The Reserve Bank of India (RBI) has allowed Indian banks to provide loans to non-residents against their foreign currency deposits. These loans can also be offered through the overseas branches of Indian banks, according to a notification issued by the RBI on Tuesday.
Understand what this means
The RBI’s latest decision means that Non-Resident Indians (NRIs) and other non-residents can now take loans against their foreign currency deposits without withdrawing the money.
For example, if an NRI deposits $100,000 in an FCNR account with an Indian bank, the bank can provide a loan by keeping that deposit as security. The NRI continues to earn interest on the deposit while also getting access to funds when needed.
Banks can provide these loans through their overseas branches, including those located in GIFT City. This move is expected to encourage more NRIs to keep their savings in Indian banks because they can use their deposits to obtain loans whenever required. As a result, India may receive higher foreign currency inflows, helping strengthen the country’s foreign exchange reserves and support the rupee.
Step to Increase Dollar Inflows
The decision is expected to help banks attract more foreign currency deposits under a special scheme announced earlier this month. The scheme is part of RBI’s efforts to increase dollar inflows into India.
Loans Through Overseas Branches
As per the RBI notification, Indian banks can provide loans to non-residents through their overseas branches, including branches operating in GIFT City. The loans can be given by using foreign currency deposits as collateral.
Standby Letters of Credit Also Allowed
Banks have also been permitted to issue standby letters of credit against these foreign currency deposits. This will provide additional financial flexibility to deposit holders.
Direct Loans to Deposit Holders
The RBI has further allowed banks to provide loans directly to foreign currency deposit holders. In such cases, banks can place a lien on the deposit account as security for the loan.
RBI Clarifies Swap Facility Rules
The central bank clarified that its swap facility will cover only the principal amount of the foreign currency deposits. The interest earned on these deposits will not be covered under the facility.
Short-Term Swap Transactions Permitted
Banks can undertake swap transactions for periods of less than three years. However, before doing so, they must first mobilise eligible foreign currency deposits that have a minimum maturity period of three years.
Measures to Encourage FCNR Deposits
Earlier this month, the RBI announced several measures to reduce hedging costs for Foreign Currency Non-Resident (FCNR) deposits. The objective is to encourage banks to attract more dollar deposits from Indians living abroad.
Nomura Estimates $55 Billion Inflows
According to brokerage firm Nomura, the RBI’s initiative could attract around $55 billion in foreign currency deposits. A large part of these inflows is expected to come during August and September.
Key Highlights
- RBI has allowed banks to offer loans against foreign currency deposits.
- Loans can be provided through overseas branches, including GIFT City branches.
- Banks can issue standby letters of credit against such deposits.
- Direct loans to deposit holders are also permitted.
- RBI’s swap facility will cover only the principal amount of deposits.
- The scheme aims to attract more dollar deposits from Non-Resident Indians (NRIs).
- Nomura estimates potential inflows of around $55 billion under the scheme.
