Indian banks allowed to give INR loans to Sri Lanka customers
EconomyNext: The Reserve Bank of India has allowed Indian banks to give loans to customers in Sri Lanka Bhutan and Nepal denominated in Indian rupees.
Branches of Indian banks in Sri Lanka would also be allowed to give Indian rupee loans to banks in the island or to individuals.
“This development will make credit more accessible for businesses in Sri Lanka,” the Indian embassy in Colombo said.
“The provision allowing such loans to be denominated in Indian Rupees will be particularly beneficial for Sri Lankan businesses, reducing exchange rate risks and strengthening cross-border trade and financial linkages between the two countries.”
Analysts say Sri Lankan borrowers in India may benefit compared to borrowing in US dollars due to steady deprecation of the India rupee – especially since 2011 after the RBI’s monetary anchor was shifted from wholesale price index to retail- though interest rates may be higher.
India is a large source of imports for Sri Lanka. As long as Indian exporters are willing to receive Indian rupees like US exporters or Russia, not just trade finance but actual trade could be conducted in Indian currency, analysts say.
Sri Lanka also has a bad credit rating after the worst currency crisis which can make foreign borrowings expensive.
During the last crisis, Indian banks confirmed Sri Lanka LCs, while Indian food exporters shipped goods without letters of credit against informal arrangements.
But SriLankan banks are now flushed with US dollars – after the Central Bank of Sri Lanka stopped printing money and missed its high 5 percent inflation target, preventing the destruction of capital – and are financing Indian banks and firms.
The Indian rupee – originally silver based – was the ‘dollar’ of South Asia, part of the Middle East including present day Dubai and Qatar under British administration as well as parts of North Africa informally.
OSL take:
While Sri Lanka and India enjoy strong bilateral ties with an operational free trade agreement (FTA), the latest move by India in relation to Sri Lanka is expected to strengthen cross border transactions. Sri Lankan businesses stand to benefit due to the increased access to credit providing more opportunities for Sri Lankan businesses to engage with India and vice versa. Indian businesses already operating in Sri Lanka and are planning to would also stand to benefit from the Indian government’s decision. Indian businesses/investors could therefore confidently explore the expanding business/investment opportunities in Sri Lanka as the country embarks on a path to achieve regional hub status. Other foreign businesses/investors interested in doing business with India could look at setting up bases in Sri Lanka to engage with India using the preferential treatment enjoyed by Sri Lanka.
| Article Code : | VBS/AT/20251015/Z_8 |