What changed
RBI prohibited banks from issuing non-fund based facilities (like guarantees, SBLCs, letters of comfort) for overseas JV/WOS/WoSDS if used to raise loans not connected to their ordinary business. Additionally, repayment of domestic rupee loans via ECBs from overseas branches/subsidiaries of Indian banks is no longer permitted. Banks must now ensure effective end-use monitoring of all such credit facilities.
What it means for you
Indian banks must tighten oversight on credit extended to overseas entities of Indian companies, as RBI flagged misuse for circular lending and rupee loan repayment. This restricts a common workaround where firms used overseas guarantees to raise foreign currency loans for domestic debt repayment. Banks face increased compliance burden to verify business purpose and end-use, especially for non-fund facilities and ECBs from their own overseas arms.
What you must do
- Review all existing non-fund based facilities (guarantees, SBLCs, letters of comfort) to overseas JV/WOS/WoSDS and ensure they are only for ordinary course of business, not for raising loans.
- Stop issuing any new standby letters of credit or guarantees for overseas entities if the purpose is to raise loans or advances unrelated to their business.
- Ensure that ECBs from your overseas branches/subsidiaries are not used to repay rupee loans from the domestic banking system; reject such proposals.
- Strengthen end-use monitoring mechanisms for all fund and non-fund based credit to overseas JV/WOS/WoSDS, including through branches abroad.
- Educate relationship managers and credit teams on the revised FEMA and prudential norms to prevent inadvertent violations.
Who it affects
All scheduled commercial banks (excluding Local Area Banks and RRBs), Overseas branches and subsidiaries of Indian banks, Indian companies with overseas joint ventures, wholly owned subsidiaries, or step-down subsidiaries, Exporters using bank guarantees for export advances
Can we still issue guarantees for our corporate client's overseas subsidiary to help it get a working capital loan from a foreign bank?
Only if the loan is for the subsidiary's ordinary course of business. RBI has explicitly banned guarantees used to raise loans for purposes not connected to the overseas entity's business, such as repaying rupee loans in India.
Our bank's overseas branch wants to lend ECB to an Indian parent company to repay its domestic rupee loan. Is this allowed now?
No. RBI has decided that repayment of rupee loans availed from the domestic banking system through ECBs extended by overseas branches/subsidiaries of Indian banks is not permitted, as the risk remains within the Indian banking system.
What happens if we find an existing facility that violates these new rules?
You must immediately stop any further disbursements or renewals and report the matter to your compliance and risk teams. RBI expects banks to desist from such practices and ensure end-use conformity going forward.