Indian banks, including their overseas branches, can extend rupee loans or issue Standby Letters of Credit (SBLC) against FCNR(B) deposits held with themselves. This facility is governed by RBI's FEMA regulations and Master Directions on deposits. The loan amount cannot exceed the deposit value. FCNR(B) deposits are foreign-currency-denominated term deposits held by Non-Resident Indians. Such loans serve as a collateral-backed credit facility, enabling NRIs and resident third parties to access funds without breaking the deposit prematurely.

FCNR(B) — Foreign Currency Non-Resident (Banks) — deposits are a key instrument through which India attracts foreign exchange inflows from its diaspora. These deposits are held in freely convertible foreign currencies like USD, GBP, EUR, JPY, CAD, and AUD, and are fully repatriable. Since the bank already holds the deposit as a liability, lending against it is a low-risk, fully secured transaction.

RBI permits Indian banks — including their overseas branches and wholly-owned subsidiaries — to extend rupee loans or issue SBLCs (Standby Letters of Credit, a contingent credit instrument often used in trade finance) against FCNR(B) deposits held with themselves. Crucially, the loan can be given to: (1) the depositor themselves, or (2) a third party, whether resident or non-resident.

The key regulatory conditions are: the loan cannot exceed the deposit amount; it cannot be used for re-lending, real estate speculation, or capital market investment beyond prescribed limits; and the interest rate on the loan must comply with RBI's lending rate guidelines. The deposit serves as collateral, so premature withdrawal is restricted until the loan is cleared.

This mechanism is significant because it allows NRI depositors to unlock liquidity without repatriating funds or breaking deposits, while also giving Indian borrowers access to credit indirectly backed by foreign exchange resources — a subtle but important channel in India's external sector management.