High street banks in India are significantly tightening their scrutiny of customers seeking to send money abroad, demanding detailed and certified proof of the origin of funds. This heightened compliance comes at a time when the Indian rupee continues to weaken against the US dollar, prompting a rush among individuals and businesses to move capital overseas.
Increased Scrutiny for HNIs and NRIs
Over the past month, at least two major private sector banks headquartered in Mumbai have instructed high-net-worth individuals (HNIs), non-resident Indians (NRIs), and even a film production company to submit testimonials certified by chartered accountants. These documents must validate the source of the funds intended for remittance. In a move that has raised eyebrows, several customers were informed that the certification must come from CAs specifically empanelled with the bank, rather than an accountant of their own choosing.
This increased vigilance is unfolding despite the existence of a clear regulatory framework. Under the Reserve Bank of India's Liberalised Remittance Scheme (LRS), resident individuals are permitted to remit up to $250,000 each financial year for approved purposes such as overseas investments, property purchases, and travel. NRIs, on the other hand, are allowed to repatriate up to $1 million annually from the sale of assets or property in India.
Regulatory Framework and Bank Caution
Separately, businesses can make outward remittances from their current accounts to pay foreign vendors and service providers. For instance, a movie producer can transfer funds to cover expenses like hotel stays and shooting costs in international locations. "Under the RBI regulations, only own funds can be remitted under LRS," emphasized Rajesh P Shah, partner at Jayantilal Thakkar & Co.
Restrictions are particularly stringent for remittances from Non-Resident Ordinary (NRO) accounts, where the use of borrowed funds is strictly prohibited. NRO accounts are rupee-denominated accounts used by NRIs to manage income earned within India, such as rental income, dividends, and proceeds from property or mutual fund sales.
Experts suggest that recent enforcement actions are influencing banks' cautious stance. Pankaj Bhuta, founder of CA firm P R Bhuta & Co, pointed to a penalty imposed on a leading bank by an appellate tribunal. This ruling underscored that authorised dealer banks cannot act merely as intermediaries; they must perform due diligence to ensure transactions comply with the Foreign Exchange Management Act (FEMA).
Outward remittances from NRO balances must originate solely from legitimate receivables in India and cannot come from borrowings or transfers from other NRO accounts. This has led banks to feel obligated to verify fund sources meticulously. A unique challenge arises for individuals who have emigrated and changed their residential status from 'resident' to 'non-resident.' Their savings accounts, later redesignated as NRO accounts, may contain balances accumulated over many years, making precise source identification difficult. In some cases, clients have been asked to provide salary certificates from several years back, in addition to income tax returns, to prove the funds are from their own income.
Corporate Remittances and Rising Compliance Hurdles
The scenario differs for corporate remittances. While LRS and NRO rules forbid the use of borrowed money, businesses face no such restriction when paying overseas vendors. These payments have no upper limit and can be drawn from working capital, including bank loans, provided banks verify the authenticity of the foreign supplier's invoices. Even so, financial practitioners find it unusual for banks to question fund sources in such straightforward trade transactions.
For years, affluent Indians have been diversifying their wealth by moving assets abroad, setting up offshore entities, and transferring money to NRI relatives. The rupee's consistent depreciation has only intensified this urge. Against this backdrop, banks' heightened caution is now being acutely felt by customers encountering growing compliance obstacles.
Rajesh P Shah highlighted a key concern: banks appear to be adding extra layers of compliance beyond what regulations 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 said. He added that while due diligence is necessary, banks should avoid demanding unnecessary documentation, a trend that includes insisting on certificates from their own panel of chartered accountants.
