The Reserve Bank of India has allowed domestic lenders to extend loans to non-residents against foreign currency deposits, including through their offshore branches, in a move aimed at drawing more dollar flows into the country.
The central bank set out the change in a notice on 23 June. It is expected to boost the amount of FX deposits raised through a scheme announced earlier in the month, part of a broader set of measures to bolster dollar inflows from the Indian diaspora.
The new rules open several channels for banks. Under the scheme, Indian banks can extend loans to non-residents from their overseas branches, including units in India’s tax-neutral GIFT City, using the deposits they have gathered as collateral. They can also issue a standby letter of credit against such FX deposits, extend loans to foreign currency deposit holders, and place a lien on those accounts.
The RBI set conditions on the accompanying swap facility. Its swap will cover only the principal of the deposits, not the interest component. Banks can undertake swaps for tenors of under three years, provided they have mobilised eligible foreign-exchange deposits for a minimum of three years.
The measure builds on a step taken earlier in the month, when the RBI offered to subsidise hedging costs on foreign currency non-resident (FCNR) deposits to encourage banks to bring in dollar flows from the diaspora. Brokerage Nomura estimates the scheme could attract $55 billion, with the bulk expected in August and September.
For the foreign and domestic banks operating in India, the change adds a lending and collateral dimension to what was a deposit-gathering scheme, with GIFT City positioned as a route for the offshore lending it enables.
