For tapping high growth units in special economic zones, a host of Indian banks had established offshore banking units in 2003-04 in these duty free enclaves. Four years later, most of these banks are complaining about indifferent growth and stagnancy in these units.

State Bank of India's unit in Santacruz Electronic Export Processing Zone, a duty free zone, has reported a cumulative business of just over Rs 180 crore (Rs 1.8 billion), a senior SBI official said.

The experience of Union Bank of India is no different. It has reported a business volume of about Rs 140 crore (Rs 1.4 billion). The business growth of OBUs has been in the range of 10-20 per cent annually, while clients have shown much higher growth, an employee of a bank said.

• India's great rush for SEZs

Bankers attribute this to a range of reasons from rigid operating rules to different business models of companies operating in SEZs, and "grounded" status of OBUs.

At SEEPZ, Mumbai, SBI, ICICI, Punjab National Bank, Union Bank of India and BOB are among the banks that have set up OBUs. At Noida (near Delhi), Canara Bank has also set up an OBU.

"There is nothing wrong with clients and staff. These branches are working under highly restrictive regulatory conditions with a mandate to serve, predominantly, the customers in the zone or lend to SEZ developers," said a top executive of a Mumbai-based public sector bank.

"In addition, OBUs can only have an exposure of up to 25 per cent in Domestic Tariff Area, that too under the scheme of external commercial borrowings," said K K Agarwal, general manager (international banking) of Bank of Baroda.

OBUs in countries like Singapore and Bahrain have lighter regulatory obligations for minimum capital, taxation, and reserve requirements. In India, while OBUs in zones are not taxed in the first five years of operations and enjoy exemption from cash reserve ratio requirements, they are not ordinarily exempt from statutory liquidity ratio requirements.

Similarly, though OBUs can raise funds from foreign currency deposits of non-residents (including non-resident Indians) and invest their funds overseas and trade in foreign currencies abroad, they don't enjoy the benefits of OBUs in other countries.

For example, OBUs in India cannot lend overseas nor participate in international syndications or consortia at par with foreign branches. They can neither finance overseas acquisitions nor fund third country trade.

According to a senior SBI executive, infotech units in SEEPZ work on a business model that ensures that clients make advance payments. As a consequence, they depend much less on bank funds. Also, the gems and jewellery units in the zone enjoy credit from suppliers, reducing the need for bank assistance.

While room for further business growth, at present, looks limited in SEZs, the OBUs are hoping on zones specific for sectors like textile and automotive industry to revive their fortunes.