Offshore Banking Ppt

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OFFSHORE BANKING An offshore bank is a bank located outside the country of residence of the depositor, typically in a low tax jurisdiction (or tax haven) that provides financial and legal advantages. These advantages typically include: greater privacy (see also bank secrecy, a principle born with the 1934 Swiss Banking Act) low or no taxation (i.e. tax havens) easy access to deposits (at least in terms of regulation) protection against local political or financial instability. TYPES: Primary OFC’S Secondary OFC’S

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Transcript of Offshore Banking Ppt

OFFSHORE BANKINGAn offshore bank is a bank located outside the country of residence of the depositor, typically in a low tax jurisdiction (or tax haven) that provides financial and legal advantages. These advantages typically include:

greater privacy (see also bank secrecy, a principle born with the 1934 Swiss Banking Act) low or no taxation (i.e. tax havens) easy access to deposits (at least in terms of regulation) protection against local political or financial instability.


Primary OFCS Secondary OFCS Booking OFCS..

Advantages of Offshore Banking :y Offshore banks provide access to politically and economically stable jurisdictions. This may be an advantage for those resident in areas where there is a risk of political turmoil who fear their assets may be frozen, seized or disappear. However, developed countries with regulated banking systems offer the same advantages in terms of stability. y Some offshore banks may operate with a lower cost base and can provide higher interest rates than the legal rate in the home country due to lower overheads and a lack of governement intervention. Advocates of offshore banking often characterise government regulation as a form of tax on domestic banks, reducing interest rates on deposits.

y Offshore finance is one of the few industries, along with tourism, that geographically remote island nations can competitively engage in. It can help developing countries source investment and create growth in their economies, and can help redistribute world finance from the developed to the developing world. y Interest is generally paid by offshore banks without tax deducted. This is an advantage to individuals who do not pay tax on worldwide income, or who do not pay tax until the tax return is agreed, or who feel that they can illegally evade tax by hiding the interest income. y Some offshore banks offer banking services that may not be available from domestic banks such as anonymous bank accounts, higher or lower rate loans based on risk and investment opportunities not available elsewhere. y Offshore banking is often linked to other services, such as offshore companies, trusts or foundations, which may have specific tax advantages for some individuals.

Disadvantages of Offshore Bankingy Offshore banking has been associated with the underground economy and organized crime, through money laundering. Following September 11, 2001, offshore banks and tax havens, along with clearing houses, have been accused of helping various organized

crime gangs, terrorist groups, and other state or nonstate actors. y The existence of offshore banking encourages tax evasion, by providing tax evaders with an attractive place to deposit their hidden income. y Offshore jurisdictions are often remote, so physical access and access to information can be difficult. Yet in a world with global telecommunications this is rarely a problem. Accounts can be set up online, by phone or by mail. y Developing countries can suffer due to the speed at which money can be transferred in and out of their economy as hot money. This Hot money is aided by offshore accounts, and can increase problems in financial disturbance. y Offshore banking is usually more accessible to those on higher incomes, because of the costs of establishing and maintaining offshore accounts. The tax burden in developed countries thus falls disproportionately on middle-income groups. Historically, tax cuts have tended to result in a higher proportion of the tax take being paid by high-income groups, as previously sheltered income is brought back into the mainstream economy.

Activities of offshore banking.

y Wholesale banking: includes syndicated loans, project loans and such other high value loans to MNCs and banks. y Merchant banking: arranging external funds, issue process of foreign currency bonds and equities. y Routing banking: many transactions are routed through offshore banks for advantages of tax saving or for escaping the regulations.

Offshore banking also borrows funds from major Eurocurrency market and lends or invests the same in other countries. thus offshore banks is engaged in wide range of transactions: foreign currency loans which includes syndicated loans, taking of deposits, issue of securities, OTC in derivatives & management of customers financial assets.

Offshore Banking in INDIAFinancial expert have been pleading to establish an offshore banking centre in India Geographically, India provides distinct advantages in attracting offshore banking units, because of Stable economic & political performance

Vast market,Technical manpower.Vital time linked for international money market dealers. In 1996 the sodhani committee on foreign exchange reforms, recommended offshore banking in India. The establishment of offshore banking in India was foreseen when the Foreign Exchange Regulation Act (FERA) was replaced by Foreign Exchange Management Act (FEMA), in 1999. Hence, beginning of offshore banking in India is permitted for the first time offshore banking units (OBUs) to be set up in special economic zones (SEZs). y SEZs will be deemed to be a foreign territory for the purpose of trade operation and duties so as to led the growth of the economy. y The OBUs would be treated as foreign branches of India located in India. Which would carry out mainly wholesale banking operation. y OBUs will be regulated and supervised by RBI. It has limited mandate in India. State Bank of India & ICICI Bank have opened the first offshore banking units (OBU) in India at the SEEPZ special economic zone, Mumbai.

Balance sheet of banks

Basically banks balance sheets are different from companies. Items such as inventory, accounts receivable, or payable are regular and significant in case of banks. Assets contains loan & investment, where liability deposits & borrowings. y ASSETS: Cash: cash represents only 2% to 4% of assets thats because banks like to lend money to and earn interest. Cash is necessary only for liquidity purpose; other wise it erodes value of money against inflation and interest. Thus banks keep most of its money tied up in loans and investment, which is called earning assets. Securities: cash is not an earning asset but 4% of cash may be sufficient to maintain liquidity. Investment grade securities are liquid, and they have higher yield than cash, so its always prudent for a bank to keep securities on hand in case they need to free up soma liquidity. SLR requirement in India is of such kind. Loans (advances): loans represent the majority of banks assets. A bank can typically earn a higher interest rate on loans than on securities. Loans therefore contain risk. If banks make bad loans to customer r businesses, then bank may suffer loss.

Other assets: it includes property and equipment, represents only small fraction of assets. A bank can generate large revenues with very few hard assets.

y Liabilities:Deposits: main source of funds for banks is deposits it highlights the bankers business i.e. intermediation.Deposits constitute over 60% of bankers funds.

Borrowings: banks borrow from market as well as fromcentral banks. This is the next important source of funds. Capital: capital is also known as shareholders equity. Bank owners contribute to bank capital. Banks have stipulated minimum capital. This is to ensure that banks do not just play with depositors funds. Promoters should also be part of the risk.

ASSET LIABILITY MANAGEMENTAsset liability management is an integrated strategy of managing balance sheet having regard to its size & quality that income from interest are maximized with the overall risk preference of the bank the mismatch and changes in the level of asset & liabilities can cause both liquidity & interest rate risk

ALM function and its growing importance1. In 1980s volatility of interest rates in USA and Europe caused the focus to broaden to include the issue of interest rate risk. ALM began to extend beyond the bank treasury to cover the loan and deposit functions. 2. The induction of credit risk into the issue of determining adequacy of the capital further enlarged the scope of ALM in later 1980s. 3. In the current decade earning a proper return of bank equity and hence maximization of its market value has meant that ALM covers the management of the entire balance sheet of a bank. 4. The bank management is now expected to target required profit levels and ensure minimization of risk to acceptable levels to retain the interest of investors in their banks. This also implies that ALM encompasses costing and pricing policies in comprehensive sense.

ALM IN INDIAThe introduction of ASSET LIABILITY MANAGEMENT (ALM) in the Public Sectors Banks (PSBs) has been suggested by several experts.

Since liberalization the banks have been given a large amount of freedom to manage their balance sheets. But the knowledge new systems and organizational changes that are called for to manage it particularly the new banking risks are still lagging. The turmoil in domestic and international markets during the last few months and impending changes in the country financial system are a grim warning to our banks management to gear up their balance sheet managements in a single heave. To begin with as the RBIs monetary and credit policy of October 1997 recommends an adequate system of ALM to incorporate comprehensive risk management should be introduced in the PSBs. It is suggested that the PSBs should introduce ALM which would focus on liquidity management, interest rate risk management and spread management. Broadly there are 3 requirements to implement ALM in these banks. They are as follows:y Developing a better understanding of ALM concepts. y Introducing an ALM information system. y Setting up ALM decision making processes i.e. ALM committee. The above requirements are already met by the new private sector banks. For example:-

1. These banks have their balance sheets available at the close of every day. 2. Changes in interest rate by them to manage interest rate risk. 3. Their maturity mismatches are based on data provided by their MIS.

NON PERFORMING ASSETy Non-performing assets, also called non-performing loans, are loans,made by a bank or finance company, on which repayments or interest payments are not being made on time. y A loan is an asset for a bank as the interest payments and the repayment of the principal create a stream of cash flows. It is from the interest payments than a bank makes its profits. y Banks usually treat assets as non-performing if they are not serviced for some time. If payments are late for a short time a loan is classified as past due. Once a payment becomes really late (usually 90 days) the loan classified as non-performing.

y A high level of non-performing assets compared to similar lenders may be a sign of problems, as may an sudden increase. However this needs to be looked at in the context of the type of lending being done. Some banks lend to higher risk customers than others and therefore tend to have a higher proportion of non-performing debt, but will make up for this by charging borrowers higher interest rates, increasing spreads. A mortgage lender will almost certainly have lower non-performing assets than a credit card specialist, but the latter will have higher spreads and may well make a bigger profit on the same assets, even if it eventually has to write off the nonperforming loans. EFFECT OF FOREIGN EXCHANGE EXPOSURE ON BANKS BALANCE SHEET: The risk inherent in running open foreign exchange positions have been heightened in recent years by the pronounced volatility in forex rates, thereby adding a new dimension to the risk profile of banks balance sheets. Forex risk is the risk that a bank may suffer losses as a result of adverse exchange rate movements during a period in which it has an open position, either spot or forward, or a combination of the two, in an individual foreign currency. The banks are also exposed to interest rate risk which arises from the maturity mismatching of foreign currency position. Even in

cases where spot and forward position in individual currencies are balanced the maturity pattern of forward transactions may produce mismatches. As a result banks may suffer losses as a result of changes in premia / discount of the currencies concerned. In the Forex business banks also face the risk of default of the counterparties or settlement risk. While such type of risk crystallization does not cause principal loss banks may have to undertake fresh transaction in cash, spot market for replacing the failed transaction. Banks also face risk called time zone risk or Herstatt risk which arises out of time lag in settlements of one currency in one center and the settlement of another currency in another time zone.

FOREX RISK MANAGEMENT MEASURES:1. Set appropriate limits for open position and gaps. 2. Clear cut and well defined division of responsibility between front, middle and back offices. The top management should also adopt the VaR (Value at Risk) approach to measure the risk associated with the exposures. Reserve Bank of India has recently introduced two statements i.e. Maturity and Position (MAP) and Interest Rate Sensitivity (SIR) for measurement of forex risk exposures.

Banks should use these statements for periodical monitoring of forex risk exposures. All these risk give sensitivity to the following factors: 1. Profit Sensitivity: As interest rate risk and open position risk can generate uncertainty of profits, banks suffer in their revenue. 2. Asset Value Sensitivity: Foreign currency denominated loans and deposits are affected by value change and thus can sanities originally balanced positions.

PARTICIPATION OF INDIAN BANKS IN OFFSHORE BANKINGA few Indian banks such as State Bank of India, Indian Overseas Bank, Bank of India and Bank of Baroda have set up offshore banking units for deposit taking and lending at Bahrain, Hong Kong, Colombo, Cayman Island and so on. Indian Banks taking company, IBU International Finance in Hong Kong for both offshore and onshore banking.

QUESTIONAIRE1. What are the benefits of offshore banking?

Offshore banking services provide wide range of benefits and opens up distinct opportunities. Opening such an account provides a powerful tool for keeping money secure and making it exempted from taxes. Using an offshore bank account provides opportunities that are not available to domestic banking users. The most important of those are bank secrecy / confidentiality and exemption from taxes on gains. Income generated in form of interest on deposits is not taxed by the income tax. Customers also get possibility to invest globally. Perhaps the most important benefit that offshore banking provides is that the account is strictly private. The confidentiality of all operations conducted through the account is protected by the legislation. The account is protected from creditors, tax authorities and other interested parties. It is to some extent a defense tool.

2. How do I get an offshore bank account? Very easily. Open an HSBC Offshore Bank Account In Sterling, US dollars or Euros in minutes. 3. Why to go offshore? Offshore banking centers open wide range of opportunities for its users: access to innovative banking products, anonymity, safety, politically and economically safe environment. Benefits of going offshore are discussed here. 4. Can I avoid taxes with offshore banking?

Most offshore banking centers are at the same time tax havens (low or no tax jurisdictions). Some offshore jurisdictions exempt all incomes from all taxes, while others exempt only those incomes that were generated by sources outside the jurisdiction. Although offshore banking centers do not tax your incomes, your home country may be taxing foreign generated income. So you must check your countrys legislation: if your countries authorities do not tax income generated from foreign sources, then your offshore incomes shall not be taxed, but if they do (like US does), you should report them, otherwise it will be considered as tax evasion. 5. Is offshore banking legal? Answer to this question is quite simple: it is legal; nobody is arrested for having offshore bank account. Opening offshore bank account is absolutely legal service provided by a financial institution that is licensed in full compliance with the legislation of a tax haven. What can be illegal is when a person holds offshore bank account, receives an income and does not report this income in his home country, if the countrys legislation requires that. In other words using offshore banking is legal, but using offshore banking for illegal operations, such as tax evasion is illegal. 6. Is offshore banking safe and secure? Offshore jurisdictions are politically stable countries with strong economies and developed financial sector. Financial sector is tightly regulated to eliminate risk of bank

failures and ensure a good image of a jurisdiction making offshore banking highly secure. 7. Is my information kept anonymous and confidential? Most financial institutions in offshore banking centers provide anonymity to their clients. Generally bank secrecy is ensured by a countrys legislation. Degree of bank secrecy varies from one jurisdiction to another; therefore if you are interested primarily in bank secrecy, you should check the legislation first to be sure to what extent your personal information is protected. 8. Which one is the best tax haven? What country is the best option? It is difficult to answer this question. Simple answer is: it depends. It depends what exactly you are looking for. If it is bank secrecy, then Panama may be a good choice. If you are resident of UK and want to go offshore, then you may want to choose services provided by Channel Islands (Jersey, Guernsey, and Isle of Man). The answer varies according to your priorities. We provide here description for major tax havens, so it is up to you which one to choose. 9. Which banks provide offshore bank accounts? Offshore bank accounts are provided by both local banks operating at offshore banking centers and also by reputable international banking institutions, such as HSBC and Barclays. Actually you can open an HSBC Offshore Bank Account In Sterling, US dollars or Euros in minutes.

10. Is offshore banking really linked with criminal affairs and criminal financing? Despite the fact that offshore banking provides bank secrecy, high degrees of privacy and confidentiality, this sector is strictly regulated and supervised business and this leaves very small space for criminal affairs. Opening an offshore bank account is not as simple as it may seem at the first sight. There are a few organizations like Financial Action Task Force (FATF), Basel Committee and the Offshore Group of Banking Supervisors (OGBS) that impose strict regulations on offshore banking sector of a tax haven. Tax havens that do not comply with the regulations imposed by these organizations risk to see themselves in a black list. This makes it almost impossible to transfer funds banking institutions from jurisdiction that is in the black list. Such approach makes tax haven authorities interested in to reduce or completely eliminate illegal transaction and makes very hard for criminals to engage in money laundering. So it is very important that the bank your choice has good reputation and is incorporated in a tax haven that has good reputation.

ACKNOWLEDGEMENTWe express our sincere thanks to our esteem institution GURU NANAK KHALSA COLLEGE for this opportunity given to us. We wish to express our sincere thanks to all our professors and to our subject Professor PRIYA

THAPAR for being the constant source of inspiration in completing the project. It is our foremost duty to all those who has supported us and our group members who have helped us in completing our project.









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