RBI tightens rules on bank guarantees to overseas units of Indian firms-LiveMint
Directive comes after banks started extending guarantees and credit facilities that are not fund-based for purposes other than those related to the business
Mumbai: The Reserve Bank of India (RBI) on Tuesday barred banks from issuing guarantees to overseas units of Indian companies for purposes not connected with their business.
RBI’s directive came after banks started extending guarantees and credit facilities that are not fund-based for purposes other than those related to the business.
“It has been observed that banks are extending non-fund based credit facilities like guarantees/stand-by letter of credits/letter of comforts, etc.,...for purposes which are not connected with their business, rather, in certain cases, used to avail foreign currency loans for repayment of rupee loans,” RBI said.
RBI said banks cannot issue guarantees or stand-by letters of credit for the purpose of raising of foreign currency loans on behalf of overseas units of Indian companies.
Banks till now were permitted to extend fund and non-fund based credit facilities to overseas joint ventures and subsidiaries of Indian companies up to 20% of their capital.
Banks should also ensure effective monitoring of the end use of such facilities and its conformity with the business needs of such entities, RBI said.
RBI has also barred companies from repaying their rupee loans availed from domestic banking system through external commercial borrowings extended by overseas branches of the banks, saying that the risk remains within the Indian banks.
Noting that some exporters are using export advances, received through guarantees issued by Indian banks for repayment of loans availed from Indian banks, RBI said it is a violation of prudential norms.
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