MUMBAI, July 1: Indian banks operating in Hong Kong have put on hold all India-related business in the wake of Hong Kong's reunification with China. The base of the $2 billion Indian syndicated loan market is also likely to be shifted from the erstwhile British colony to Singapore.

The primary reason behind this development is the Indian government's silence on the fate of the double taxation avoidance treaty entered into with the former Hong Kong administration. "The government has not clarified its stand on the treaty. Even officials of Hong Kong Monetary Authority who recently visited India did not spell out the policy.

Under these circumstances, the consensus is to avoid India-related asset parking in the Hong Bank branches of Indian banks," a senior banker said.

Among Indian banks, State Bank of India, Indian Overseas Bank, Bank of India and Uco Bank have branches in Hong Kong. Besides, the deposit taking company—IBU Banking Corporation—a joint venture of Indian Bank, Bank of Baroda and Union Bank—has also been operating in Hong Kong since the 1980s.

"We are not sure whether the double taxation avoidance treaty will remain valid in future when Hong Kong comes under the special area provisions for the next 50 years. If it is scrapped, the Indian bank branches operating in the island will not be able to keep their bottomlines in tact if they continue to take India-related assets in their books," the banker said.

According to him, the base of the syndicated loan market for Indian corporates will overnight shift to Singapore. The major International syndication players like Jardine Flemming, Chase Asia, BA Asia and CS First Boston have already shifted base to Singapore over the last few months even though they continue to run shops in Hong Kong.

Moreover, most of the Japanese banks which have so far been taking lending decisions from Hong Kong have also shifted base to Japan.

Traditionally, Hong Kong has been one of the five major bases for the Indian loan syndication market. The other five centres are Singapore, Tokyo, London and New York. In 1996-97, about $2 billion worth of syndicated loans was raised from the Hong Kong market. "All Indian banks operating in Hong Kong have always been keen on taking Indian assets in their books.

Now the situation has changed as uncertainty has gripped the industry. It will continue in the short run till the legal provisions are cleared," another banker said.

The loan syndication base is likely to be shifted to Singapore and Japan. While the financial institutions will focus to the Japanese market, Indian corporates will shift the attention to Singapore which boasts of a more sophisticated market.

Besides, the Singapore government has recently announced tax exemptions on deals syndicated in Singapore in which the Singapore-based domestic and offshore banks' participation is pegged at 60 per cent or above.

The Hong Kong money market is also set to lose its depth following the bankers' perference for Singapore because of the versatility of offers and services. "Since Hong Kong and Singapore are in the same time zone, we will now focus on the Singapore screen for the options it offers and the legal protection. The situation may change in the long or even medium term.

But for the time being, we are withdrawing from Hong Kong," a leading forex dealer said.

Meanwhile, Bank of Baroda, one of the partners in the Indian joint venture IBU Banking Corporation, is planning to buy out the stakes of the other two Indian banks—Indian Bank and Union Bank. The Reserve Bank of India has in principle agreed to the arrangement. BoB wants to enter the vast Chinese market through the existing deposit taking company. Barring State Bank, which is in the process of opening a representative office in Shanghai, no other bank has any presence in mainland China.

The Indian Banks Association's chief economist, Bandi Ramprasad, feels there will be no change in Hong Kong's status as a regional financial centre despite the takeover by China. "The change in political scenario will not cast its shadow on the financial activities, at least till the end of the century," Prasad said.

Copyright © 1997 Indian Express Newspapers (Bombay) Ltd.