SynopsisBanks can now offer loans to non-residents and issue standby letters of credit against FCNR(B) deposits under the RBI's swap facility. This regulatory clarity from the central bank allows Indian banks, including overseas branches, to lend to non-residents who then place these funds as FCNR(B) deposits, serving as collateral. This move aims to boost foreign currency inflows, with the swap facility covering only the principal amount of deposits.ReutersReserve Bank of IndiaThe Reserve Bank of India (RBI) on Tuesday clarified that banks can extend loans to non-residents and issue standby letters of credit (SBLCs) against FCNR(B) deposits mobilised under its recently announced swap facility, providing regulatory clarity on a key issue that had prompted questions from lenders seeking to tap non-resident deposits.In a set of frequently asked questions (FAQs) issued on the FCNR(B) deposit, external commercial borrowing (ECB) and overseas foreign currency borrowing swap facilities, the central bank said Indian banks, including their overseas branches, are permitted to extend loans to non-residents or issue SBLCs in favour of overseas lenders against FCNR(B) deposits mobilised under the June 8 scheme.Also Read: Banks seek RBI clarity on leveraged NRI FCNR deposit structuresThe RBI also clarified that banks are permitted to lend directly to FCNR(B) account holders and mark a lien on such deposits.The clarification comes days after several lenders sought guidance from the RBI on leveraged FCNR(B) deposit structures. People familiar with the matter had told ET that banks wanted explicit regulatory comfort on whether an overseas branch of an Indian bank could lend to a non-resident customer who would subsequently place the borrowed funds as an FCNR(B) deposit with the bank's Indian entity.According to bankers cited by ET, some lenders believed existing deposit mobilisation rules could be interpreted as restricting banks from creating deposits through loans extended to the same customer, prompting them to seek clarity before marketing such products more widely.The issue gained prominence after some lenders, including State Bank of India, began offering structured products overseas that allow customers to raise foreign currency loans backed by FCNR(B) deposits. Under such arrangements, the deposit is pledged to the lender through an irrevocable lien and serves as collateral for the loan.Bankers had said broader adoption of such structures depended on regulatory clarity, especially as lenders seek to maximise inflows under the RBI's special FCNR(B) swap window, which is open for deposits mobilised until September 30.Also Read: RBI temporarily eases FCNR(B), NRE deposit rate norms to attract overseas fundsThe central bank said banks may continue offering regular FCNR(B) deposits without availing the swap facility, although records for such deposits must be maintained separately. It also clarified that the RBI's swap facility covers only the principal amount of deposits and not the interest component.The RBI's latest clarification is expected to provide comfort to banks exploring such products, although lending decisions will continue to be subject to normal credit appraisal, underwriting and regulatory requirements.The June 8 scheme was introduced to encourage foreign currency inflows by allowing banks to swap FCNR(B) deposits, eligible ECBs and overseas foreign currency borrowings with the RBI at a concessional rate. Under the facility, ECBs with an average maturity of three years and above are eligible, while the corresponding RBI swap can run for up to five years and remains co-terminus with the repayment schedule of the borrowing. (Join our ETNRI WhatsApp channel for all the latest updates)...moreElevate your knowledge and leadership skills at a cost cheaper than your daily tea.Subscribe Now