MLG Associates

Example:

Mr. Anil Gupta of New Delhi wants to give a loan to Mr. Vikas Goyal, a PIO, currently resident of Dubai by transferring INR 30,00,000 from his resident savings account in ICICI Bank to Mr. Vikas’s checking account in Citibank Dubai.

Notes on this case

1. This is a case of capital transaction. Why ? Since it leads to change in Balance Sheet of Mr Anil in India.  

2. The transaction is permissible vide clause (e) of Schedule II of FEM (Permissible Capital Account Transactions) Regulations, 2000.

Source : https://rbi.org.in/scripts/BS_FemaNotifications.aspx?Id=155

The transaction is allowed by Reg. 8B of FEM (Borrowing and Lending in Indian Rupees) Regulations, 2000 however it is subject to conditions as follows:

Loan is free of interest and the minimum maturity of the loan is one year

Loan can only be given to a Non Resident Indian and that too, a relative.

Loan amount should be within the overall limit under the Liberalised Remittance Scheme per financial year (USD 250000 as of now) as available for a resident individual.

Loan shall be utilised for meeting the borrower’s personal requirements or for his own business purposes in India;

Loan shall not be utilised for activities like chit fund, Nidhi Company, agricultural/ plantation activities, real estate business, TDR

Loan amount should be credited to the NRO a/c of the NRI/PIO.

Credit of such loan amount may be treated as an eligible credit to NRO a/c;

Loan amount shall not be remitted outside India; and

Repayment of loan shall be made by way of inward remittances/ debit to NRO/NRE FCNR/ out of the sale proceeds of the shares or securities or immovable property against which such loan was granted.

Points to note:
Here, it needs to be understood that though RBI allows the transaction per-se, it does not allow Mr. Anil to credit it directly to Citibank DUBAI account of Mr. Vikas.

Instead, Mr. Anil will transfer the funds to Mr. Vikas’s NRO account.

Also, FEMA Remittance Regulations do not allow Mr. Vikas to transfer this money overseas/to NRE account and thus this borrowing is practically non-repatriable for Mr. Vikas.

In this case, the word NRI has not been defined. However, it can be assumed that borrower cannot be a PIO/foreign national. It is necessary that a close relative relationship exists between lender and borrower. Hence, loan to an NRI friend will not be allowed.

BNote