What changed
RBI issued a circular on October 4, 2024, flagging instances where non-resident guarantees (including SBLCs and performance guarantees) for resident Indians violate FEMA rules. AD Category-I banks are now explicitly directed to verify that any guarantee contracts they advise or handle for resident clients are fully compliant with FEMA regulations.
What it means for you
Banks must tighten due diligence on cross-border guarantee transactions to avoid facilitating unauthorized structures. Non-compliance could invite regulatory action under FEMA, impacting both the bank and its client. This reinforces RBI's stance against circumventing capital account restrictions via guarantee instruments.
What you must do
- Review all outstanding non-resident guarantee contracts (including SBLCs and performance guarantees) for resident clients to ensure FEMA compliance.
- Update internal compliance checklists to flag any guarantee from a non-resident favoring a resident Indian as a high-risk item requiring prior approval.
- Train trade finance and forex teams on the specific FEMA provisions governing non-resident guarantees.
- Advise resident clients to seek RBI approval or restructure any non-compliant guarantee arrangements immediately.
Who it affects
AD Category-I banks, Resident Indian companies availing non-resident guarantees, Trade finance and forex departments, Compliance officers handling FEMA matters
What types of guarantees are covered by this circular?
The circular covers all guarantees issued by non-residents in favor of resident Indians, including Standby Letters of Credit (SBLCs) and performance guarantees.
What action can RBI take if a bank fails to comply?
RBI can initiate action under Section 10(4) and 11(1) of FEMA, 1999, which may include directions to the bank or penalties for non-compliance.
Does this circular apply to guarantees already in place?
Yes, banks must ensure that all existing guarantee contracts advised by them are in accordance with FEMA regulations, implying a review of past transactions as well.