Banks operating through international banking units at GIFT City are pressing the International Financial Services Centres Authority for relief from sustainable lending norms on loans backed by Foreign Currency Non-Resident deposits, or FCNR(B) deposits, according to people familiar with the matter. The request comes as deposit mobilisation at the financial hub has accelerated sharply, driven by the Reserve Bank of India's swap facility introduced in June, which improved the economics of raising foreign currency deposits.
The issue has emerged at the intersection of prudential regulation, balance-sheet management and the policy push to deepen India's offshore banking ecosystem. Banks say the rapid build-up in FCNR(B) liabilities has created a mismatch with the current framework for sustainable lending targets, which were designed to encourage credit deployment into priority and long-term productive sectors. In the case of international banking units, however, the underlying funding is foreign currency denominated and often tied to specific liability structures that do not fit neatly into domestic lending templates.
Deposit Surge Pressure
The surge in FCNR(B) deposits has altered the operating environment at GIFT City. These deposits, typically held by non-resident Indians in foreign currency, became more attractive after the RBI's swap arrangement reduced hedging and funding costs for banks. That, in turn, encouraged lenders to mobilise more such deposits through their IFSC units, expanding their foreign currency balance sheets at a pace that may now outstrip the current regulatory treatment of the resulting loans.
Banks are understood to be arguing that applying sustainable lending targets to these loans could distort the original purpose of the framework. Sustainable lending norms are generally intended to steer credit toward environmentally and socially aligned sectors, but international banking units operate in a specialised offshore environment where asset-liability matching, currency risk and cross-border funding considerations are central. Industry executives believe a rigid application of the norms could reduce flexibility just as GIFT City is trying to establish itself as a competitive international financial centre.
The request to the IFSCA is also being watched closely because it may set a precedent for how the regulator treats other foreign currency funding channels in the future. If exemptions are granted, banks could gain greater room to deploy FCNR(B)-linked funds without being constrained by domestic-style lending obligations. If not, lenders may need to recalibrate their deposit strategy or absorb lower efficiency in the use of those funds.
Regulatory Balancing Act
For the IFSCA, the decision will require a careful balance between regulatory consistency and market development. On one hand, the authority has been keen to promote GIFT City as a globally competitive jurisdiction with a ruleset tailored to offshore finance. On the other, it must ensure that exemptions do not weaken the broader policy intent behind sustainable finance norms, especially as India seeks to align its financial system with climate and transition goals.
The expectation in the market is that the IFSCA may follow the RBI's lead in carving out similar relief where the structure of the product and the nature of the unit justify it. Banks point out that the RBI has in the past provided specific exemptions or modifications for certain foreign currency deposit products, recognising that offshore or non-resident-linked banking requires differentiated treatment. A comparable approach from the IFSCA would therefore not be unusual.
The matter also underscores the growing importance of GIFT City in India's banking architecture. What began as a niche offshore platform is increasingly becoming a meaningful source of foreign currency liabilities and cross-border banking activity. As deposit volumes rise, so too does the need for a regulatory framework that can accommodate scale without undermining policy objectives.
What Banks Want
At the core of the industry's request is a simple proposition: FCNR(B) deposits raised through international banking units should not be treated in the same way as conventional domestic deposits when it comes to sustainable lending targets. Banks contend that these funds are inherently different in tenor, currency and end-use constraints, and that forcing them into a standard sustainability quota could reduce the attractiveness of the product and complicate treasury management.
The outcome will matter beyond a single product category. It will signal how far India's financial regulators are willing to adapt sustainability rules to the realities of offshore banking. It will also influence how aggressively banks pursue foreign currency deposit growth at GIFT City in the months ahead. For now, the industry is waiting for the IFSCA's response, with expectations building that the authority may opt for a pragmatic exemption rather than a strict reading of the existing norms.