INTERNATIONAL BANKING OPERATIONS MANAGEMENT :

International banking is one of the important constituents of the international financial sector. Since 1973 it has acquired new characteristics and dimensions. The number of participants, which at the beginning of the period were mainly American banks, has considerably widened to include German, UK, Japanese, French, Italian and now

Asian banks branches and subsidiaries. In view of the large scale expansion of international banking, with more cross border transactions, international banks have to face many issues like

– Cross border risks

– International legal and regulatory framework

– Money laundering activities

– Volatile international markets due to various factors including PESTEL factors

All these issues put more and more pressures on the operations of international banks across the nations. This has called for a collective effort to manage these issues, by strengthening the operational activities of international banks.

Some of the important features of Operations Management are:

Expansion of business: International banks are linked together in various ways;

(i) Correspondent banks

(ii) Foreign branches

(iii) Foreign subsidiaries and affiliates

(iv) Off shore Banking Units

(i) Correspondent banks: An informal linkage between banks in different countries is set up when banks maintain correspondent accounts with each other. Large banks have correspondent relationships with banks in almost every country in which they do not have an office of their own. The purpose of maintaining foreign correspondents is to facilitate international payments and collections for customers. Correspondent banking allows banks to help their clients in their business abroad. This relationship is primarily for settling customer payments, but it can also be extended to providing limited credit for each other’s customers and to setting up contacts between local business people and the clients of the correspondent banks. Correspondent banking relationship is especially useful in issuing / confirming L/Cs, Guarantees, and Bid Bonds etc.

(ii) Foreign branches: When banks open their branches in another country/countries they are designated as “Foreign Branches”. Foreign branches are subject to both Host country banking rules and the rules at home. The books of a foreign branch are incorporated in those of the parent bank, although the foreign branch will also maintain separate books for revealing separate performance, for tax purposes, for local authorities. Generally, these foreign branches are equipped with latest technology, and on account of competitive advantages they can offer better customer service, as well as innovative products to their clients.

(iii) Foreign Subsidiaries and Affiliates: A foreign subsidiary is a locally incorporated bank that happens to be owned either completely or partially by a foreign parent. Foreign subsidiaries do all types of banking, and it may be very difficult to distinguish them from an ordinary locally owned bank.

Foreign subsidiaries are controlled by foreign owners, even if the foreign ownership is partial. Foreign affiliates are similar to subsidiaries in being locally incorporated, but they are joint ventures, and no individual foreign owner has control (even though a group of foreign owners might have control).

(iv) Off Shore Banking Unit (OBU): International banking handles its operations through many channels, as explained above. However off shore banking is having certain special features over others. An off shore bank is a bank located outside the country of residence of the depositor. These OBUs are generally located in a low tax jurisdiction or tax haven that provides tax and legal advantages.

Important features of offshore banks:

(a) Offshore banks provide access to politically and economically stable jurisdictions. This helps residents of many nations which are politically not very stable to make use of offshore banking units located in other centers, who can offer better avenues for their investments.

(b) Higher interest rates for deposits: In most of the offshore centers, banks have freedom to offer their own interest rates without any restrictions. In view of the lower cost of operations and other competitive advantages, off shore banks can offer higher rates to their depositors.

(c) Most of the offshore banks are located in tax havens, there by either lower taxes needs to be paid or no tax is applicable.

(d) In most off shore banking centers, banks get exemption from reserve requirements, hence costs are lower

(e) One of the issues faced by off shore banking units, in view of lesser regulatory controls, is that these units are used as a vehicle for money laundering activities Offshore Banking in India – salient features: In India offshore banking units have been permitted to be setup in Special Economic Zones (SEZs).

Article 10 of the Foreign Exchange Management Act, 1999 allows Reserve Bank of India to delegate powers to offshore banking units to deal in foreign exchange.

SEZs are treated as a foreign territory for the purpose of trade operations and duties/tariffs to encourage exports OBUs would be considered as foreign branches of Indian banks located in India.

These OBUs would be exempt from reserve requirements and provide access to SEZ units and SEZ developers to international finances at international rates.

OBUs would be offering wholesale banking services

By setting up different types of outlets and links like correspondent banks, foreign branches, foreign subsidiaries and affiliates, off shore banking units International banks manage their operations across various financial markets operating in different time zones. International banks operational efficiency would depend upon (i) effective international risk management system (ii) good corporate governance practices (iii) keeping pace with the changed environment by offering innovative cost effective products and services (iv) taking advantage of the technological revolutions.