The Reserve Bank of India (RBI) recently provided regulatory clarity on a significant issue for lenders looking to tap non-resident deposits. The central bank stated that Indian banks, including their overseas branches, are now permitted to extend loans to non-residents or issue Standby Letters of Credit (SBLCs) in favor of overseas lenders against Foreign Currency Non-Resident (Bank), or FCNR(B), deposits. These FCNR(B) deposits must be those mobilized under the RBI's recently announced swap facility, a move designed to incentivize foreign currency inflows into India.
This clarification addresses concerns from banks regarding the utilization of these FCNR(B) deposits and aims to boost foreign currency liquidity. The swap facility itself, introduced as part of broader foreign exchange measures, covers only the principal amount of these deposits. This allows banks to provide leverage for these deposits, as was similarly done during a previous offering in 2013, which analysts like Jefferies considered crucial for the scheme's success.
The RBI's initiative permits banks to mobilize FCNR(B) deposits in any freely convertible currency, although the swap facility with the RBI is available specifically in U.S. dollars. The underlying deposits will have a one-year lock-in period. This swap facility, operational until October 16, 2026, for deposits mobilized till September 30, 2026, offers concessional swaps to compensate banks for hedging costs on three-to-five-year FCNR(B) deposits, thereby encouraging overseas fundraising by state-owned companies and greater foreign currency deposit mobilization by Indian entities.
