RBI Priority Sector Lending Amendment 2026 - FCNR NRE Deposits

What Happened?

On August 7, 2026, the Reserve Bank of India (RBI) issued the Priority Sector Lending – Targets and Classification Second Amendment Directions, 2026 (RBI/2026-27/232). This amendment modifies how banks must treat advances extended against fresh Foreign Currency Non-Resident (Bank) [FCNR(B)] deposits and Non-Resident (External) Rupee (NRE) deposits. Specifically, advances against qualifying fresh FCNR(B) deposits (3-5 year tenure mobilised between June 8-September 30, 2026) and fresh NRE term deposits (3+ year tenure mobilised between June 19-September 30, 2026) are now excluded from ANBC calculation for priority sector lending targets.

Background & Legal Context

This amendment builds on RBI's June 2026 policy decisions:

• Governor's Statement (June 5, 2026): Introduced a US Dollar-Rupee swap facility for fresh FCNR(B) dollar funds with minimum 3-year and maximum 5-year tenor
• FMOD.MAOG circular (June 8, 2026): Established the swap facility mechanics for FCNR(B) deposits
• CRR/SLR Amendment Directions (June 8 & June 19, 2026): Provided exemption from Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR) maintenance on qualifying FCNR(B) and NRE deposits

Under the Reserve Bank of India Act, 1934 and the Banking Regulation Act, 1949, the RBI has statutory authority to issue directions regarding priority sector lending. The original Priority Sector Lending Directions, 2025 (as updated January 19, 2026) defined ANBC as the baseline for calculating bank compliance with priority sector lending targets.

Key Legal Provisions: While this is primarily RBI regulatory guidance, it intersects with indirect taxation under GST and corporate compliance under the Income Tax Act 2025. Banks claiming deductions for advances extended must ensure classification aligns with these RBI directions to avoid disputes with tax authorities during assessment for AY 2026-27.

What Does This Mean for You?

For Scheduled Commercial Banks (SCBs):

• Reduced ANBC Base: Advances against eligible FCNR(B) and NRE deposits no longer count toward ANBC, lowering your priority sector lending target denominator. For example, if your total ANBC is ₹1,000 crore and ₹50 crore qualifies for exclusion, your new effective ANBC becomes ₹950 crore
• Flexibility in Target Compliance: Lower ANBC means you need proportionally less absolute rupee amount in priority sector lending. If your priority sector target is 40% of ANBC, the reduced base provides breathing room for target achievement
• Time-Bound Window: The exclusion applies only to deposits mobilised between June 8-September 30, 2026 (FCNR(B)) and June 19-September 30, 2026 (NRE). After September 30, 2026, any fresh deposits mobilised won't qualify for this exemption
• Renewed Deposits Also Eligible: The amendment explicitly includes deposits renewed upon maturity during the qualification period, not just fresh deposits

For Non-Banking Finance Companies (NBFCs) and Other Lenders:

• This amendment is specific to banks under RBI's regulatory ambit. However, if your business relies on bank funding, expect improved liquidity availability as banks deploy freed-up FCNR(B) and NRE resources

For Corporate Borrowers:

• Improved Availability: Banks have incentive to mobilise FCNR(B) and NRE deposits (CRR/SLR exempt + ANBC excluded). This surplus capital may flow to non-priority sector borrowers, potentially improving credit availability and terms
• No Direct Income Tax Benefit: Under Income Tax Act 2025, interest paid on borrowings remains deductible under Section 36(1)(iii), regardless of ANBC classification. This amendment doesn't change your ability to claim interest deduction

For Deposits Mobilised/Renewed:

• If you hold FCNR(B) or NRE deposits that qualify (mobilised/renewed during the specified period), the underlying advances funded by your deposits may be excluded from priority sector calculation, but your deposit interest remains taxable under applicable provisions

What Should You Do Now?

If You Are a Bank:

• Audit Internal Systems: Ensure your core banking system correctly identifies and excludes qualifying FCNR(B) and NRE-funded advances from ANBC calculation. Incorrect classification could lead to regulatory penalties
• Strengthen Documentation: Maintain clear audit trails showing (a) deposit mobilisation/renewal date, (b) advance amount and date, (c) link between deposit and specific advance, (d) CRR/SLR exemption eligibility
• Aggressive FCNR(B)/NRE Mobilisation: With only a 3-4 month window (until Sept 30, 2026), accelerate campaigns to mobilise qualifying deposits before the deadline expires
• Train Compliance Teams: Your Priority Sector Lending (PSL) and Regulatory Compliance teams must understand the new calculation methodology to prevent breaches
• Financial Reporting: Update your ANBC disclosure in quarterly/annual financial statements to reflect the exclusion for FY 2025-26 (April 2025 - March 2026) if deposits were mobilised during your financial year

If You Are a Corporate/Individual Borrower:

• Monitor Loan Structuring: If banks improve credit availability, this is an opportunity to refinance existing loans at better terms. Approach your relationship manager for discussions
• GST Compliance Reminder: Interest paid on fresh loans remains subject to GST @ 18% (if applicable under GST law). Ensure your invoicing captures correct GST treatment

If You Are an Accountant/Auditor:

• Review Client Bank Compliance: For AY 2026-27 financial statements of bank clients, verify that ANBC calculations reflect this amendment correctly
• Monitor for Regulatory Changes: RBI may issue clarifications by year-end. Stay updated via official RBI communication channels

Key Takeaways

• ANBC Exclusion: Advances funded by qualifying FCNR(B) (3-5 year) and NRE (3+ year) deposits mobilised/renewed by Sept 30, 2026, are excluded from ANBC for PSL target calculation
• Time-Sensitive: The exemption window closes September 30, 2026. Banks must act quickly to mobilise deposits within this period
• Reduced PSL Burden: Lower ANBC means banks need lower absolute rupee amounts in priority sector advances, improving compliance flexibility
• No Impact on Interest Deduction: Under Income Tax Act 2025, interest on borrowings remains deductible; this amendment doesn't change tax treatment of loan interest
• Documentation Critical: Banks must maintain robust audit trails linking deposits to advances and ensuring CRR/SLR exemption eligibility to withstand regulatory/tax scrutiny

Important Note: This amendment applies to financial year 2026-27 onwards for new deposits mobilised. For assessment purposes under AY 2026-27, banks must disclose PSL compliance calculations reflecting this change in their financial statements and tax returns.

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