Context:
The Reserve Bank of India has clarified that Indian banks, including their overseas branches, may extend loans to non-residents against eligible FCNR(B) deposits. This permission supplements the existing lending provisions and aims to encourage foreign-currency inflows.
Explanation:
- FCNR(B) means Foreign Currency Non-Resident (Bank) Account, a term-deposit facility available to NRIs and eligible persons of Indian origin.
- Deposits are maintained in permitted foreign currencies; therefore, depositors are protected from rupee exchange-rate risk.
- Both the principal and interest are fully repatriable, meaning they can be transferred abroad.
- FCNR(B) deposits generally have maturities ranging from one to five years.
- Banks may grant loans against such deposits by creating a lien, under which the deposit serves as collateral until repayment.
- Swap mechanism: The bank gives the foreign currency received through eligible FCNR(B) deposits to the RBI and receives rupees in return; at maturity, the RBI returns the foreign currency to the bank at the pre-agreed exchange rate, protecting the bank from exchange-rate risk.
- Under a foreign-exchange swap, currencies are exchanged temporarily and reversed later at a predetermined rate.
- The RBI’s swap facility reduces banks’ hedging costs, encouraging them to mobilise more foreign-currency deposits.
- Higher FCNR(B) inflows can strengthen banks’ foreign-currency resources and support India’s forex reserves and external-sector stability.
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