BANKS CAN EXTEND LOANS AGAINST FCNR(B) DEPOSITS

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BANKS CAN EXTEND LOANS AGAINST FCNR(B) DEPOSITS

1. RBI Allows Loans Against FCNR(B) Deposits

The Reserve Bank of India (RBI) has permitted banks, including their overseas branches, to extend loans against Foreign Currency Non-Resident (Bank) [FCNR(B)] deposits. These loans can be provided to non-resident account holders or through Standby Letters of Credit (SBLC) issued in favour of overseas lenders. The new permission is an addition to existing lending provisions and gives banks greater flexibility in mobilising foreign currency deposits. This move is expected to improve access to finance for Non-Resident Indians (NRIs) while making FCNR(B) deposits more useful as collateral for borrowing and investment purposes.

2. FCNR(B) Deposit Push

To encourage foreign currency inflows, the RBI announced a special dispensation allowing banks to mobilise fresh three- to five-year FCNR(B) deposits until September 2026. Under this scheme, banks can swap these deposits with the RBI at a concessional rate, reducing their hedging costs. This measure lowers the financial burden on banks while attracting more foreign currency deposits from Non-Resident Indians. By providing this facility, the RBI aims to strengthen India's foreign exchange reserves, improve banking liquidity, and increase the availability of overseas funds for lending and investment activities.

3. Hedging Cost Absorption by RBI

A major feature of the RBI's initiative is its decision to absorb the hedging cost associated with eligible FCNR(B) deposits. Banks can swap foreign currency deposits with the RBI at a concessional rate, effectively reducing the risk arising from exchange rate fluctuations. Normally, banks bear the cost of protecting themselves against currency volatility. By taking on this burden, the RBI has made FCNR(B) deposits more attractive and cost-effective for banks. This policy is expected to encourage greater mobilisation of foreign currency deposits and strengthen India's financial stability through increased foreign capital inflows.

4. Benefits for Banks and Economy

The RBI's decision offers several benefits to banks and the Indian economy. Banks can raise more foreign currency deposits at lower costs and use them to extend loans or improve liquidity. Lower hedging expenses enhance profitability and encourage participation in the scheme. Increased foreign capital inflows strengthen India's foreign exchange reserves and improve financial stability. The initiative also supports economic growth by making more funds available for productive lending. Experts believe these measures could attract billions of dollars into India's banking system, boosting investor confidence and strengthening the country's external financial position.

5. FCNR(B) Deposits – Meaning

Foreign Currency Non-Resident (Bank) [FCNR(B)] deposits are fixed deposit accounts maintained by Non-Resident Indians (NRIs) in designated foreign currencies such as US Dollar, Pound Sterling, Euro, Japanese Yen, Australian Dollar, and Canadian Dollar. These deposits are protected from exchange rate fluctuations because both the deposit and repayment are made in the same foreign currency. FCNR(B) deposits generally have a maturity period of one to five years and offer attractive interest rates. They help NRIs earn returns while enabling Indian banks to mobilise foreign currency resources for lending and investment.

6. Swap Facility

The RBI has introduced a swap facility that allows banks to exchange foreign currency received through eligible FCNR(B) deposits with the central bank. Under this arrangement, the RBI purchases the foreign currency and provides Indian rupees to banks at a concessional swap rate. At the end of the agreed period, the transaction is reversed. This facility significantly reduces the banks' currency risk and hedging costs. As a result, banks are encouraged to mobilise more foreign currency deposits, improving liquidity and supporting financial stability while ensuring adequate foreign exchange reserves for the country.

7. Standby Letter of Credit (SBLC)

A Standby Letter of Credit (SBLC) is a financial guarantee issued by a bank on behalf of its customer to assure payment if the customer fails to meet contractual obligations. Under the RBI's revised guidelines, banks may issue SBLCs in favour of overseas lenders against eligible FCNR(B) deposits. This provides additional security for international borrowing and facilitates access to overseas credit. SBLCs are widely used in international trade and finance because they reduce lending risk. The RBI's decision expands financing options for NRIs while improving the usefulness of FCNR(B) deposits as collateral.

8. Key Features of the RBI Scheme

The RBI scheme allows banks to mobilise fresh FCNR(B) deposits with maturities between three and five years until September 2026. Banks can avail concessional swap facilities to reduce hedging costs while continuing to offer regular FCNR(B) deposits separately. The scheme applies only to newly mobilised eligible deposits and requires appropriate regulatory compliance. The facility is expected to increase foreign currency inflows, strengthen India's external financial position, and improve liquidity in the banking system. Overall, it provides banks with greater flexibility in raising overseas funds while supporting economic and financial stability.