5/8/2020 Guide to FCNR Loan - Advantages & Disadvantages

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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

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5/8/2020 Guide to FCNR Loan - Advantages & Disadvantages

FCNR loans are usually only provided to well-established

corporates operating as a private limited company
(https://www.india lings.com/company-registration) 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 pro le.
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 uctuation.
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

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5/8/2020 Guide to FCNR Loan - Advantages & Disadvantages

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 (https://www.india lings.com/learn/types-of-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.

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