Banks operating through international banking units at GIFT City are pressing the International Financial Services Centres Authority for relief from sustainable lending requirements, arguing that the recent surge in Foreign Currency Non-Resident Bank deposits has altered the economics of their offshore balance sheets. The request comes as lenders grapple with a sharp increase in FCNR(B) inflows after the Reserve Bank of India introduced a swap facility in June, a move that made such deposits more attractive and helped channel foreign currency funds into the Gujarat financial hub.
Deposit Surge Pressure
The core issue is straightforward: banks say the pace of FCNR(B) mobilisation has outstripped the practical ability of international banking units to deploy those funds into qualifying sustainable lending assets. FCNR(B) deposits are typically raised in foreign currency from non-resident Indians and are often used by banks to fund overseas or offshore lending books. But when inflows rise rapidly, lenders can find themselves holding a larger pool of foreign currency liabilities than they can efficiently match with eligible loans under existing sustainability-linked norms.
Industry sources indicate that banks are seeking a regulatory carve-out similar to the one the RBI has previously granted in comparable circumstances. The argument is that the surge in deposits was not driven by a structural change in lending appetite, but by a policy-induced spike following the swap window. In other words, banks contend that the inflows are temporary and exceptional, and therefore should not trigger rigid compliance burdens that were designed for more stable funding conditions.
The pressure is particularly acute for international banking units at GIFT City, which are still in a relatively early stage of scale-up. These units are expected to operate with global standards and attract cross-border business, but they also face a narrower set of eligible assets and counterparties than domestic branches. That makes sudden deposit growth harder to absorb without regulatory flexibility.
RBI Precedent Matters
The request is likely to be viewed through the lens of precedent. The RBI has, in the past, shown willingness to relax or recalibrate norms when policy measures create unusual deposit flows or distort the normal asset-liability profile of banks. That history matters because it gives lenders a credible basis to argue that the current situation is not a compliance failure, but a consequence of a broader policy objective aimed at deepening foreign currency funding channels.
For the IFSCA, the decision will involve balancing two competing priorities. On one hand, the authority has been building GIFT City into a globally competitive financial centre, and excessive regulatory rigidity could discourage banks from mobilising funds there. On the other hand, sustainable lending norms are intended to ensure that financial activity aligns with longer-term prudential and environmental objectives, and repeated exemptions could weaken the credibility of the framework.
The broader policy context is also important. GIFT City has been positioned as a gateway for international banking, treasury operations and offshore financial services. A sustained rise in FCNR(B) deposits would normally be seen as a positive sign for the ecosystem, reflecting confidence in the platform and the attractiveness of foreign currency products. But if those deposits cannot be deployed efficiently, banks may face margin pressure, liquidity management challenges and compliance friction.
Regulatory Trade-Offs Ahead
The likely outcome now hinges on how the IFSCA interprets the exceptional nature of the inflows and whether it is prepared to mirror the RBI's earlier flexibility. A similar exemption would give banks breathing room and allow them to manage the deposit surge without breaching sustainable lending thresholds. It would also reinforce the message that GIFT City regulations can adapt to market conditions, especially when policy actions create temporary distortions.
At the same time, any relief is likely to be carefully calibrated rather than open-ended. Regulators will want to avoid creating a precedent that encourages banks to seek exemptions whenever funding conditions become inconvenient. The challenge is to distinguish between a one-off policy-driven spike and a structural shift in the market.
For now, the episode underscores a recurring tension in India's financial architecture: the push to build globally competitive offshore banking platforms, and the need to maintain disciplined regulatory standards as those platforms scale. The banks' plea for relief suggests that the success of the June swap facility has created a new operational problem, one that regulators may now need to solve if they want GIFT City's international banking model to keep expanding without unnecessary strain.