Lending in Foreign Exchange under FEMA

As discussed in the article ‘Borrowing and Lending under FEMA, an Overview’, FEMA provisions controls the transactions of borrowing and lending by a person resident in India in foreign exchange.

• The lending in foreign exchange by a person resident in India is specifically permissible as under:
  • Lending by an Authorised Dealer (‘AD’) in India or its branch outside India:
    1. An AD in India or its branch outside India is allowed to extend foreign currency denominated External Commercial Lending (‘ECL’) to a borrower outside India in accordance with the provisions contained in Schedule III of FEMA Notification No. FEMA.3(R)/2018-RB, detailed provisions of which are outlined in Para B below.
    2. An AD is allowed to grant loans to its constituents in India for meeting their foreign exchange requirements or for their rupee working capital requirements or capital expenditure subject to compliance with prudential norms, interest rate directives and guidelines, if any, issued by Reserve Bank in this regard.
    3. Subject to the directions or guidelines issued by the Reserve Bank from time to time, an AD in India is allowed to extend foreign exchange loans to another AD in India.
    4. Branches outside India of AD banks are allowed to extend foreign exchange loans against the security of funds held in NRE/ FCNR deposit accounts[1].
• Lending by a person resident in India other than AD (subject to the terms and conditions as specified by the Reserve Bank from time to time in consultation with the Government of India): Eligible resident entities may extend foreign currency denominated ECL to a borrower outside India in accordance with the provisions contained in Schedule III of FEMA Notification No. FEMA.3(R)/2018-RB, detailed provisions of which are outlined in Para B below.
• Schedule III of FEMA Notification No. FEMA.3(R)/2018-RB: Schedule III of FEMA Notification No. FEMA.3(R)/2018-RB outlines detailed provisions in relation to lending to the borrowers outside India by a person resident in India. Silent features of same are as under:

1. An AD in India is allowed to extend an ECL in foreign exchange to a foreign entity in which an Indian entity has made overseas direct investment as per the provision of Foreign Exchange Management (Transfer or Issue of any Foreign Security) Regulations, 2004.
2. Foreign branches of the Indian banks are allowed to extend foreign exchange loans in the normal course of their banking business outside India.
3. An eligible entity under the provision of FEMA is allowed to lend in foreign exchange to a foreign entity in which it has made direct investment in accordance with the FEMA provisions.
4. A person resident in India is allowed to lend in foreign exchange out of funds held in his/her EEFC account, for trade related purposes to his/her overseas importer customer subject to such terms and conditions as stipulated by the Reserve Bank of India from time to time in consultation with Government of India.
5. Indian companies are allowed to grant loans in foreign exchange to the employees of their branches outside India for personal purposes provided that the loan shall be granted for personal purposes in accordance with the lender’s Staff Welfare Scheme / Loan Rules and other terms and conditions as applicable to its staff resident in India and abroad.

[1] Foreign Exchange Management (Deposit) Regulations, 2016, notified vide Notification No. FEMA 5(R)/2016-RB dated April 1, 2016

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