RBI Allows Banks To Lend Against FCNR(B) Deposits

The Reserve Bank of India (RBI) has permitted Indian banks, including their overseas branches, to extend loans to non-resident account holders and issue Standby Letters of Credit (SBLCs) in favour of foreign lenders against FCNR(B) deposits mobilised under a newly introduced swap facility.

This clarification was issued through the central bank’s latest Frequently Asked Questions (FAQs).

The RBI said this permission is in addition to existing regulatory provisions that already allow banks to offer secured or unsecured credit and issue guarantees under normal banking guidelines.

It further clarified that banks can extend loans to FCNR(B) account holders and create a lien on such deposits.

A lien refers to the legal right of a bank to retain control over assets until a borrower’s obligations are fulfilled.

Earlier, on June 5, the RBI introduced a special framework allowing banks to mobilise fresh FCNR(B) deposits with maturities of three to five years until September 2026.

Under this scheme, banks are also permitted to undertake currency swaps with the RBI at concessional rates, effectively eliminating or significantly reducing hedging costs associated with foreign currency deposits.

By absorbing hedging expenses, the RBI has made FCNR(B) deposits a more attractive source of foreign funding for Indian banks.

Market estimates suggest that these measures could attract up to $50 billion in additional foreign capital inflows into India, as banks are expected to offer higher interest rates to depositors after accounting for the reduced hedging burden.

Under the forex swap arrangement, the RBI will conduct a buy-sell foreign exchange swap covering only the principal component of deposits, excluding interest payments.

The central bank also clarified that banks may undertake swaps for maturities of less than three years, provided they have mobilised eligible FCNR(B) deposits with a minimum original tenor of three years under the scheme.

Interest rates on such deposits, including cases involving differential interest structures, must comply with the Reserve Bank of India’s Commercial Banks Interest Rate on Deposits Directions, 2025.

Banks will continue offering standard FCNR(B) deposits without opting for the swap facility for tenors between three and five years.

However, they must maintain separate records for such deposits, even though there is no requirement for a minimum one-year lock-in period.

The RBI also clarified rules related to External Commercial Borrowings (ECBs).

ECBs may be raised for any permitted tenure under Foreign Exchange Management regulations, but only those with an average maturity of three years or more are eligible for the swap facility.

The tenor of the swap will align with the loan repayment schedule or ECB maturity, subject to a maximum of five years.