RBI Bars Residents From Credit Guarantees to NRIs Under FEMA
Why in the news
RBI notified fresh foreign exchange regulations that forbid residents in India from giving credit guarantees to NRIs.
Key facts
- Prohibition: residents cannot issue a credit guarantee in favour of an NRI.
- Exception: a resident can serve as surety or principal debtor only when two tests are met.
- Test one: the underlying deal is allowed under foreign exchange law.
- Test two: resident and non-resident are each eligible to lend or borrow from the other under existing rules.
Legal basis
The rules come under the Foreign Exchange Management Act (FEMA).
Purpose
- Keep cross-border capital flows within the regulations.
- Avoid unauthorised financial exposure and risk.
Exam angle
- Regulator: RBI; Act: FEMA.
- Banned instrument: credit guarantee by a resident for an NRI.
- Allowed roles: surety or principal debtor, with conditions.