Summary of this article
RBI swap facility covers only FCNR deposit principal amount
Banks can offer loans and lien on deposits
Forex swap facility extended to ECBs and OFCBs
The Reserve Bank of India (RBI), on June 23, issued a set of frequently asked questions (FAQs) clarifying key aspects of its recently announced foreign exchange swap facility for Foreign Currency Non-Resident (Bank), or FCNR(B) deposits, external commercial borrowings (ECBs), and overseas foreign currency borrowings (OFCBs).
The clarification comes after the RBI introduced a special US dollar-rupee forex swap scheme on June 8 to help banks attract fresh foreign currency deposits from non-resident Indians (NRIs) and raise foreign capital.
According to the RBI, the swap facility for FCNR(B) deposits is a simple foreign exchange buy-sell swap arrangement that covers only the original principal amount deposited by customers. The interest earned on these deposits will not be covered under the facility.
FCNR Deposits And Swap Facility
FCNR(B) deposits allow NRIs to maintain fixed deposits (FDs) in foreign currencies, helping them avoid risks regarding exchange rate arising from fluctuations in the rupee.
The RBI has mentioned that banks receiving eligible FCNR(B) deposits can avail of the swap facility for the principal amount of the deposits. The arrangement allows banks to mobilise foreign currency deposits without taking on additional currency risk.
The central bank also clarified that banks can undertake swaps for periods of less than three years if the underlying FCNR(B) deposits have an original maturity of at least three years, in line with the scheme's eligibility requirements.
Further, banks are allowed to offer differential rates of interest on these deposits. This means lenders can decide the interest rates they wish to offer to attract depositors, subject to applicable regulations.
Loans Against FCNR Deposits Allowed
In its FAQs, RBI said banks are permitted to extend loans to FCNR(B) account holders and may mark a lien on such deposits. A lien gives the bank a legal claim over the deposit until the loan obligations are met.
This clarification provides additional flexibility to deposit holders who may wish to borrow against their foreign currency deposits.
Facility Extended To ECBs And OFCBs
The RBI has also introduced a US dollar-rupee forex swap facility for external commercial borrowings raised by public sector undertakings (PSUs). The facility is available for ECBs with an average maturity period of three years or more.
According to the FAQs, the tenure of the swap will match the repayment schedule or maturity of the ECB, subject to a maximum period of five years.
A similar swap facility has been made available for overseas foreign currency borrowings raised by Authorised Dealer Category-I banks. These borrowings must have a minimum maturity period of three years to qualify under the scheme.
The measures are aimed at facilitating foreign currency inflows while providing clarity on the operational aspects of the newly introduced swap facilities.
