Indian Reserve Bank Issues Restrictive Net Banking Guidelines

by Mary Swire, Tax-News.com, Hong Kong

22 June 2001

The Reserve Bank of India recently issued net banking guidelines stipulating, amongst other things, that only banks licensed in India and operating a domestic branch network will be permitted to offer internet banking in the country. This move could be seen as somewhat short-sighted given that the government is currently pushing several Indian cities, most notably Mumbai, as potential offshore banking centres.

Banks will need to seek the RBI's approval to offer online banking services, and these will be restricted to local currency transactions for account holders only. The RBI notification follows the recommendations of the 'Working Group on Internet Banking' which looked at technology and security issues, legal issues, and regulatory and supervisory issues. The guidelines are due to be implemented in phases.

The Reserve Bank stated that the existing rules applying to the 'in-out' scenario, where customers in cross border jurisdictions are offered banking services by Indian banks (or branches of foreign banks in India), and the 'out-in' scenario, whereby Indian residents are offered services by banks operating in cross border jurisdictions, would also apply to internet banking, meaning that these types of transaction would not be permitted.

However, it said that exceptions would be made where resident Indians have been permitted to maintain their accounts with overseas banks by the authorities. It also said that overseas branches of Indian banks would be permitted to offer internet banking services to their overseas customers subject to their satisfying both the host and home supervisor.

Moving on, the RBI suggested that banks should be connected to inter-bank payment gateways for the settlement of e-commerce transactions, and stated that only institutions that are members of the cheque clearing system in the country will be permitted to particpate in the inter-bank gateways. However, it noted that payments effected using credit cards, those arising out of cross border e-commerce transactions, and all intra-bank payments should be excluded for settlement through an inter-bank payment gateway.

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