Borrowing and Lending in foreign currency in India

Borrowing and lending transactions in Indian Rupees (INR) between persons resident in India and Non-Resident Indians/Persons of Indian Origin are governed by clause (e) of sub-section 3 of section 6 of the Foreign Exchange Management Act, 1999 read with Foreign Exchange Management (Borrowing and Lending in Rupees) Regulations, 2000, notified vide Notification No. FEMA 4/2000-RB dated May 3, 2000. Within the contours of the Regulations, Reserve Bank of India also issues directions to Authorised Persons under Section 11 of the Foreign Exchange Management Act (FEMA), 1999. These directions lay down the modalities as to how the foreign exchange business has to be conducted by the Authorised Persons with their customers/constituents with a view to implementing the regulations framed.
Master Direction – Borrowing and Lending transactions in Indian Rupee between Persons
Resident in India and Non-Resident Indians/ Persons of Indian Origin[January 1, 2016]

Borrowing and Lending in foreign currency by an Authorised Dealer

Regulations

Reserve Bank of India Act, 1934
Foreign Exchange Management Act, 1999 (42 of 1999)
Foreign Exchange Regulation Act (FERA) of 1947 [withdrawn by FEMA Act]
Foreign Exchange Management (Transfer or Issue of Any Foreign Security) Regulations, 2015
FOREIGN EXCHANGE MANAGEMENT (POSSESSION AND RETENTION OF FOREIGN CURRENCY) REGULATIONS, 2000

Reserve Bank of India
Foreign Exchange Department
Central Office-Mumbai – 400 001

NOTE: The Reserve Bank of India, is the custodian of the country’s foreign exchange reserves and is vested with the responsibility of managing their investment. The legal provisions governing management of foreign exchange reserves are laid down in the Reserve Bank of India Act, 1934. The Reserve Bank issues licences to banks and other institutions to act as Authorised Dealers in the foreign exchange market. In keeping with the move towards liberalisation, the Reserve Bank has undertaken substantial elimination of licensing, quantitative restrictions and other regulatory and discretionary controls.

Permitted currency: RBI EXCHANGE CONTROL MANUAL sets out the regulations governing permitted currencies and methods of payment to be used for settlement of financial transactions between residents and non-residents through authorised dealers. The expression ‘permitted currency’ is used in the Manual to indicate a foreign currency which is freely convertible i.e. a currency which is permitted by the rules and regulations of the country concerned to be converted into major reserve currencies like U.S. Dollar, Pound Sterling and for which a fairly active market exists for dealings against the major currencies. Accordingly, authorised dealers may maintain balances and positions in any permitted currency. Authorised dealers may also maintain positions in Euro of the European Currency Area.

Mechanism for settlement of payments: The Asian Clearing Union (ACU- Agreement 1974- Head office at Tehran, Iran ) is only a mechanism for settlement of payments between participating countries Until 31st December 1995 the settlement of transactions was being made in Indian rupees or in the currency of the other participating country or in AMU Effective January 1 1996 payments are required to be made/received through ACU dollar accounts maintained with authorised dealers in India in the names of their correspondent banks in ACU countries or ACU dollar accounts maintained by authorised dealers with their branches/correspondents abroad. The Exchange Control regulations laid down in this Manual will govern the payments and receipts cleared through the Union.

Borrowing in foreign currency by an Authorised Dealer: An authorised dealer in India may borrow in foreign currency in the circumstances and subject to the conditions mentioned below:

The borrowing may be from the Head Office or branch or correspondent outside India of the authorised dealer or any other entity as permitted by RBI.

The aggregate amount of borrowing by all branches of authorised dealer from all permitted sources shall be upto hundred percent of the unimpaired Tier I capital of the authorised dealer or such other limit as decided by the RBI from time to time, or US$ 10 million, whichever is more.

A branch outside India of an authorised dealer may borrow in the normal course of its banking business outside India, subject to the directions or guidelines issued RBI from time to time, and the Regulatory Authority of the country where the branch is located.

An authorised dealer may borrow from a bank or a financial institution outside India, for the purpose of granting pre-shipment or post-shipment credit to his exporter constituent in India

The borrowing shall be subject to compliance with prudential norms, interest rate directives and guidelines, if any, issued by RBI from time to time

Lending in foreign currency by an Authorised Dealer: An authorised dealer in India or his branch outside India may lend in foreign currency in the circumstances and subject to the conditions mentioned below:

The loans may be extended by a branch outside India of an authorised dealer in the normal course of its banking business outside India;

The loans may be extended by an authorised dealer to its constituents in India for meeting their foreign exchange requirements or for their rupee working capital requirements or capital expenditure

Credit facilities may be extended to a wholly owned subsidiary abroad or a joint venture abroad of an Indian entity; provided that not less than 51 per cent of equity in such subsidiary or joint venture is held by the Indian entity and that the credit facilities are in compliance with the Foreign Exchange Management (Transfer and Issue of Foreign Security) Regulations, 2000;

Loan may be granted to the constituents maintaining RFC Account, against the security of funds held in such account;

Loans may be extended by an authorised dealer or its branch outside India against the security of funds held in NRE/FCNR (B) deposit accounts in accordance with the Foreign Exchange Management (Deposit) Regulations, 2000;

Loans may be extended by an authorised dealer to another authorised dealer.

Loans and credit facilities extended by an authorised dealer or its branch outside India will be subject to compliance with prudential norms, interest rate directives and guidelines, if any, issued by RBI from time to time.

Borrowing and Lending in Foreign currency by persons other than authorised dealer

Borrowing in foreign currency by persons other than an authorised dealer: The circumstances and the conditions regarding borrowing in foreign currency by persons other than an authorised dealer are mentioned below:

i. For execution of projects outside India and for exports on deferred payment terms: A person resident in India may borrow, whether by way of loan or overdraft or any other credit facility, from a bank situated outside India, for execution outside India of a turnkey project or civil construction contract or in connection with exports on deferred payment terms, provided the terms and conditions stipulated by the authority which has granted the approval to the project or contract or export is in accordance with the Foreign Exchange Management (Export of Goods and Services) Regulations, 2000.

ii. For imports: An importer in India may, for import of goods into India, avail of foreign currency credit for a period not exceeding six months extended by the overseas supplier of goods, provided the import is in compliance with the Export Import Policy of the Government of India in force.

iii. Borrowing by resident individual: An individual resident in India may borrow a sum not exceeding US$ 250,000/- or its equivalent from his close relative outside India, subject to the conditions that:

the minimum maturity period of the loan is one year;

the loan is free of interest; and

the amount of loan is received by inward remittance in free foreign exchange through normal banking channels or by debit to the NRE/FCNR account of the non-resident lender.

Lending in foreign currency by persons other than an authorised dealer: The circumstances and the conditions regarding lending in foreign currency by persons other than an authorised dealer are mentioned below:

Lending to WOS / JV: An Indian entity may lend to its wholly owned subsidiary or joint venture abroad constituted in accordance with the provisions of Foreign Exchange Management (Transfer or issue of foreign security) Regulations, 2000.

Lending by Select Institutions: Export Import Bank of India, Industrial Development Bank of India, Industrial Finance Corporation of India, Industrial Credit and Investment Corporation of India Limited, Small Industries Development Bank of India Limited or any other institution in India may extend loans to their constituents in India out of the foreign currency borrowings raised by these institutions with the approval of the Central Government for the purpose of onward lending.

Lending by Indian companies to their employees: Indian companies in India may grant loans to the employees of their branches outside India for personal purposes provided that the loan shall be granted for personal purposes in accordance with the lender’s Staff Welfare Scheme/Loan Rules and other terms and conditions as applicable to its staff resident in India and abroad.

Foreign currency account

Reserve Bank of India has issued Notification No.FEMA.74/2002-RB dated November 1, 2002 amending its Notification No.FEMA.10/ 2000-RB dated May 3,2000 allowing a person resident in India to open, hold and maintain with an authorised dealer in India a foreign currency account to be known as Resident Foreign Currency (Domestic) Account out of foreign exchange acquired in the form of currency notes, bank notes and travellers cheques. Debits to the account shall be for payments towards a current account transaction in accordance with the provisions of the Foreign Exchange Management (Current Account Transactions) Rules, 2000 and towards a capital account transaction permissible under the Foreign Exchange Management (Permissible Capital Account Transactions) Regulations, 2000.

Opening, holding and maintaining a Foreign Currency Account in India in certain other cases:

(1) A shipping or airline company incorporated outside India or its agent in India, may open, hold and maintain a Foreign Currency Account with an authorized dealer in India for meeting the local expenses in India of such airline or shipping company:

Provided that the credits to such accounts are only by way of freight or passage fare collections in India or by inward remittances through normal banking channels from its office outside India and, in the case of agent, from his principal outside India.

(2). An authorized dealer in India may, subject to the directions as may be issued by the Reserve Bank, allow ship-manning / crew managing agencies in India to open and maintain non-interest bearing foreign currency accounts in India for the purpose of undertaking transactions in the ordinary course of their business.[Foreign Exchange Management (Foreign Currency Accounts by a person resident in India) (Amendment) Regulations, 2008]