India

Introduction

  

About India

India is the fastest growing emerging economy in the world, was the 16th largest export economy globally (2015) and is a world leader in IT.

India is a relatively low-cost region in which to operate and has a skilled workforce, enabling companies to use it as a strategic and operational support centre for wider operations. It is a major exporter of IT services, particularly in business process outsourcing and software services, which is the fastest growing part of the economy.

The Indian government is undergoing a series of economic reforms to increase efficiencies in doing business with the global economy and seeks to overcome its historical limitations, particularly to FDI. These have culminated in the privatisation of state-owned enterprises, the reduction of financial controls, industrial deregulation and the increase of FDI caps. India's largest trading partner is the European Union (EU), followed by China and the US.

India's banking sector is dominated by state-owned banks, with the government holding majority stakes in four of the five largest banks. There are 26 public sector banks, 25 private sector banks and 43 foreign banks.

 

What solutions are available in India?

Solution Description
Payment Factory A centralised management of payments for the organisation to drive greater visibility, control and efficiency in the execution process.

Corporate Treasury in India

India is the fastest-growing emerging economy in the world, and a global leader in information technology. Here, we highlight some of the key factors relevant to treasury and cash management in India.

 

Financial Market Development

  • The World Economic Forum ranks India 53rd in the world for financial market development in The Global Competitiveness Report 2015-2016.
  • The report also states that macroeconomic stability has improved but India ranks 100 for the soundness of its banks.
  • The Indian rupee (INR) is a closed currency. The Reserve Bank of India (RBI) has imposed capital controls in the past, such as in August 2013 when it cut overseas remittances by individuals to USD 75,000 from USD 200,000, and reduced overseas investments by Indian companies by three-quarters.
  • In November 2016, large-denomination bank notes were removed from circulation and strict bank withdrawal limits were imposed. These limits have since been lifted and new bank notes have been introduced.

 

Sophistication of Banking Systems

  • India's banking sector is dominated by state-owned banks, with the government holding majority stakes in four of the five largest banks. There are 26 public sector banks, 25 private sector banks, and 43 foreign banks.
  • Daily foreign exchange turnover averaged USD 34 billion in April 2016, accounting for 0.5% of global turnover (Bank for International Settlements triennial global survey 2016).
  • India's bond market is not well-developed. Government bonds account for 75% of India's debt market, with large banks dominating the corporate bond sector. India does not have a functional trading platform for bonds. Currently only the top-rated borrowers have access to the corporate bond market. Most other entities use private placements (loans from banks) as debt.
  • India is a member of the Asian Clearing Union.

 

Regulatory Bodies

  • The banking system in India is regulated by the Reserve Bank of India. Regulation is in line with international standards. RBI approval is required in certain cases for the repatriation of funds.

 

Tax

  • Corporate income tax is charged at a rate of 30% to Indian companies and 40% to foreign companies. Resident companies are taxed on worldwide income. Foreign companies are taxed on income that is received in India. There are additional surcharges for income that exceeds certain levels.
  • All companies are liable to pay wealth tax of 1% of the value of specified net assets exceeding INR 3 million.
  • There is no withholding tax on remittance of profits by the branches of foreign companies to their head office.
  • Interest income received by a foreign company is taxed at a concessional rate of withholding at 5% or 20%, subject to conditions. Interest expenses are tax deductible.
  • Tax incentives are available to certain industries operating in Special Economic Zones (SEZs). For example, offshore banks and international financial services centres that meet certain conditions are eligible for a 100% tax exemption on specified income for five years and a 50% concession for a further five years.
  • VAT is charged at 5%-15% depending on the nature of the goods involved and the individual state. India introduced a Goods and Services Tax (GST) on 1 July 2017 to replace 16 other levies, including VAT. GST will be charged at 0%, 5%, 12%, 18% and 28%, depending on the goods.
  • India has tax treaties with more than 90 countries and territories.

 

Benefits for Local Treasury

  • India has a pro-business government that is relaxing foreign direct investment (FDI) rules.
  • The Reserve Bank of India is broadening the country’s derivative and debt markets
  • Two Indian banks have joined SWIFT’s global payments innovation initiative, improving cross-border payment infrastructure.
  • India is a relatively low-cost region in which to operate and has an adequately skilled workforce, enabling companies to use it as a strategic and operational support centre for wider operations.
  • Resident and non-resident companies are permitted to participate in cross-border sweep structures, but for non-resident companies, foreign-exchange control rules and withholding tax on inter-company loans apply.
  • Cash concentration is available, but non-residents may have to pay withholding tax on interest.
  • Notional pooling is not permitted in India.

 

Banking

 

Banking System

  • State-run banks dominate India's banking sector, with four of the top five banks being majority controlled by the government: State Bank of India, Bank of Baroda, Punjab National Bank and Bank of India. The fifth is ICICI Bank, which is privately owned.
  • There are 26 public sector banks (controlling 80% of the banking sector), 25 private sector banks, 43 foreign banks, 56 regional rural banks, 1,589 urban cooperative banks and 98,550 rural cooperative banks, with further financial support from cooperative credit institutions.
  • The government announced in 2014 that it would reduce its stake in state-run banks, although it also planned to boost struggling state-owned banks with private sector expertise and a central banking body, the Bank Board Bureau.

 

Bank Accounts

  • Residents are permitted to open foreign currency and INR accounts domestically. Foreign currency accounts both in India and overseas are subjected to certain conditions prescribed by the RBI. 
  • Non-residents (as defined under Foreign Exchange Management Act, 1999) can open INR account in India, subject to conditions prescribed by the RBI.  

 

Legal and Regulatory

  • The RBI's Board for Financial Supervision oversees India’s banking sector, with the National Bank for Agriculture and Rural Development overseeing provincial rural and most cooperative banks under the auspices of the RBI. The RBI also implements foreign currency controls.
  • A resident company must be registered under the Companies Act 2013 and rules made there under. 
  • A company incorporated outside India can enter Indian markets as Wholly Owned Subsidiary in India or as a Joint Venture Partner of an Indian Company. A company incorporated outside India can also set up a branch, project office or liaison office in India under various regulations.
  • India has anti-money laundering legislation in place and is a member of the Asia/Pacific Group on Money Laundering (APG), the Eurasian Group on Combating Money Laundering and Financing of Terrorism (EAG) and Financial Action Task Force (FATF). It also has the Financial Intelligence Unit under the Ministry of Finance, which is tasked with safeguarding the financial system against from the abuses of money laundering, terrorism financing and other economic offences

 

Payments

 

Payment Systems

NG–RTGS

 

India’s national real-time gross settlement (RTGS) system

  • For high-value (more than INR 200,000) and urgent INR-denominated interbank transfers.
  • Operated by the RBI.
  • Effects final settlement of net balances originating from other clearing houses.
  • Settles transactions in approximate real time (within two hours) on gross or offset basis, with participant banks' accounts with RBI.

CTS

 

Cheque Truncation System

  • Processes cheque payments in India.
  • Operated by National Payments Corporation of India (NPCI).
  • Cheque clearing houses dealt with on a grid-based system and split into three regions - North, Southeast and West. Allows same-day settlement with cheques drawn within same jurisdiction. Cheques drawn on banks outside of these jurisdictions can take three days to three weeks.
  • Cheques are truncated before being processed in regional clearing houses.
  • Final settlement is done via RTGS across participant banks' accounts with RBI.

 

NACH

 

National Automated Clearing Services

  • Is a deferred net settlement system operated by the RBI.
  • Used for repetitive and non-urgent bulk electronic credit and debit payments for transactions up to INR 10,000,000.
  • Divided into NACH-Credit and NACH-Debit subsystems.
  • Payment instructions done centrally.
  • Payments settled on T+0.
  • Final settlement done via RTGS across participant banks' accounts with RBI.

 

NEFT

 

National Electronic Funds Transfer

  • For low-value, one-off electronic payments.
  • Is a deferred net settlement system operated by the RBI.
  • Uses Structured Financial Messaging System (SFMS) to process transactions.
  • Payments made on half hourly batches on T+0. 
  • Final settlement done via NG-RTGS across participant banks’ accounts with RBI.

BBPS

 

Bharat Bill Payment System

  • Used for bill payments similar to GIRO payments.
  • Payments settled on T+0.
  • Final settlement done via NG-RTGS across participant banks' accounts with RBI.
  • Live with over 10 players and over 30 billers. 
  • Supports transactions through cards, wallets, UPI, IMPS and Net Banking.

 

IMPS

(Immediate Payment Service)

Interbank Mobile Payments Service

  • Operated by NPCI.
  • A real-time electronic interbank payment and collection system. 
  • Facilitates fund transfer using multiple payment identifiers like combination of account number and Indian Financial System Code (IFSC) or a combination of Mobile Money Identifier (MMID) and mobile number or Aadhar number. 
  • Available 24/7, 365 days a year.
  • Final settlement done via NG-RTGS across participant banks' accounts wiht RBI.

UPI

(Unified Payments Interface)

 

  • Operated by NPCI.
  • Over 20 participant banks
  • A real-time electronic system used for both payment and collections through Push and Pull mode.
  • Available 24/7, 365 days a year.
  • Facilitates fund transfers using multiple payment identifiers like Virtual Payment Address (VPA) or combination of account number and Indian Financial System Code (IFSC) or a combination of Mobile Money Identifier (MMID) and mobile number or Aadhar number.
  • Introduced the concept of Payment Service Providers (PSP) to enable banks to offer mobile applications to non-customers to participate in UPI.
  • Final settlement done via NG–RTGS across participant banks' accounts with RBI.

 

 

 

Payment Instruments

 

Credit Transfers

  • High-value (more than INR 200,000) and urgent credit transfers settled via NG–RTGS in approximate real time.
  • Low-value, non-urgent, bulk credit transfers settled via NACH same day.
  • One-to-one electronic payments settled via NACH or NEFT same day.

 

Direct Debit

  • NACH Debit used for regular transfers for transactions up to INR 10,000,000 and supports both C2B and B2B Payments. 
  • Settled via NACH on T+0.

 

Cheques

  • Common form of payment, especially for retail and commercial payments.
  • Cheques truncated and processed via CTS through grid system, which is divided into three grids.

 

Card Payments

  • Common form of payment and growing in popularity.
  • Visa and MasterCard are the main brands of credit card used, and these are cleared next day.
  • RuPay is India's payment card. It is operated by the NPCI.
  • Most card credits and debits are processed by National Financial Switch (NFS) and settled via the Clearing Corporation of India (CCIL) same or next day.
  • Electronic money schemes are available through top-up prepaid cards.
  • Multi-application cards have been introduced by the RBI for use in banking, postal and financial services. The banks authorised to issue these cards are: ICICI Bank, HDFC Bank and Oriental Bank of Commerce.

 

Other Payment Formats

  • Cash is a common form of payment.
  • Online banking is a popular form of payment, with 22% of internet users banking online, and this is estimated to increase significantly in future.  

 

Demographics

Recent developments

 

India Tweaks GST

India's GST Council has removed nearly 200 items from the top rate of its Goods and Services Tax (GST). In a recent meeting, the council decided to retain the 28% band for so-called luxury and sinful items, but shifted 177 items into the lower 18% bracket. Around 20 items were also moved from the 18% bracket to the 12% one. Goods and services fall into five main categories with tax charged at 0%, 5%, 12%, 18% and 28%.

Read more about this development here.

 

12 Million Users Use Tez

Google’s digital payments service has gained 12 million users in India in the first three months since its launch. The app, known as Tez, has processed 140 million transactions since September, with the average number of daily transactions quadrupling during the period. Figures from the National Payments Corporation of India show Tez accounted for 70% of transactions on the Government’s Unified Payments Interface between October and November. Tez is currently rolling out a feature that will enable people to use the app to pay utility bills.

Read more about this article here.

 

Cash is Still King

Indians continue to retain their preference for cash a year after high denomination bank notes were taken out of circulation in a bid to encourage consumers to adopt electronic payment methods. The removal of INR 1,000 and INR 500 notes in November last year led to a steep take up in electronic payment options, but 12 months later, cashless payments account for less than 5% of all transactions.

The Government has set a target to have 25 billion cashless transactions completed this fiscal year.

Read more about this article here.

 

 

 

This Market Profile is brought to you by DBS. Get in touch with us for further insights on doing treasury in India and take advantage of our innovative solutions to empower your business. Click here to find out more.

 

 

Sources: IMF World Economic Outlook database, October 2016; CIA World Factbook; Trading Economics; PwC

Please note that the information contained in this document, assembled based on information available and accurate as at July 2017, is of a general nature only and is subject to change whether for economic, political, social or other reasons.

 

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Last updated on 08 Feb 2018