The Reserve Bank of India on Tuesday imposed restrictions on non-fund based credit facilities — guarantees, stand-by letters of credit, letters of comfort, and so on — extended by banks to Indian companies’ overseas arms.
Further, the central bank disallowed repayment of rupee loans taken from the domestic banking system through external commercial borrowings (ECBs) extended by overseas branches/subsidiaries of Indian banks.
The overseas arms of India companies include joint ventures, wholly-owned subsidiaries, and wholly-owned step-down subsidiaries. The RBI directed banks, including their overseas branches/subsidiaries, not to issue non-fund based credit facilities on behalf of overseas arms of Indian companies for the purpose of raising loans/advances of any kind from other entities except in connection with the ordinary course of overseas business.Non-fund based credit
This directive has been issued as the RBI has found that banks were extending non-fund based credit on behalf of Indian companies’ overseas arms for purposes which are not connected with their business.
Rather, in certain cases, the credit was used to get foreign currency loans for repaying rupee loans. About a year back, a clutch of Indian banks found themselves in a soup when the stand-by letters of credit extended by them on behalf of a big gem and jewellery company was invoked by a couple of foreign banks.
Since the risk remains within the Indian banking system where the ECB is from overseas branches/subsidiaries of Indian banks, the RBI said repayment of rupee loans taken from the domestic banking system through ECBs extended by overseas branches/subsidiaries of Indian banks will, henceforth, not be permitted.Exporters
The RBI asked exporter-borrowers to desist from the practice of using export advances, received on the strength of guarantees issued by Indian banks, for repayment of loans taken from Indian banks.
This practice is a clear violation of RBI’s instructions except in cases where banks have received approvals under the Foreign Exchange Management Act.
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