Guide to FCNR Loan for Indian Businesses

FCNR(B) stands for Foreign Currency Non-Resident (Bank). FCNR(B) loans are thus loans raised by Indian corporates in foreign currency as per the guidelines issued by Reserve Bank of India. FCNR loans are sometimes preferred by Indian businesses as it entails lower interest cost and the borrower does not have to go to international market for raising funds at competitive rates.

FCNR Loan Eligibility

FCNR loans are usually only provided to well-established corporates operating as a private limited company or limited company in India with a very good track record of repayment. FCNR loan can be availed for a wide variety of purposes ranging from working capital to purchase of capital equipment. However, most banks require a minimum loan requirement of USD100,000 or 10 million Japanese Yen for processing FCNR loan application.

FCNR Loan Advantages

• FCNR loans have very low interest rates when compared to loan designated in Indian rupees. FCNR loans have interest rates of LIBOR + 1% – 3%, based on the borrower risk profile.
• FCNR loan can be easily obtained through banks in India.
• Can be used to hedge currency exposure risk.

FCNR Loan Disadvantages

• Small businesses would not be eligible.
• FCNR loan must be hedged for currency fluctuation.
• Exposes the business to currency and international market risks.

FCNR Loan Usage

FCNR loan can be used for a wide variety of purposes as mentioned below:

Working Capital

FCNR loan can be extended for working capital purposes in Indian rupees or foreign currency. Exporters can avail foreign currency loan for working capital purposes as pre-shipment credit or post shipment credit in foreign currency. While using FCNR loan for working capital purposes, it is recommended that the business have a natural hedge or cover itself from exchange risk.

Importing of Raw material

FCNR loan can be used by importers while importing raw material instead of rupee based loans. Availing foreign currency loan for raw material and exporting goods would ensure the business has a natural hedge, as foreign currency loans can also be repaid in foreign currency. A part of working capital limit can be earmarked as foreign currency loan in the overall sanctioned working capital facility.

Importing Capital Good

Those importing machinery or equipment from abroad can avail FCNR loan for a period not exceeding 3 years including moratorium period. Importing capital good backed by Letter of Credit denominated in foreign currency or with FCNR loan will ensure that the business enjoys very low interest rate on the capital equipment imported for a period of upto 3 years. Normally, the import of capital goods should be arranged on 180 days usance basis.

Repayment of Rupee Term Loan

FCNR loan can be used to repay rupee term loan provided the duration of the foreign currency loan does not exceed the portion of the existing rupee loan which has not yet expired or 3 years whichever is less. Replacing rupee term loan with FCNR loan that is hedged can reduce interest cost.

Repayment of ECB’s

External commercial borrowing (ECB) in the form of foreign commercial bank loans, buyers credit, suppliers credit, corporate bonds, etc., can be repaid with FCNR loan after obtaining permission from the Government of India / RBI as per the applicable guidelines.