decade has given rise to its desire to spend according to the changing life style. This has offered the Indian banking system, a ready market, for mobilization and development of their funds. Given the rising purchasing power of this class, there is huge untapped potential for business. Meaning: Retail banking is activity devised in past few years and now used extensively. It represents any banking, which is not wholesale based. It includes any

business that is conducted through branch network, which is mainly focused towards personal sector. It encompasses all institutions that provide a related range of banking services—money deposit, credit services and some form of financial advice. Retail banking today is characterized by three areas:  Multiple products (deposits, credit cards, insurance, investment)  Multiple channels of distribution (call center, branch internet)  Multiple customer groups (consumer, small business)

Need for retail banking  Economic prosperity and the consequent increase in the purchasing power of consumer.  Technological factors also added to the requirement convenience of using credit cards, internet and phone banking anywhere and any time banking has also flood customers into banking.  Decline in interest rates have also contributed to increase retail banking.  With the large corporate borrowers having diversified the sources to fund their financial requirements, frequent reduction in cash reserve ratio resulting in pumping in of liquidity, declining bank rate leading to decline in spreads un- attractive yields on government securities etc. have all forced banks to be in search of alternative opportunity to deploy their funds.

Segments in retail banking: There are three segments in retail banking which included: a. Deposit products (convenient deposit schemes such as flexi deposits) b. Loan products (such as housing loans, education loans, conveyance loans, personal loans for diverse purposes such as medical expenses, travel abroad) Oth