Banking - IFSC Banking Units and the Limits of the Licence
What this domain tests
The Banking section tests the IFSCA (Banking) Regulations, 2020 and the operating model of IFSC Banking Units (IBUs) in GIFT-IFSC: who may set up an IBU, what it may book, and where IFSCA's jurisdiction ends and RBI's FEMA jurisdiction begins.
Core rules
- An IBU is a branch or division of the parent bank, not a subsidiary. The parent's capital, supervision and liability stand behind it; the IBU keeps a separate general ledger and the "IBU" designation.
- Business is foreign currency only. An IBU cannot open INR accounts, run Indian retail branches, or handle cash.
- Permitted core business: external commercial borrowing (ECB) lending to Indian corporates, trade finance and factoring, syndication, loans to non-residents, guarantees for overseas contracts, derivatives, and participation in IFSC exchanges.
- Deposit-taking is essentially non-resident business; resident-facing activity is confined to permitted foreign-currency transactions.
- Entry conditions include parent-level capital/net worth (the figure to remember for a foreign bank branch is USD 20 million equivalent), a track record, and IFSCA registration. Prudential reporting goes to IFSCA.
Worked example
An Indian bank's IBU is asked to (a) lend USD 50 million to an Indian corporate as an ECB, (b) take a USD 5 million deposit from an offshore fund, and (c) book an INR term loan for an Indian exporter. Only (a) and (b) are possible. The ECB is foreign-currency lending permitted to IBUs, subject to the FEMA ECB framework; the offshore fund's dollar deposit is standard non-resident business. The INR loan fails twice over - it is domestic-currency business and domestic lending, which belong in the parent's domestic book.
Traps that cost marks
Treating an IBU as a separately incorporated bank; assuming DICGC deposit insurance covers IBU deposits (it does not); assuming IFSCA registration displaces FEMA; forgetting that the parent, not the IBU, is the licensed entity.