The Reserve Bank of India (RBI) has imposed restrictions on credit facilities extended by banks to Indian companies' overseas arms.

The central bank has also banned repayment of rupee loans taken from the domestic banking system through external commercial borrowings extended by overseas branches or subsidiaries of Indian banks.

Credit restrictions

The restrictions on credit facilities apply to credit facilities, including bank guarantees and stand-by letters of credit (L/Cs), extended to overseas joint ventures and subsidiaries of Indian companies.

The move follows the RBI's findings that banks were extending credit on behalf of Indian companies' overseas arms for purposes not connected with their business.

Shadow banking

Instead, in some cases, the credit was used to obtain foreign currency loans to repay rupee loans.

In this context, several Indian banks were caught out last year when stand-by L/Cs extended by them on behalf of a large gem and jewellery company were not accepted by foreign banks.

This article represents the views of the author and not necessarily those of the ICC or any of the other partners in DC-PRO.