Module: | MODULE A: INTERNATIONAL BANKING
Q204: Consider the following statements regarding Recognized Lenders under the External Commercial Borrowing framework:
1. A recognized foreign lender must be a resident of a country that is compliant with the Financial Action Task Force or the International Organization of Securities Commissions.
2. Foreign branches or subsidiaries of Indian banks are permitted to participate as recognized lenders for foreign currency denominated External Commercial Borrowings.
3. Foreign branches of Indian banks are freely permitted to lend under the Indian Rupee denominated External Commercial Borrowing framework.
Which of the statements given above is or are correct?
2. Foreign branches or subsidiaries of Indian banks are permitted to participate as recognized lenders for foreign currency denominated External Commercial Borrowings.
3. Foreign branches of Indian banks are freely permitted to lend under the Indian Rupee denominated External Commercial Borrowing framework.
Which of the statements given above is or are correct?
✅ Correct Answer: A
🎯 Quick Answer:
Option A is correct because only statements 1 and 2 are accurate.Structural Breakdown: To prevent money laundering, lenders must belong to jurisdictions compliant with global financial security standards like the Financial Action Task Force, validating statement 1. Statement 2 is correct because the overseas branches of Indian commercial banks can utilize their foreign currency deposits to fund Indian corporate clients in US Dollars or Euros.
Statement 3 is strictly incorrect.
The regulations explicitly prohibit foreign branches or subsidiaries of Indian banks from participating as lenders in Indian Rupee denominated External Commercial Borrowings.
Historical Context: The restriction on Indian bank branches participating in Indian Rupee denominated offshore loans was implemented to ensure that the risk of currency volatility is actually transferred to genuine foreign investors, rather than cycling back onto the balance sheets of the Indian banking system.
Causal Reasoning: The causal reasoning for enforcing Financial Action Task Force compliance is to safeguard the sovereign financial system from terror financing and illicit money flows disguised as corporate debt.