NRIs, borrow against your deposits

The restrictions on end-use varies for rupee loans and foreign currency loans.

Non-resident Indians (NRIs) have an easy way to obtain a loan in India with minimum documentation. Loans against non-resident external (NRE), non-resident ordinary (NRO) and foreign currency non-resident (FCNR (B)) deposits are available with leading banks such as State Bank of India (SBI), ICICI Bank and HDFC Bank. Some other banks offer loans against one of these options. These loans can be taken either as a demand loan or as an overdraft.

NRIs have three options to hold a deposit in domestic banks. They are the non-resident external (NRE), Non-resident ordinary (NRO) and foreign currency non-resident (FCNR (B)) deposits. While the NRE and NRO are rupee-denominated and can be held as an account or a deposit, the FCNR (B) can be only in the form of a deposit and is held in a foreign currency such as the US dollar, euro, pound, yen. Loans against NRE and NRO deposits are given out in rupees while loans against FCNR (B) deposits are available in foreign currency.

Loan quantum

The quantum of loan differs from bank to bank. For instance, ICICI Bank gives 90 per cent of the principal amount of the deposit or up to a maximum of ₹500 lakh as loan. HDFC Bank offers 90 per cent of the principal amount for NRE and NRO deposits and 70 per cent of the FCNR (B) deposit as loan. SBI offers unlimited loans on its NRO and NRE deposits. But when it comes to the foreign currency loan, on the FCNR (B) deposits, SBI restricts the loan amount to $25,000, €20,000 and £15,000 depending on the currency in which the money is borrowed. Bank of Baroda offers 95 per cent of the FCNR (B) deposit you have with the bank as loan.

Purpose of loans

The restrictions on end-use of the loan varies based on whether you take a rupee loan or a foreign currency loan. A rupee loan taken can be utilised within the country while a foreign currency loan cannot be used for domestic purposes.

A rupee loan can be used for investments, purchasing a house or an apartment, for doing any business activity or for any emergency requirements. However, these loans are not allowed to be used for agricultural and plantation activities and as an investment in real estate business. Also, you cannot lend the money borrowed through this route and cannot repatriate the same. On the other hand, the foreign currency loans can be used for investments outside India as per RBI guidelines.

According to experts, if you intend buying a home, taking loan against these deposits is better than going for a normal home loan. Rishi Mehra, CEO, Wishfin.com, says, “Given the time consumed in the lengthy formalities and the cost such as processing fee associated with a normal home loan, it is advisable for NRIs to go for a loan against NRE deposits if they have huge sums stacked in them.” He also adds that borrowing against the deposits could be cheaper than taking a normal home loan.

Interest rate and loan tenor

Experts say that the interest rates on the loan will typically be 1 to 2 percentage points over and above the deposit rates. For instance, SBI charges 1 per cent over and above the deposit rates for the loans taken against its NRE and NRO deposits. The deposit rates for SBI are 4.25 per cent (for deposits of ₹1 crore and above), 6.25 per cent (for deposits less than ₹1 crore and tenor of less than two years) and 6 per cent (for deposits less than ₹1 crore and tenor two years and above).

Bank of Baroda, for its foreign currency loan against FCNR (B), charges 1.5 per cent over the six-month LIBOR rate at the time of taking the loan or 1.5 per cent over and above the deposit rate whichever is higher.

The loan tenor is generally the pending period for maturity of the deposit.

Repayment options

Two types of repayment options are available. First, is by way of adjusting both the loan and the interest amount with that of the deposit amount at the time of maturity. That is, when the deposit matures, the total loan amount (principal plus the interest component) will be deducted and the balance paid back to the borrower.

Second, an NRI can repay through fresh inward remittance by transferring money to these deposits through regular banking channels. Repayment can also be made from another NRO account.

For a foreign currency loan, failure to repay the interest amount will lead to pre-mature closure of the account. Bank of Baroda, for instance, closes the deposit if the borrower fails to pay the interest amount for two consecutive quarters.

However, if you have taken a loan against your deposit, premature closure of the deposit is not allowed. The outstanding loan has to be repaid in order to withdraw the deposit before the actual maturity date.

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