Can NRIs Give Loans To Indian Residents Or Firms

When we talk about cross-border money lending, there is one common question that every NRI and OCI ends up asking: Can NRIs give loans to Indian Residents or Firms?. Well, the answer is yes. NRIs, both individuals and companies, can end monetarily to resident Indian subject to specific considerations under the RBI regulations, Foreign Exchange Management Act (FEMA), and the Income Tax Act. 

In this blog, we will examine in detail the rules, limits, considerations, and reporting requirements for lending to Indian residents, companies, and NRIs. 

Loan Given By NRI/OCI To Resident Indian. 

NRIs can provide loans in Indian rupees (INR) to residents of India. However, NRIs must adhere to the following conditions:

Non-Repatriable Basis

• The loan principal and interest cannot be repatriated directly outside India. 
• Repayment of the loan must be made in the NRI lender's NRO account. 
• NRIs, however, can still repatriate up to USD 1 million per financial year from their NRO account. 

Mode Of Receiving Loan

The NRI must transfer the loan amount via: 

• Direct remittance from an overseas account of the NRI, or
• Debit to the NRO/NRE/FCNR (B) account in India. 
• NRIs cannot give cash loans. 

Loan Tenure

NRI can provide a loan for a maximum period of three years. 

Interest Rate

The interest rate on loans provided by NRI cannot exceed 2% above the prevailing bank rate on the date the loan is granted to the resident Indian. 

Repayment

Indian residents who have taken a loan from an NRI can repay the loan and the interest only into the lender's NRO account. 

A Tip For NRIs: Always draft a clear loan agreement under FEMA with professional assistance. This ensure 100% tax compliance. 

Loan Given By NRI/OCI To Indian Companies 

NRIs can lend loans to Indian firms and companies in INR either on a repatriable or a non-repatriable basis. However, while lending the loan, the following strict conditions apply. 

Prohibited Sectors

NRI cannot lend loan to any Indian company engaged in the following prohibited sectors.

• Agricultural, real estate business (except townships, development, construction, roads, bridges), and plantations. 
• Trading in TDR, which is Transferable Development Rights. 
• Acting as a Nidhi or Chit Fund Company.

Mode Of Borrowing

• Loans to Indian companies by an NRI can be raised only by issuing Non-Convertible Debentures (NCDs). 
• NCDs must be issued through a public offer, not privately. 

Interest Rate

For NRI loans to Indian companies, the interest rate cannot exceed 3% above SBI's lending Rate. 

Loan Tenure

NRIs can provide loans to Indian companies for up to 3 years. Meaning the loan shall be repaid only after three years from the date of borrowing.

Repartition Rules

Loan on a repatriable basis: The NCD allotment to NRIs must not exceed the FDI ceiling. 

Loan non-repatriable basis: The loan proceeds must be received via inward remittance or debited to the NRE/NRO account. Ensure that the repayments can only be made to the NRO account. 

Loan Fund Utilization

• The loan funds must be used only for the borrower company's business activities. 
• Loan funds must not be used for further lending or investment activities. 
• Loan funds can be parked in bank FDs until the borrower wants to utilize them. 

Reporting Requirements

Within 30 days of receiving the loan receipt, the company should submit the report to the RBI containing. 

• The NRI lender information and remittance details.
• A CS (company secretary) certificate verifying compliance with NCD rules. 

Henceforth, the company cannot take loans from its NRI lenders casually; they must issue NCDs and must follow RBI-prescribed procedures. 

Loans By Foreign Nationals (Non-NRIs) To Indian Companies

Foreign individuals who are not OCIs or NRIs cannot directly lend money to an Indian company. 

Foreign individuals can do so only under the following circumstances. 

• They hold at least 25% of direct equity in the company or 
• At least 51% of indirect holdings exist. 

Loans given under these circumstances fall under the category of External Commercial borrowing (ECBs), permitted only if the lender is a resident of a FATF or IOSCO-compliant country. 

The Bottom Line

NRIs lending loans to Indian residents and companies is perfectly legal, but only when you are on the right side of the rule book. Both the lending and borrowing of funds are regulated under the regulatory framework of the Ministry of Finance and the Reserve Bank of India. 

For NRIs seeking professional consultation on which type of loan can be provided by an NRI, Savetaxs is the name to trust. Our experience furthermore assists in explaining the procedure on how NRI can lend a loan to Indian residents and firms in compliance. 

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