What changed
Previously, banks could only lend to direct overseas JVs/WOS (holding >51%) up to 20% of capital. Now, they can also lend to wholly owned step-down subsidiaries of those overseas subsidiaries. The circular specifies conditions like effective monitoring, risk management, compliance with Section 25 of BR Act, and using foreign currency funds.
What it means for you
Banks can now support deeper tiers of Indian corporate overseas structures, enabling more acquisition and expansion financing. However, they must ensure robust credit and interest rate risk management, monitor maturity mismatches, and adhere to all existing prudential norms. This expands lending opportunities but requires careful due diligence on the step-down subsidiary's country and project viability.
What you must do
- Update credit policy to include step-down subsidiaries as eligible borrowers.
- Ensure systems for monitoring and managing cross-border credit and interest rate risks are in place.
- Verify compliance with Section 25 of the Banking Regulation Act, 1949 for each facility.
- Use only foreign currency funds (FCNR(B), EEFC, RFC) for such lending and manage exchange risk.
- Conduct thorough appraisal of the step-down subsidiary's project viability and country restrictions.
Who it affects
Scheduled commercial banks (excluding RRBs and LABs), Indian corporates with overseas subsidiaries and step-down subsidiaries, Credit and risk management teams in banks
What is the prudential limit for lending to step-down subsidiaries?
The circular does not specify a separate limit; it states that such lending is within the existing prudential limits, which for direct JVs/WOS is 20% of unimpaired capital funds.
Can we lend to step-down subsidiaries that are not wholly owned?
No, the circular explicitly permits credit facilities only to wholly owned step-down subsidiaries of subsidiaries where the Indian company holds more than 51%.
What are the key compliance requirements before granting such facilities?
Banks must ensure effective monitoring, proper risk management systems, compliance with Section 25 of BR Act, use of foreign currency funds, management of maturity mismatches, adherence to all prudential norms, and no restrictions in the host country on loan repayment or security enforcement.