The Reserve Bank of India (RBI) has warned banks against issuing letters of credit (LoCs) and guarantees to Indian companies? overseas subsidiaries and said that such non-fund-based credit was being used for purposes other than the business the company was involved.
?It is advised that banks, including overseas branches or subsidiaries of Indian banks, shall not issue standby letters of credit,guarantees,letter of comforts, etc., on behalf of overseas subsidiaries of Indian companies for the purpose of raising loans of any kind from other entities except in connection with the ordinary course of overseas business,? the central bank said in a notice on Tuesday.
Further, Indian banks must monitor the use of such non-fund-based credit by the overseas subsidiaries of Indian companies, the RBI said.
?This may make it difficult for the subsidiaries to get funding, but the impact is not far-reaching,” said the head of corporate credit at a private bank.
Typically, an Indian company’s overseas subsidiary approaches an Indian bank for a guarantee or letter of credit to use it for availing loans from another bank there. Banks were allowed to issue non-fund-based credit to overseas subsidiaries of Indian companies up to 20% of unimpaired capital of the bank.
The central bank has noted that companies have used such non-fund-based credit from banks to
avail loans to repay advances taken earlier at high interest rates.
Further, manufacturing and infrastructure companies cannot raise external commercial borrowings from overseas branches of Indian banks and use the same to repay rupee loans, the RBI said.