Rupee fall impact: Many Indians looking to transfer money overseas are facing tightened scrutiny from high street banks, demanding to provide detailed proof behind the origin of the funds. This comes as rupee continues to slide against the US dollar and many rush to move their funds abroad.
Over the past month, at least two Mumbai-headquartered private sector banks have asked high net worth individuals (HNIs), non-resident Indians (NRIs) and even a film production company to submit chartered accountant-certified testimonials validating the source of funds proposed to be remitted abroad, according to an ET report. In several instances, customers were also told that the certification must come from accountants empanelled with the bank, rather than a CA of their choice.
Rules for overseas fund transfers
These checks come even though the regulatory framework already lays out clear limits and conditions. Under the Reserve Bank of India’s liberalised remittance scheme (LRS), resident individuals can remit up to $250,000 annually for overseas investments, property purchases, travel and other permitted purposes, according to ET. NRIs are allowed to repatriate up to $1 million a year after selling assets or property in India.
Separately, businesses are permitted to make outward remittances from current accounts to pay overseas vendors and service providers, such as a movie producer transferring funds to cover hotel stays and shooting expenses in foreign locations.
“Under the RBI regulations, only own funds can be remitted under LRS,” Rajesh P Shah, partner at Jayantilal Thakkar & Co told ET.
More regulations
Restrictions are particularly tight when it comes to remittances from non-resident ordinary (NRO) accounts, where borrowed funds cannot be used.
NRO accounts are rupee-denominated accounts maintained by NRIs to manage income earned in India. Besides interest on fixed deposits, rental income and dividends, proceeds from redeemed mutual funds and property sales in India are typically credited to these accounts.
According to Pankaj Bhuta, founder of CA firm P R Bhuta & Co, recent enforcement action may be influencing banks’ approach. He pointed to a penalty imposed on a leading bank by an appellate tribunal, noting that authorised dealer banks cannot act only as middlemen for outward remittances and must carry out due diligence to ensure the transaction complies with FEMA rules.
Under RBI rules, outward remittances from NRO balances must be sourced only from legitimate receivables in India and cannot come from borrowings or transfers from other NRO accounts. “So, an authorised dealer bank may feel obliged to verify the source of funds before processing such remittances. However, a peculiar challenge arises in cases involving a change in residential status from ‘resident’ to ‘non-resident’ upon emigration. Savings bank accounts [which are subsequently redesignated as NRO accounts] often contain balances accumulated over several years, making it difficult to precisely identify the source of funds. In certain instances, despite initially furnishing income tax returns, our clients have been additionally required to provide salary certificates dating back several years to establish that the funds originated from their own income,” Bhuta said.
The situation is different for corporate remittances. While LRS and NRO-related transfers prohibit the use of borrowed money, businesses face no such restriction when paying overseas vendors. These payments do not have an upper limit and can be made from working capital, including bank borrowings, provided banks verify the authenticity of invoices raised by foreign suppliers. Even so, practitioners say banks questioning the source of funds in such cases is unusual. “But assessing fund sources in such cases is strange,” said another practitioner.
For years, many wealthy Indians have been shifting a portion of their assets overseas, setting up companies and trusts, transferring money to NRI relatives, and spreading wealth across currencies and jurisdictions. This strategy is often driven by diversification goals and long-term planning for the next generation, many of whom settle abroad. With the rupee hitting new lows, the urge to remit more funds has only intensified.
Against this backdrop, banks’ heightened caution is being felt most acutely now, as customers pushing more money overseas encounter growing compliance hurdles.
Problems with regulations
Shah said that banks seem to be layering additional compliance requirements on top of what the rules already mandate.
“Once a CA certifies the same, there should be no requirement to have an additional certificate asking for the sources of funds. But, bank compliance teams are asking for extra documents, adding to the paperwork for customers."
He further added that while bankers should do their due diligence, they should not ask for something which is unnecessary.
"Over the last one month some banks are even insisting on certificates from the CAs listed with them,” he said.