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