money matters for NRIs
Loans for NRIs

NRIs are permitted to take loans in India with some restrictions. The common restriction is that funds from any loan or overdraft should not be used for agricultural, plantation or real estate business, purchase of immovable property, shares, debentures, bonds or re-lending. There are two exceptions:

Loans for Agriculture

Authorized dealers are permitted to grant loans to resident family members of Indian origin for land based agricultural activity, against the security of land held by him in India; singly or jointly with other resident members provided:

1. The loan is need-based and granted only in cases where the total land holding of the NRI does not exceed five hectares in his individual name or jointly with others.

2. The loan should be utilized for carrying out agricultural activities on the existing land and not for acquiring additional land.

3. The loan can be repaid out of income generated from the agricultural activity or by remittances in foreign exchange sent by the NRI abroad, or by debit to the NRI's account.

4. Regulations regarding margin, rate of interest, security, etc., stipulated by the RBI are complied with.

Loans for Investments

Authorized dealers are permitted to grant loans/overdrafts on non-repatriation basis to NRIs to purchase shares, or to contribute to the capital of companies engaged in the manufacturing or industrial activities, export-oriented trading, hospitals, hotels of 3-star or higher grades, shipping development of computer software and oil exploration services, subject to:

1.  The concerned Indian investee company intends to issue shares to NRIs on non-repatriation basis.

2.  The period of loan does not exceed the unexposed maturity of the Non-Resident External Fixed Deposit pledged as security.

3. The loan should be disbursed on behalf of the NRI.

4. The loan and interest will be paid by a remittance from abroad or through the maturity proceeds of the NRIs NRE deposits. The loan can be repaid out of local Rupee funds from an NRO account. The condition in this case is that the interest charged must be at commercial rates.

The following are some freely permissible loans for NRIs in India.

Loans abroad against securities provided in India

Authorized dealers may with the prior permission of the RBI, grants loans to NRIs through their offices/branches abroad against the security of fixed deposits, shares, securities and immovable property in India.

Authorized dealers do not require separate RBI permission to remit the sale proceeds of this security for liquidation of the outstanding if the funds from which these assets were acquired were remitted into India; and there is no bar on their repatriation.

Authorized dealers (banks) are permitted to grant Rupee loans to NRIs as per policy laid down by the bank's Board of Directors. The quantum of the loan, rate of interest, margins, etc., on such loans may be decided by the authorized dealers based on relevant directives issued by the Department of Banking Operations and Development in this regard. The repayment of the loan may be made by debit to NRE/FCNR/NRO accounts of the non-resident borrowers or out of inward remittances by the borrowers. Authorized dealers are not permitted to grant loans for certain activities and they must ensure that the proceeds of the Rupee loans are not utilized for those purposes. The following are the activities that are not permitted with the rupee loans:

  • The business of chit fund, or
  • Nidhi company, or
  • Agricultural or plantation activities or real estate business or construction of farmhouses, or
  • Trading in Transferable Development Rights (TDRs), or
  • Investment in the capital market including margin trading and derivatives.

Loans to expatriates

Until now, loans to employees of Indian companies employed in branches outside India required the permission of the RBI. As such loans were treated as a loan by a resident to a non-resident. Circular AP (Dir Series) Circular No 74 dated February 20, 2004 permits Indian companies to grant loans in foreign currency to the employees of their branches outside India for personal purposes on the same terms, as they grant loans to employees in India.

Loans by Non-Residents to Residents

These can be made on non-repatriation basis if:

1.  The funds have been remitted through normal banking channels.

2.  The interest rate does not exceed 2% over the bank rate prevailing at the time the loan was given,

3.  The maturity does not exceed 3 years.

4. The payment of interest, as well as repayment of loan should be credited to an NRO/NRSR account.

The NRI is, for these purposes, permitted to borrow from an authorized dealer collateralizing his assets.

A resident Indian can borrow up to US$ 250,000, or its equivalent in foreign exchange from an NRI resident outside India who is close relative provided the loan is interest free and the minimum maturity period of the loan is one year.

Loans against Security of NRE Bank Accounts and FCNR Deposits

Authorized dealers are permitted to grant loans in India and abroad to non-residents, on repatriation basis; provided the loans are fully secured by NRE fixed deposits. The loan can be repaid from funds in an NRO account but in such cases the commercial rate of interest must be charged.

Authorized dealers can grant loans to residents against deposits held in NRE accounts and FCNR deposits if:

1.  There is no direct or indirect foreign exchange consideration.

2.  The term does not exceed the unexpired period of maturity of the fixed deposit accepted as security.

3.  The NRI should furnish an irrevocable undertaking not to withdraw the deposit before maturity.

4.  The loan should be for personal or business purposes.

5.  The loan should be granted by the bank against the NRE fixed deposit issued by the same bank; and not by any other bank.

6. The branch giving the loan should hold the original deposit against which the loan is granted; and the branch that has issued the receipt must be advised of the lien.

7. The RBI has stipulated in January 2007, that banks should not grant fresh loans or renew existing loans in excess of Rs. 20 lacs, against NRE and FCNR deposits. In addition banks have been advised not to undertake artificial slicing of the loan amount to circumvent the ceiling.

Loans against NRNR

Loans can be granted on the security of NRNR deposits. The margin and rate of interest can be decided by the lending bank. Repayment can be by an inward remittance or by debiting the NRI's NRE, FCNR or NRO account. However, these deposits have since been discontinued, with effect from April 1, 2002.

Loans against NRO Accounts

Loans/overdrafts can be granted against the security of NRO fixed deposits. This is available to third party resident individuals if:

1. The loans are to be utilized for meeting the borrower's personal requirements and/or business needs.

2. The funds held in the NRO account are the borrower's and not somebody else's.

3. Regulations regarding rate of interest, margin, etc. are complied with.

4. Against NRO Savings Accounts, overdrafts can be permitted up to Rs. 5, 00,000 by authorized dealers. The overdraft must be cleared though in 2 weeks.

Loans to Students

AP (Dir Series) Circular No. 45 dated December 8, 2003, recognized students abroad as non-residents. It is, however, clarified in this circular that their entitlements to loans will remain unchanged as per the provisions of Notification No. 4/2000- RB dated May 3, 2000.

Loan against Guarantees by Non-Residents

These are permitted if

1. No direct or indirect outflow of foreign exchange is involved by way of guarantee commission or otherwise.

2. The loan is fully secured by primary asset in the form of hypothecation is mortgage of assets or guaranteed by an international bank. The loans/overdrafts granted to a resident against an international bank guarantee should also be in conformity with a lending discipline prescribed by RBI for working capital and term loans.

3. Stipulation of the RBI regarding margin and interest rates are complied with.

Loans to Foreign Nationals

On September 11, 1997 the ceiling on loans to foreign nationals permanently resident for personal purposes has been raised to Rs. 5 lakhs.

Housing Loans

Authorized dealers can freely approve loans to NRIs, where the NRI is the principal borrower while the resident co-borrower is a close relative or where the land is jointly owned by them. In these cases the payment of margin money and repayment of the loan should be made by the NRI borrower. Loans can also be given to residents with the NRI as a co-obligant.

Certain institutions, such as HDFC have been permitted by the RBI to give loans up to Rs.10 lakhs to NRIs holding Indian passports for purchasing residential accommodation. Repayment should be made within 15 years. The loan must be fully secured by an equitable mortgage and, if necessary by a lien on the borrower's assets in India.

Loans can also be given against the security of NRE/FCNR deposits

If the initial deposits and installments are from money abroad, the repatriation right is protected.

If the house/apartment is rented out, the entire rental income should be adjusted towards the repayment of the loan.

General permission has been given to Indian companies to give housing loan to their NRI staff, provided the remittance is from inward remittances.

Loans for ESOPS

Banks may grant loans to NRI employees of Indian companies to acquire shares under their ESOP scheme. The amount should not exceed 90% of the purchase price the shares, or Rs. 20 lakhs per NRI employee. The rate of interest and margin on such loans may be decided by the bank, subject to the directives issued by the Reserve Bank. The amount should be paid directly by the bank to the company; and should not be credited to the borrower's non-resident account in India.

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