Indian banks have asked the Reserve Bank of India (RBI) to remove a guarantee restriction in order to attract NRI money. The banks have also sought the revival of a special deposit scheme for foreign currency non-resident accounts (FCNR) to increase dollar supply.

However, it is understood in the current scenario that the RBI has not said anything about opening a FCNR window. While banks have suggested that FCNR could be a quicker route to increase dollar supply, the RBI and the government are taking a pause to study the situation before acting on the same.

An issue regarding the SBLC (standby letter of credit) – a credit comfort or guarantee that some large Indian banks had given to offshore banks in 2013, came up when the RBI looked for a response from banks to a FCNR plan. But the SBLC mechanism was discontinued for FCNR following RBI’s instruction, considering the risks involved as the arrangement allowed an offshore bank to directly receive funds from Indian banks. The overall factor is that without SBLC, leveraging would not be possible; and without leveraging FCNR inflows would not be enough.

But the RBI has instructed banks to restrict the use of SBLC to genuine trade payments. Banks say that RBI may have to bear the full cost of hedging, besides accounting for existing FCNR deposits that are likely converting into new deposits under the proposed scheme. – Image credit: freepik – editor@nrifocus.com