RBI Clarifies FCNR(B) Swap Facility

Source: Business Standard

Context

The Reserve Bank of India (RBI) on Tuesday, 23 June 2026 issued detailed clarifications through a set of Frequently Asked Questions (FAQs) on the special FCNR(B) Swap Facility, External Commercial Borrowings (ECBs), and Overseas Foreign Currency Borrowings (OFCBs) introduced on 8 June 2026. The clarifications address operational and structural concerns raised by bankers awaiting clarity on leveraged structured products to mobilise diaspora-centric overseas deposits. The RBI confirmed that Indian banks (including their overseas branches) can extend loans to non-residents or issue Standby Letters of Credit (SBLCs) to overseas lenders against FCNR(B) deposits mobilised under the swap facility — enabling substantial leverage of dollar inflows. Banks are also permitted to extend loans to FCNR(B) account holders and mark a lien on such deposits. The RBI also clarified that the swap facility is a plain buy/sell forex swap covering only the principal amount of the FCNR(B) deposit — not the interest component. Hedged FCNR(B) transactions are excluded from net open position (NOP) limits. The swap facility is open until 16 October 2026 for fresh FCNR(B) deposits mobilised between 8 June and 30 September 2026, with a minimum original tenor of 3 years and maximum of 5 years. Banks have raised FCNR(B) interest rates to 6%–7.1% on major foreign currencies; brokerages estimate that NRIs could earn 15–27% annual returns through the leveraged scheme. State Bank of India (SBI) is offering 9x leverage. The swap is also available for ECBs (PSUs only) and OFCBs (Authorised Dealer Category I banks). The measure aims to shore up forex reserves, support the rupee (closed at ₹94.73/USD on 23 June 2026), and attract diaspora capital amid heightened FII outflows from Indian equities.

Key RBI Clarifications

1. Loans Against FCNR(B) Deposits:
   • Indian banks (including overseas branches) can extend loans to non-residents against FCNR(B) deposits.
   • Can also issue SBLCs to overseas lenders against such deposits.
   • Can extend loans to FCNR(B) account holders and mark lien on deposits.
2. Swap Facility Coverage:
   • Plain buy/sell foreign exchange swap covering only the principal amount.
   • Interest component NOT covered by swap.
3. Tenor Flexibility:
   • Swaps allowed for tenors less than 3 years, provided original deposit tenor is ≥ 3 years.
4. Differential Interest Rates:
   • Banks may offer different rates based on tenor and size of deposit.
   • Must comply with RBI’s existing deposit rate directions.
5. Regular FCNR(B) Deposits:
   • Banks may continue offering regular FCNR(B) deposits (3–5 year tenor) without availing the swap facility.
   • No 1-year minimum lock-in required.
   • Separate records must be maintained.
6. Net Open Position (NOP) Limit Exclusion:
   • Hedged FCNR(B) transactions excluded from net open position limits.
7. Cancel and Rebook:
   • Banks may cancel and rebook FCNR(B) deposits if residual maturity < 3 years.

Foreign Currency Non-Resident (Bank) Account — FCNR(B)

• What: A term deposit account for NRIs in freely convertible foreign currencies (USD, GBP, EUR, JPY, AUD, CAD, etc.) held at Indian scheduled banks; tenure 1–5 years; interest income tax-exempt under Section 10(15)(iv)(fa) of Income Tax Act, 1961 for NRIs and RNORs; principal and interest fully repatriable; protects against rupee depreciation (deposit and payout in foreign currency); insured under DICGC up to ₹5 lakh.
• Where: Maintained by Indian scheduled commercial banks (public, private, foreign) anywhere in India; can also be operated through their overseas branches with RBI authorisation.

Swap Facility Details

• Type: Plain buy/sell US Dollar–Rupee forex swap by RBI.
• Purpose: Eliminate hedging cost for banks raising FCNR(B) deposits.
• Tenor: Co-terminus with deposit (3–5 years).
• Coverage: Principal only, NOT interest.
• Cost to Bank: Zero hedging cost (absorbed by RBI).

Standby Letter of Credit (SBLC)

• What: A guarantee issued by a bank that promises payment to a beneficiary if the applicant defaults on an obligation; commonly used as collateral for overseas loans; functions as a secondary payment instrument.
• Where: Issued by Indian banks (including overseas branches) to overseas lenders against FCNR(B) deposits held in India.

External Commercial Borrowing (ECB)

• What: A forex loan from foreign lenders by eligible Indian borrowers for specified end-uses; under the new RBI swap window, PSUs raising ECBs of 3+ years average maturity can avail US Dollar–Rupee swap with tenor co-terminus with ECB repayment (max 5 years).
• Where: Borrowed from international markets (banks, capital markets); regulated by RBI through the ECB Framework under FEMA, 1999.

Overseas Foreign Currency Borrowing (OFCB)

• What: Foreign currency borrowing by Authorised Dealer Category I (AD-I) banks in overseas markets for funding their international operations and rupee swap obligations; under new RBI window, swap facility available for OFCBs of minimum 3-year maturity.
• Where: Raised by Indian banks’ overseas branches/subsidiaries in international wholesale markets.

Net Open Position (NOP) Limit

• What: A regulatory limit on a bank’s total exposure to foreign currency risk — the net difference between long and short positions in foreign currency; under the new clarification, hedged FCNR(B) transactions are excluded from NOP limits, giving banks more headroom.
• Where: Monitored by RBI for all Authorised Dealer banks in India.

Comparison: Types of NRI Accounts

Feature	NRE	NRO	FCNR(B)
Currency	INR	INR	Foreign currency
Source of Funds	Foreign income only	Foreign + Indian income	Foreign income only
Repatriability	Fully repatriable	Up to USD 1 mn/year	Fully repatriable
Currency Risk	Yes (INR depreciation)	Yes	NO (deposit in foreign currency)
Tax Treatment	Tax-free (NRI status)	Taxable	Tax-free (NRI/RNOR status)
Account Type	Savings & Term	Savings & Term	Term only
Tenor	Up to 10 years	Flexible	1–5 years
DICGC Insurance	₹5 lakh	₹5 lakh	NOT covered (per some sources) / ₹5 lakh (per others)

Reserve Bank of India (RBI)

• What: India’s central bank and monetary authority, established on 1 April 1935 under RBI Act, 1934; nationalised on 1 January 1949; regulates monetary policy, banking, payment systems, currency, foreign exchange; current Governor: Sanjay Malhotra (since 11 December 2024).
• Where: HQ in Mumbai; 31 regional and sub-offices across India; 4 zonal offices at Chennai, Delhi, Kolkata, Mumbai.

Foreign Exchange Management Act (FEMA), 1999

• What: A central legislation that consolidates and amends the law relating to foreign exchange in India; replaced FERA, 1973; enacted to facilitate external trade and payments and promote orderly development and maintenance of forex markets.
• Where: Enacted by Parliament; administered by RBI and Department of Economic Affairs (Ministry of Finance); applicable to all foreign exchange transactions in India.

RBI’s Forex Toolkit

• Spot Market Interventions: Direct dollar sales/purchases.
• Forex Forward Sales: To moderate rupee fluctuations.
• Buy/Sell Swaps: Like the current FCNR(B) window.
• Sell/Buy Swaps: Opposite of buy/sell, for liquidity management.
• Standing Deposit Facility (SDF): Domestic liquidity tool.
• Special Open Market Operations (OMOs): Bond market intervention.

Practice MCQs

Q1. With reference to the RBI’s clarification on the FCNR(B) Swap Facility issued on 23 June 2026, consider the following statements:

1. Indian banks, including their overseas branches, can extend loans to non-residents against FCNR(B) deposits mobilised under the swap facility.
2. Banks can issue Standby Letters of Credit (SBLCs) in favour of overseas lenders against FCNR(B) deposits.
3. Banks are permitted to mark a lien on FCNR(B) deposits when extending loans.
4. The swap facility covers both the principal and interest of the FCNR(B) deposits.

How many of the above statements are correct?

(a) Only one (b) Only two (c) Only three (d) All four (e) None

(Statement 4 is wrong; the RBI clarified that the swap facility is a plain buy/sell forex swap covering only the principal amount, NOT the interest.)

Q2. With reference to the RBI’s special FCNR(B) Swap Window announced on 8 June 2026, consider the following statements:

1. The window is open until 16 October 2026 for fresh FCNR(B) deposits mobilised between 8 June and 30 September 2026.
2. The eligible deposits must have an original tenor of 3 to 5 years.
3. The RBI is absorbing the entire currency hedging cost for banks under the scheme.
4. The scheme requires NRIs to deposit a minimum of USD 1 million per account.

How many of the above statements are correct?

(a) Only one (b) Only two (c) Only three (d) All four (e) None

(Statement 4 is wrong; the scheme does NOT specify a minimum deposit of USD 1 million per account; standard FCNR(B) minimum deposit amounts apply (much smaller).)

Q3. With reference to FCNR(B) accounts, consider the following statements:

1. FCNR(B) accounts are maintained in freely convertible foreign currencies (USD, GBP, EUR, etc.).
2. Interest income from FCNR(B) deposits is tax-exempt under Section 10(15)(iv)(fa) of the Income Tax Act, 1961 for NRIs and RNORs.
3. The principal and interest in FCNR(B) accounts are fully repatriable without any annual cap.
4. FCNR(B) is a savings account, not a fixed deposit account.

How many of the above statements are correct?

(a) Only one (b) Only two (c) Only three (d) All four (e) None

(Statement 4 is wrong; FCNR(B) is exclusively a term/fixed deposit account, NOT a savings account.)

Q4. With reference to differences between NRI account types, consider the following statements:

1. NRE accounts are rupee-denominated, while FCNR(B) accounts are in foreign currency.
2. NRO accounts have repatriation capped at USD 1 million per financial year, but NRE and FCNR(B) accounts are fully repatriable.
3. FCNR(B) accounts protect NRIs from rupee depreciation risk because deposits and repayments are in foreign currency.
4. All three accounts — NRE, NRO, and FCNR(B) — must be denominated in Indian rupees.

How many of the above statements are correct?

(a) Only one (b) Only two (c) Only three (d) All four (e) None

(Statement 4 is wrong; only NRE and NRO are rupee-denominated; FCNR(B) is in foreign currency (USD, GBP, EUR, etc.).)

Q5. With reference to the swap facility’s coverage for ECBs and OFCBs, consider the following statements:

1. The US Dollar–Rupee Forex Swap Facility for ECBs is available to Public Sector Undertakings (PSUs) with ECBs of average maturity 3+ years.
2. The swap tenor for ECBs is co-terminus with the ECB repayment schedule, subject to a maximum of 5 years.
3. The swap facility for OFCBs is available to Authorised Dealer Category I banks with minimum maturity of 3 years.
4. The swap facility is available to private sector companies for any ECB, regardless of maturity.

How many of the above statements are correct?

(a) Only one (b) Only two (c) Only three (d) All four (e) None

(Statement 4 is wrong; the ECB swap facility is available only to PSUs, with average maturity of 3+ years, NOT to private sector companies for any ECB.)

Q6. With reference to leverage and yields under the FCNR(B) swap window, consider the following statements:

1. State Bank of India (SBI) is offering 9x leverage against FCNR(B) deposits.
2. Brokerages estimate that NRIs could earn 15–27% annual returns under the leveraged FCNR(B) scheme.
3. Banks such as Yes Bank, Canara Bank, and South Indian Bank have raised FCNR(B) interest rates to as high as 7.1% on major foreign currencies.
4. Hedged FCNR(B) transactions are added to the bank’s Net Open Position (NOP) limits.

How many of the above statements are correct?

(a) Only one (b) Only two (c) Only three (d) All four (e) None

(Statement 4 is wrong; hedged FCNR(B) transactions are EXCLUDED from net open position (NOP) limits, NOT added.)

Answer Key

1. (c), Statements 1, 2, 3 are correct; Statement 4 is wrong because the swap covers only principal, not interest.
2. (c), Statements 1, 2, 3 are correct; Statement 4 is wrong because the scheme has no USD 1 million minimum.
3. (c), Statements 1, 2, 3 are correct; Statement 4 is wrong because FCNR(B) is a fixed deposit, not savings.
4. (c), Statements 1, 2, 3 are correct; Statement 4 is wrong because FCNR(B) is in foreign currency.
5. (c), Statements 1, 2, 3 are correct; Statement 4 is wrong because ECB swap is for PSUs only.
6. (c), Statements 1, 2, 3 are correct; Statement 4 is wrong because hedged transactions are excluded from NOP.