India's RBI to allow domestic banks to extend loans against overseas FX deposits

MUMBAI: India’s central bank has allowed domestic lenders to extend loans to non-residents against foreign currency deposits, including via their offshore branches, the Reserve Bank of India said in a notice on Tuesday.

The move is expected to boost the overall amount of FX deposits garnered via the route, which was announced earlier this month as part of a broader measures to bolster dollar inflows into the country.

Under the scheme to raise FX deposits, Indian banks will be allowed to extend loans to non-residents from their overseas branches, including via those in India’s tax-neutral GIFT City, using deposits garnered as collateral.

Domestic lenders will also be allowed to issue a standby letter of credit against such FX deposits.

Banks will be able to extend loans to foreign currency deposit holders and place a lien on such accounts.

RBI’s swap will cover only the principal amount of the deposits and not the interest component.

Banks will be allowed to undertake swaps for tenors of less than three years for foreign currency deposits, provided they have mobilised eligible foreign-exchange deposits for a minimum period of three years.

Earlier this month, the RBI offered to subsidise hedging costs for foreign currency non-resident (FCNR) deposits as a way to encourage banks to bring in dollar flows from the Indian diaspora.

Brokerage Nomura estimates the scheme could attract $55 billion, with the bulk expected in August and September.