RBI allows swap transactions for rupee denominated foreign loans

In a bid to facilitate External Commercial Borrowings (ECBs) lending denominated in rupee by overseas lenders, the Reserve Bank of India (RBI) has allowed such lenders to enter into swap transactions with their overseas bank who shall, in turnm enter into a back-to-back swap transaction with banks in India.

In a currency swap, the parties to the contract exchange the principal of two different currencies immediately, so that each party has the use of the different currency.  It will help to hedge risks from currency exposures.

As per the new norms the recognized non-resident lender will first approach his overseas bank with appropriate documentation as evidence of an underlying ECB denominated in rupee with a request for a swap rate for mobilizing rupee for onward lending to the Indian borrower. Based on that the overseas bank will approach an authored dealer bank for a swap rate along with documentation furnished by the customer that will enable the bank in India to satisfy itself that there is an underlying ECB in rupee.

RBI said that a Know Your Customer (KYC) certification on the end client shall also be taken by the bank in India as a one-time document from the overseas bank. Based on the documents received from the overseas bank, the bank in India should satisfy itself about the existence of the underlying ECB in rupee and offer an indicative swap rate to the overseas bank. The overseas bank in turn will offer the same to the non-resident lender on a back-to-back basis.

The continuation of the swap shall be subject to the existence of the underlying ECB at all times. On the due date, settlement may be done through the Vostro account of the overseas bank maintained with its counter party bank in India, said RBI.