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Home>> Publications >> Exchange Control Manual Category >> Exchange Control Manual - Exchange Control Manual View
 
Date: 01 Jun 2005
Loans in India to (a) Non-residents Against Fixed Deposits/Securities/Immovable Properties, (b) Residents Against Guarantees by Non-residents.
10,13

Loans in India to Non-residents against Shares/

Securities/Properties held by them in India

10D.2 (i) Authorised dealers may grant loans and overdrafts to Non-resident persons of Indian nationality/origin against the security of shares/debentures and immovable property held by them in India, according to their commercial judgement provided:

(a) Shares/Securities are held in the name of the concerned NRI with the general or special permission of Reserve Bank. In the case of loans against security of immovable properties (other than agricultural/plantation property or farm house) to persons of Indian origin holding foreign passport, the properties have been acquired with the general or special permission of Reserve Bank.

(b) The loan is utilised for meeting the borrower's personal requirements and/or for his own business purposes and not for (i) re-lending or investment in shares/securities/immovable property, or (ii) investment in agricultural/plantation activities or farm house and in real estate business (i.e. dealing in land and other immovable property for commercial purposes either singly or in association with others).

(c) The quantum of loan, margin, interest etc., are in accordance with the guidelines issued by Department of Banking Operations and Development regarding advances against shares/securities/immovable properties.

(d) The loan amount is retained in India and not remitted abroad. The loan amount should not be credited to NRE/FCNR/NRNR account of the non-resident.

(e) The repayment of the loan is made by way of remittances from abroad through normal banking channel or by debit to the NRO/NRSR/NRE/FCNR account of the borrower or out of the sale proceeds of the shares/securities/immovable property against which such loan was granted.

Regulations governing grant of loans/overdrafts against balances held in NRO/NRE/FCNR account have been laid down in Chapters 13 and 14.

 

(ii)

Reserve Bank has granted general permission to certain financial institutions

providing housing finance e.g. Housing Development Finance Corporation, LIC Housing Finance Ltd., etc. to grant housing loans to non-resident Indian nationals for acquisition of a house for self occupation subject to certain conditions. Full details of the documents/particulars required to be furnished by the borrowers should be ascertained from the financial institution concerned.

     
 

(iii)

Authorised dealers may also grant housing loans to NRIs holding Indian passports

against the security of immovable property proposed to be acquired by them subject to the following conditions:

 
   
 

(a)

The house/flat will be used for self occupation by the non-resident on return to India and not for any other purpose.

     
 

(b)

The quantum of loan, margin money and the purpose of loan will be at par with those applicable to housing loans being granted to residents.

     
 

(c)

The loan should be fully secured by creating equitable mortgage of the concerned property and if necessary, lien on borrower's other assets in India.

     
 

(d)

Repayment of the loan should be made by the borrower within a period not exceeding 15 years and in instalments comprising principal and interest including all charges by remittances from abroad through normal banking channels or out of funds in his/her NRE/FCNR/NRO account in India.


 

(e)

If the house/flat is rented out, the entire rental income, even if it is more than the prescribed instalment, should be adjusted towards repayment of the loan. If the rental income is less than the prescribed instalment, the borrower should remit the amount to the extent of the shortfall from abroad or pay the difference out of his/her NRE/FCNR/NRO account in India.

     
 

(f)

The housing loans would be subject to interest rate directives issued by Reserve Bank from time to time and will be outside the purview of the housing finance allocations prescribed for providing finance to resident Indians.

     

Authorised dealers should maintain separate record of such loans granted by them with full details such as name and address of the borrower, amount of margin money paid, amount of loan, period of loan, payment schedule, details of repayment received and manner of such payments, for verification by inspecting officials of Reserve Bank.

 
 

NOTE:

In the case of persons who have returned to India for permanent settlement, the repayment of the outstanding loans may be allowed in rupees.

A.D.(M.A. Series) Circular No.48
     
 

(iv)

Authorised dealers may also grant loans to NRIs where the NRI is a principal borrower with resident close relative(s) (as defined in Section 6 of Companies Act, 1956) as co-obligant/guarantor or where the land is owned jointly by NRI borrower with resident close relative subject to the conditions mentioned in sub-paragraph (iii) above. There would also be no objection to loans being granted to residents with NRI as a co-obligant.

     
 

(v)

Reserve Bank will also be prepared to grant general permission to companies/ banks and other institutions in India to grant housing loans to their employees deputed abroad and holding Indian passports, under their "Staff Housing Loan Schemes" upto Rs.25 lakh per employee subject to certain conditions. Application for the purpose should be made to the Chief General Manager, Reserve Bank of India, Exchange Control Department, Central Office, (External Payments Division), Mumbai-400 001 by letter togetherwith full details of the scheme.

     

Loans in India to NRIs against Security of

NRI Bonds issued by SBI

 

10D.3

Deleted.

   

Loans in India to Non-resident holders of

India Development Bonds issued by SBI

 

10D.4

Deleted.

   

Loans/Overdrafts to Residents against

Security of India Development Bonds

 

10D.5

Deleted.

   

Loans in India against Guarantees by Non-residents

 

10D.6

(i)

Authorised dealers may grant loans and overdrafts to persons, firms and companies

 

in India against the guarantees of individuals, firms and companies (including banks)

outside India subject to the following conditions:-

 
   

(a)

No direct or indirect outgo of foreign exchange is involved by way of guarantee commission or otherwise.

       
   

(b)

The loan is fully secured by the guarantee of an international bank and the lender bank adheres to the guidelines prescribed for capital adequacy, prudential norms, etc. and the lending discipline prescribed for working capital and term loan purposes, by Reserve Bank from time to time.

       
   

(c)

Regulations relating to normal margin, interest rates, etc. as stipulated by Reserve Bank from time to time are complied with.

       

Authorised dealers should, however, apply the usual norms and considerations and obtain such security as they consider necessary.

 
 

(ii)

Authorised dealers should promptly report to Reserve Bank, details of cases where

the guarantee has been invoked but the amount has not been remitted by the non-resident guarantor.

 

Loans to Residents against Shares/Securities/

Properties in India of Non-residents

 

10D.7

(i)

Authorised dealers may grant loans to resident family members of persons of

 

Indian nationality/origin who have gone abroad for employment, etc. (NRI) for land-

based agricultural activities against the security of land held by them in India either singly or jointly with other resident members of the family subject to the following conditions:

 
   

(a)

The loan should be need-based and granted only in cases where the total land holding of the NRI does not exceed five (5) hectares in his individual name or jointly with others. The amount of loan should not exceed Rs.3 lakhs.

       
   

(b)

The amount of loan should be utilised for carrying on agricultural activities on the existing land holding only and not to be used for acquiring any additional land.

       
   

(c)

The loan can be repaid out of income generated from the agricultural activity or by remittances in foreign exchange sent by NRI from abroad or by debit to his NRE/FCNR/NRO account.

       
   

(d)

Requirements regarding security, margin, rate of interest etc. as stipulated by Reserve Bank from time to time should be complied with.

       
 

(ii)

Applications not covered by sub-paragraph (i) above for grant of loans/overdrafts

against pledge of collateral viz. shares/securities of Indian companies or immovable propertty held in India by persons, firms and companies resident outside India should be referred to Reserve Bank for prior approval in form LOV 1.

 

Loans from Non-resident Relatives

 

10D.8

Persons (i.e., individuals) resident in India can avail of interest free loans on non-repatriation basis from their non-resident relatives for personal purposes and business activities and not for

the purpose of carrying on agricultural/plantation activities, purchase of immovable property, shares, debentures, bonds or for re-lending. Under the general permission granted by Reserve Bank vide its Notification No. FERA.175/97-RB dated 27th February 1997, such loans can be availed of subject to the following conditions:

 
 

(a)

The loans should be from the relatives as defined in Section 6 of the Companies Act, 1956.

     
 

(b)

The loan amount should be received through normal banking channels or by debit to the lender's NRE/FCNR account with an authorised dealer.

     
 

(c)

The repayment of loan amount is made by credit to the Ordinary Non-resident Rupee (NRO) account of the non-resident lender.

     

Applications for availing of loans from non-resident relatives on non-repartiation basis but which do not fall within the above criteria or loans on repatriation basis, should be referred to Reserve Bank for prior approval giving full details such as name/address of lender, loan amount, rate of interest, purpose and period of the loan repayment schedule, etc.

 

Guarantees for Non-residents

 

10D.9

(i)

In terms of Section 26 of FERA, 1973, persons resident in India cannot, except with the general or special permission of the Central Government or Reserve Bank, give a

guarantee in respect of any debt or other obligation or liability (a) of a person resident in India, and due or owing to a person resident outside India; or (b) of a person resident outside India. Reserve Bank has by its Notification No. FERA.132/93-RB dated 26th April 1993 granted general permission to shipping agents to give, in respect of any debt or other obligation or liability of their foreign shipping principals, guarantees in favour of Income-tax, Customs, Port Trust and other Central and State Government authorities in India, subject to such instructions as may be issued by Reserve Bank from time to time. Shipping agents should abide by the following instructions while giving such guarantees.

 
   

(a)

he guarantee should be covered by counter-guarantee of overseas shipping principal to the effect that the latter will reimburse the amounts which the shipping agent may have to pay on behalf of the shipowner under the guarantee. In lieu of specific counter-guarantees, the shipping agents may also obtain a general undertaking from the shipping principal in the form of a letter addressed to the agent providing the following clause:

       
     

"This is to clarify that you, as our shipping agents, have the full authority to give guarantees in respect of any of our debts or other obligations or liability in favour of any officer or other authority appointed or constituted under the Income-tax Act, the Customs Act, the Major Ports Act or any other Central or State Act in force in India. You may pay the dues payable to any of those authorities out of our funds representing genuine freight collections and lying with you or at your power or disposal. If any shortfall arises, we will fully reimburse you by making adequate remittance in this regard in foreign exchange through banking channel."

       
     

NOTE:

In case of tramp agencies, shipping agents may obtain, if they so desire, such letters of undertaking from the master of the ship instead of overseas principals.

         
   

(b)

Amounts paid by shipping agents should be recovered out of the funds remitted from abroad by the overseas shipping principal through normal banking channels and/or from the latter's surplus freight/passage fare collections in India.

       
 

(ii)

Reserve Bank has likewise granted general permission to authorised dealers vide

the above Notification to give guarantees in favour of persons resident in India in respect of any debt or other obligation or liability of a person resident outside India subject to such instructions as may be issued by Reserve Bank from time to time. Authorised dealers may accordingly give on behalf of their overseas Head Office/branches/correspondents or a bank of international repute guarantees/performance bonds in favour of residents of India in connection with genuine transactions involving debt, liability or obligation of non-residents provided the bond/guarantee is covered by a counter guarantee of the overseas Head Office/branch/correspondent or a bank of international repute. Authorised dealers may make rupee payments to the resident beneficiaries immediately when the guarantee is invoked and simultaneously arrange to obtain the reimbursement from the overseas bank concerned which had issued the counter guarantee. Authorised dealers are well advised that they should ensure that counter guarantees are properly evaluated and their own guarantees against such guarantees are not issued in routine manner. Before issuing a guarantee against the counter guarantee from an overseas Head Office/branch/ correspondent/bank of international repute, authorised dealers should satisfy themselves that the obligations under the counter guarantee, when invoked, would be honoured by the overseas bank promptly. If the authorised dealer desires to issue guarantee with the condition that payment will be made provided reimbursement has been received from the overseas bank which had issued the counter guarantee, this fact should be made clearly known to the beneficiary in the guarantee document itself. Cases where payments are not received by the authorised dealers when the guarantees of overseas banks are invoked, should be reported to Reserve Bank indicating the steps being taken by the bank to recover the amount due under the guarantee.

 
 

NOTE:

Authorised dealers may issue guarantees in favour of overseas organisations issuing travellers cheques in respect of blank travellers cheques stocked for sale by them or on behalf of their constituent who are full-fledged money changers holding valid licences from Reserve Bank, subject to suitable counter guarantee being obtained from the latter. In the event of the guarantee being invoked authorised dealers may effect remittance but should send a separate report thereon furnishing full details to the Chief General Manager, Exchange Control Department, (Forex Market Division), Reserve Bank of India, Central Office, Mumbai 400 001.



Loans/Overdrafts to NRE Account Holders in India

 

13B.9

(i)

Authorised dealers may grant loans/overdrafts in India to the account holders

 

themselves for purposes other than investment in India, provided that the advances are

fully secured by the fixed deposits and regulations relating to normal margin, interest rate, etc. are complied with. Repayment will have to be made either by adjustment of the deposit or by fresh remittances in foreign exchange from abroad. The loan can also be repaid out of local rupee resources held in the NRO account of the borrower subject to the condition that the loan repaid from local resources would be charged interest at commercial rate as in force from time to time.

 
 

(ii)

Authorised dealers may also grant loans/overdrafts in India to the account

holders themselves for purposes of making direct investment in India on non-repatriation basis by way of contribution to the capital of Indian firms/companies engaged in manufacturing/industrial activities, export oriented trading activities, hospitals, hotels of 3 star or higher grades, shipping, development of computer software and oil exploration services subject to compliance with the following conditions:

 
 

(a)

The concerned Indian investee company intends to issue shares to NRIs on non-repatriation basis in terms of Reserve Bank's Notification No. FERA.114/92-RB dated 27th April 1992.

     
 

(b)

The period of loan shall not exceed the unexpired period of maturity of NRE fixed deposit accepted as security. There is no objection to the renewal of deposit and the loan at the request of the depositor and borrower subject to compliance with the interest rate directives of Reserve Bank.

     
 

(c)

The loan amount shall be disbursed to the investee firm/company on behalf of the NRI account holder.

     
 

(d)

Investment made out of the loan shall not be allowed to be repatriated outside India at any time in future. (For repatriation of income earned please see paragraph 10C.24A).

     
 

(e)

The loan will be repaid together with interest thereon either by remittance from abroad or by utilisation of maturity proceeds of his NRE deposits accepted as security. The loan can also be repaid out of local rupee resources held in NRO account of the NRI borrower in India subject to the condition that the loan repayable from local resources would be charged interest at commercial rate as in force from time to time.

     
 

(f)

Requirements regarding margin, interest rate etc. as stipulated by Reserve Bank from time to time are complied with.

     
 

(iii)

Authorised dealers may grant loans to non-resident individuals of Indian

nationality and foreign citizens of Indian origin against their NRE deposits in India for the purpose of acquisition of flats/houses in India for their own residential use subject to the following conditions:

 
 

(a)

The period of loan does not exceed the period of unexpired maturity of the NRE deposits accepted as security. There is no objection to the renewal of deposit and the loan at the request of the depositor and borrower subject to compliance with the interest rate directives of Reserve Bank.

     
 

(b)

The loan will be repaid together with interest thereon either by remittance from abroad or by utilisation of maturity proceeds of the NRE deposit/s accepted as security. The loan can also be repaid out of local rupee resources held in NRO account of the NRI borrower in India subject to the condition that the loan repayable from local resources would be charged interest at commercial rate as in force from time to time.

     
 

(c)

The house/flat to be acquired/constructed with the loan should be meant for residential use of the borrower and not for any commercial purpose.

     
 

(d)

The sale proceeds of the house/flat, if sold, will not be allowed to be repatriated outside India. (For repatriation of income earned by way of rent please see paragraph 10C.24A).


     
 

(e)

Requirements regarding margin, interest rate, etc. as stipulated by Reserve Bank from time to time are complied with.

     
 

(f)

Acquisition of the property by foreign citizens of Indian origin will be subject to Reserve Bank's approval under Section 31 of FERA, 1973.

     
 

NOTE:

The above facility will, however, not be available for OCBs.

     
 

Applications not covered by foregoing provisions should be referred to Reserve Bank

in form LOV 1 for consideration.

 

Loans/Overdrafts to Residents against Security

of Fixed Deposits in NRE Accounts

 

13B.10

Authorised dealers may grant any type of fund based and/or non-fund based facilities to resident individuals/firms/companies in India against the collateral of fixed deposits held in NRE accounts subject to the following conditions:-

   
 

a)

There should be no direct or indirect foreign exchange consideration for the non-resident depositor agreeing to pledge his deposits to enable the resident individual/firm/company to obtain the loan/overdraft facility.

     
 

b)

The period of the loan shall not exceed the unexpired period of maturity of the fixed deposit accepted as security. In addition, the non-resident depositor should furnish an irrevocable undertaking to the authorised dealer not to withdraw the deposit during the period of the loan/overdraft. There is no objection to the renewal of deposit and the loan at the request of the depositor and borrower subject to compliance with the interest rate directives of Reserve Bank.

     
 

c)

Regulations relating to margin, interest rate, purpose of loan, etc., as stipulated by Reserve Bank from time to time should be complied with.

     
 

d)

The loan should be utilised for personal purposes or for carrying on business activities other than agricultural/plantation activities.

     
 

e)

i)

The loan should be granted by the bank against the NRE fixed deposit(s) issued by the same bank (irrespective of its branch) and not by any other bank.

       
   

ii)

The branch giving the loan should hold the original deposit receipt(s) against which the loan is granted and the branch which has issued the receipt should be advised of the lien.

       
   

iii)

Loans against NRE deposit(s) to the depositor himself or to a third party is granted only under his specific request/mandate and after verifying the authenticity of the signature of the depositor.

       

Authorised dealers should apply the usual norms and considerations as they do in the case of advances to trade/industry and satisfy themselves as to the acceptability of purpose, genuineness of credit needs of the borrower and end-use of funds and need not be guided solely by the availability of security.

 

Loans/Overdrafts to NRE Account Holders outside India

 

13B.11

Authorised dealers may allow their overseas branches/correspondents to grant any

 

type of fund based and/or non-fund based facilities to or in favour of non-resident

depositor or to third parties at the request of the depositor for bona fide purpose against the security of funds held in the NRE Accounts in India. Authorised dealers may also agree to remittance of the funds from India, if necessary, for liquidation of the outstandings, subject to report to Reserve Bank.

 

Change of Status from Non-resident to Resident

 

13B.12

NRE accounts should be redesignated as resident rupee accounts or as RFC accounts

 

(if eligible), at the option of the account holder immediately upon the return of the

account holder to India if authorised dealer is satisfied that he has returned to India for taking up employment or for carrying on a business or vocation or for any other purpose with the intention of residing in India for an uncertain period. Where the account holder is only on a short visit to India, the account may continue to be treated as NRE account even during his stay in this country. In respect of funds held in fixed deposits in NRE accounts, interest will be payable at the rate originally fixed, provided the deposit is held for the full term even after conversion into resident account.

 

Reserve Requirements

 

13B.13

In respect of the liabilities representing amounts received under NRE accounts, authorised dealers are required to comply with CRR/SLR requirements as laid down by Reserve Bank from time to time.

   

Rates of Interest

 

13B.14

Rates of interest payable on NRE accounts should be in accordance with the instructions issued by Reserve Bank from time to time.

   

Premature Withdrawal of Term Deposits

 

13B.15

(i)

Wherever a term deposit in NRE account is withdrawn before maturity,

 

directions issued in this behalf by Reserve Bank including directions, if any, about

levy of penalty should be complied with, except where it is otherwise provided in this Manual.

 
 

(ii)

In cases where FCNR deposits are converted into NRE deposits before

 

maturity at the request of account holders, the FCNR deposits should be treated as if

they have been withdrawn prematurely for making new deposits in NRE accounts. The rule regarding rate of interest for premature withdrawal of FCNR deposits will be applicable in such cases.

 

Remittance/Transfer of Funds to Non-resident Nominees

 

13B.16

The Banking Companies (Nomination) Rules, 1985 framed under Banking Regulation

 

Act, 1949 enable banks to pay the amount standing to the credit of the deceased

depositor to his nominee. Authorised dealers may allow remittance of funds lying in the NRE/FCNR accounts of the deceased accountholders to their non-resident nominees subject to the following conditions:

 
 

(i)

Application in form LEG is submitted by the nominee(s);

     
 

(ii)

A valid nomination has been registered on the bank's records in favour of the nominee/s in conformity with the provisions of the Banking Companies (Nomination) Rules, 1985;

     
 

(iii)

The nominee continues to be non-resident at the time of the claim/remittance sought for from India and that the deceased depositor was non-resident at the time of his/her death;

     
 

(iv)

All the legal heirs are non-residents. A signed declaration to the effect duly witnessed may be submitted by the nominee to the authorised dealer.

     

Application in form LEG together with the documents/particulars mentioned therein received from the nominees should be scrutinised and after satisfying about the legality of the claim as per the internal guidelines, authorised dealers may settle the claim and allow transfer of funds to the nominee to the extent of balances held in the deceased depositor's NRE/FCNR accounts. A copy of the form LEG and the relevant documents should be kept on records for verification by the inspecting officials of Reserve Bank. All other cases which do not fulfil the aforesaid terms and conditions or where the amount in NRE/FCNR account is claimed by a person other than the nominee should be referred to the concerned Regional Office of Reserve Bank for prior approval by authorised dealer in form LEG supported by documents indicated therein together with the legal representation issued by an Indian Court.

 

Permitted Types of Accounts

 

13B.17

Authorised dealers may open NRE accounts in any form, e.g. savings, current, recurring or fixed deposit account.

   

Special Series of Cheques for NRE Account Holders

 

13B.18

In order to facilitate easy identification and quicker processing of cheques drawn on

 

NRE accounts, authorised dealers have been advised to issue to their constituents

holding NRE accounts cheque books containing a special series of cheques with the prefix "NRE" printed on them in a different colour. They should ensure that only the special NRE cheques are issued to all constituents holding NRE accounts with them.

 

Transfer of Funds from One Account to Another

 

13B.19

(i)

Transfer of NRE accounts from one branch of authorised dealer to another

 

branch of same authorised dealer may be freely made. Occasionally, NRE account

holders may wish to transfer funds from accounts held with one authorised dealer to another authorised dealer at the same centre or at another centre for opening new NRE accounts or for funding NRE accounts. Authorised dealers may open (or credit) NRE accounts with funds transferred from other authorised dealers in this manner provided :

 
 

(a)

account is opened (or held) in the name of the same account holder/s;

   

and

 

(b)

a certificate, issued by the authorised dealer transferring funds confirming the Non-Resident (External) status of the account from which transfer is being made, is produced along with the relative pay order or draft.

     
 

(ii)

Authorised dealers may allow transfer of funds between NRE accounts of

different persons held with themselves or different authorised dealers for any purpose. Where the transfer of funds is by way of gift, it may be allowed after obtaining an undertaking from the transferee/transferee's banks that gift tax, if any, payable on the transfer of funds will be paid to the Income-tax authorities in India. In case of transfer of funds between NRE accounts held with different authorised dealers, the authorised dealer transferring the funds should issue a certificate confirming the non-resident status of the transferor.

 
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