Tighter Norms For Nre, Fcnr Withdrawals

The Reserve Bank of India (RBI) has imposed a penalty on deposits withdrawn prematurely by non-resident Indians (NRIs) from non-resident external (NRE) accounts or foreign currency non-resident (FCNR) accounts from one bank for the purpose of opening a non-resident non repatriable (NRNR) account rupee deposit scheme with another bank. The directive has confused banking circles as to what exactly was the reasoning behind the move. One explanation offered was that this step was taken by the RBI to keep funds from being transferred from one bank to another indiscriminately following the freeing on deposit rates on non-resident accounts.

As per the notification issued by the RBI to banks on June 4, a NRI can withdraw his deposits from his NRE or FCNR deposits prematurely to open an NRNR account with the same bank without attracting any penalty. Banking sources say that this step is desirable as these repatriable forex funds, when converted into non-repatriable rupee funds, result in an accretion to the country's forex reserves.

 

However, with the interest rates on non-resident accounts being freed, a customer might choose to switch between banks in order to obtain the highest possible interest rates. According to bankers, the RBI may have taken this step to curb this tendency as it would impact the monitoring processes of banks and the RBI.

However, this notification is seen to have loopholes. According to an executive in the NRI division of one bank, "What is there to stop the depositor from first converting the account from FCNR/NRE to NRNR with the same bank, and then withdraw this NRNR account and place it with another bank?"

Over the last few months, the RBI has taken several measures to keep closer tabs on NRI deposits. On March 5, banks were asked to report the name and address of the non-resident remitter of NRE accounts along with the names and addresses of the resident remitter. Analysts said that this move was taken as the NRE route was taken for laundering dollars held overseas. The central bank had also asked for monthly statements from banks .

As per a circular issued on May 3, the RBI allowed a transfer of funds between FCNR accounts of different persons maintained with the same bank or any other bank for any purpose -- as is the case with NRE accounts -- subject to the following conditions :

Banks should levy a penalty if such transfer involves premature withdrawal of FCNR deposits ;

Where the transfer of funds is a gift, it may be allowed after obtaining an undertaking from the transferee/transferee's bank that gift tax, if any, will be paid;

In case of transfer of funds held in the FCNR accounts held with different authorised dealers, the authorised dealer transferring the funds should issue a certificate confirming the non-resident status of the transferor and repatriable nature of the funds.