RBI Allows Cross-Border Rupee Loans: What It Means for Nepal

The Reserve Bank of India (RBI) has announced that banks in India will now be allowed to provide loans in Indian currency to residents of Nepal, Bhutan, and Sri Lanka. Stakeholders in Nepal have said this move could create an additional source of investment funding for the country.

According to the RBI, authorized dealer banks can extend rupee-denominated credit to residents and banks of these three countries. The central bank said the move aims to promote the international use of the Indian rupee and facilitate cross-border trade settlements.

“The RBI has been gradually liberalizing rules under the Foreign Exchange Management Act to promote settlement of cross-border transactions in Indian rupees and local currencies,” the statement said. “To advance this initiative further, it is necessary to make rupee liquidity available and accessible to residents of other countries.”

As part of this phased approach, the RBI decided to allow banks to extend loans to individuals and financial institutions in Nepal, Bhutan, and Sri Lanka. The revised guidelines will be notified through amendments to the existing regulations.

Experts in Nepal believe that India’s decision could open up new funding opportunities for investors in Nepal. However, they also caution that since such loans would need to be repaid in Indian rupees, they must be regulated carefully to mitigate the risk of foreign currency outflow.

Former Executive Director of Nepal Rastra Bank (NRB) Nar Bahadur Thapa said the RBI’s move will help mobilize more financial resources in Nepal. “Investors will not have to rely solely on domestic banks. This will also push Nepali banks to become more competitive,” he said.

He added that since interest rates in Nepal are relatively high, the new arrangement could enable Nepali companies to seek cheaper loans from Indian banks.

Entrepreneur and economic analyst Arun Subedi noted in a recent interview that Nepali banks still lack the capacity to fully finance large-scale projects. He said the RBI’s decision could open the door for financing major projects such as 1,000 MW hydropower plants through Indian banks.

NRB Already Allows Foreign Borrowing Under Certain Conditions

Nepal Rastra Bank had already opened the door for borrowing from foreign banks and companies in 2021 under the Foreign Investment and Foreign Loan Management Regulations, 2021. The regulation allows Nepali firms, industries, or institutions to obtain loans from foreign banks, financial institutions, or entities approved by the respective governments or central banks.

Under these provisions, loans can be taken at an annual interest rate up to six percentage points above the benchmark rate. For loans denominated in Indian rupees, interest can be charged up to two percentage points above the bank’s Marginal Cost of Funds-based Lending Rate (MCLR), which includes the cost of funds, operating expenses, and risk premium.

Similarly, Nepali companies or individuals can borrow up to USD 1 million from relatives, non-resident Nepalis, or other individuals abroad, and up to INR 100 million in the case of India. For dollar-denominated loans, the rate can be fixed at up to two percentage points above the annual benchmark rate.

For loans in Indian rupees, the rate can be set up to the latest annual average MCLR published by the RBI. The repayment period for such loans is set at one year. However, investment in real estate or securities through such loans is prohibited.

Foreign-invested industries are also allowed to borrow from abroad up to 100 percent of their paid-up or share capital or net assets. If the loan is taken in U.S. dollars, interest can be up to 3.5 percentage points above the benchmark rate, while for rupee loans, the rate can follow the RBI’s latest MCLR.

Nepali banks and financial institutions are also permitted to borrow from Indian counterparts up to 100 percent of their core capital.

NRB’s Executive Director of the Foreign Exchange Management Department, Rewati Prasad Nepal, said Nepali companies must obtain central bank’s approval, submit repayment schedules, and bear the foreign exchange risk themselves when borrowing from abroad.

He added that given Nepal’s current low-interest environment, there is no pressing need to borrow from India immediately. “If loans are taken from abroad at higher interest rates, the risk of foreign currency outflow will increase,” he said.