Borrowing and Lending under FEMA – an overview

Borrowing and lending is an essential economic activity in the finance domain. The circulation of money is highly dependent on the borrowing and lending of money, which in turn determines economic growth of the country.

Similarly, borrowing / lending of money in foreign exchange or borrowing / lending of rupee denominated foreign loan in the hands of Indians is one of the driving factors for economic growth. The provisions for such borrowings / lending are regulated under Foreign Exchange Management Act 1999 (‘FEMA’) and are permissible subject to permission obtained from Reserve Bank of India. Further, such borrowing / lending in foreign exchange does not include usage of credit cards outside India by a person resident in India and usage of credit card in India by a person resident outside India.

The detailed note outlining the provisions in relation to the borrowing / lending in foreign exchange would be outlined in the coming month’s articles as ‘Borrowing in Foreign Exchange’ and ‘Lending in Foreign Exchange’.

The money borrowed in foreign exchange is not allowed to be deployed for the following purposes:

1. In the business of Chit Fund or Nidhi Company;
2. Investment in capital market including margin trading and derivatives;
3. Agricultural or plantation activities;
4. Real estate activity or construction of farm houses; and
5. Trading in Transferrable Development Rights (TDR), where TDR shall have the meaning as assigned to it in the Foreign Exchange Management (Permissible Capital Account Transactions) Regulations, 2015.

In case of an event of change in residential status of borrower / lender, continuation of such borrowing /lending is permissible as under:

Continuation of the borrowing / loan in the event of change in the residential status of the borrower:

1. An AD/authorised bank, based on an application, may be allowed the continuance of loans granted to a resident individual who subsequently becomes a person resident outside India.
2. A resident individual will be permitted to service loans taken overseas earlier as a person resident outside India subject to terms and conditions and limit as specified by the Reserve Bank from time to time.

Continuation of lending / loan in the event of change in the residential status of the lender:

1. In case a loan was granted by a resident individual to another resident individual and the lender subsequently becomes a non-resident, the repayment of the loan by the resident borrower should be made by credit to the NRO account or any other account of the lender maintained with a bank in India as specified by the Reserve Bank from time to time, at the option of the lender.
2. In case a loan was granted by a NRI/OCI Cardholder to a person resident in India in accordance with the FEMA provisions and the lender subsequently becomes a resident, the repayment of the loan may be made to the designated account of the lender maintained with a bank in India as specified by the Reserve Bank from time to time, at the option of the lender.

Further, the provisions for borrowing / lending of Rupee denominated external commercial borrowings by a person resident in India are outlined in detail in coming months articles as ‘Borrowing of Rupee denominated external commercial borrowing’ and ‘Lending of Rupee denominated external commercial borrowing’.

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