India’s Banks Want to Use GIFT City Units in Dollar Deposit Scheme

Indian lenders are seeking approval from the Reserve Bank of India to use their GIFT City branches to extend loans linked to a foreign currency deposit scheme designed to attract dollar inflows from the Indian diaspora, as banks argue that the offshore financial hub should be treated similarly to foreign banking jurisdictions under existing leverage and credit support rules, raising questions over regulatory interpretation and cross-border banking treatment.

Indian lenders are seeking central bank approval to extend loans through branches in GIFT City, the country’s tax-neutral financial hub, as part of a plan to support a new foreign currency deposit scheme aimed at attracting dollar inflows, two sources familiar with the matter said.

Earlier this month, the Reserve Bank of India proposed subsidising hedging costs on foreign currency non-resident deposits as part of efforts to encourage banks to mobilise dollar funds from the Indian diaspora.

The scheme, first used in 2013 to support the rupee, typically allows banks to extend loans to customers who then place the proceeds into dollar deposits with Indian lenders.

Banks argue that their entities in the Gujarat International Finance Tec-City, or GIFT City, which operate under offshore banking regulations, should be treated similarly to foreign bank branches and therefore be permitted to offer such financing, the sources said.

Under existing rules, customers are permitted to take leverage and Indian banks can issue standby letters of credit to overseas banks providing such loans, guaranteeing repayment. However, it remains unclear whether these provisions extend to overseas branches of Indian banks, including those in GIFT City, and whether they are eligible to provide the financing structure.

“Most banks have branches in GIFT City, but many of them do not have a presence in foreign countries. If the leverage is not allowed through GIFT, these banks will have to depend on foreign lenders,” said VRC Reddy, treasury head at Karur Vysya Bank.

Economists and analysts expect the central bank’s measures to attract significant capital inflows.

Brokerage Nomura estimates the scheme could draw as much as $55 billion, with inflows concentrated in August and September.

“Compared to 2013, while U.S. dollar rates are much higher, the scheme will also provide leverage to investors, which will boost returns,” Nomura said in a note.

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