Indian exporters usually receive their export payments through an Authorized Dealer (AD) Category-1 Bank in India. These are banks that the Reserve Bank of India (RBI) has authorized to handle foreign exchange transactions. This is the normal and most common route for export remittances.

But the foreign exchange regulations in India, under the Foreign Exchange Management Act, 1999 (FEMA), also allow some specific cases where an Indian AD bank’s branch or correspondent located outside India can be used to handle a transaction. This is not the general channel for all exporters. It is meant only for defined situations where it makes sense for both the exporter and the foreign buyer or investor.

This article explains the legal framework, why these provisions exist, the situations in which exporters or businesses can use them, and the restrictions they need to be aware of.

What Are AD Banks?

Authorised Dealer (AD) banks are commercial banks and financial institutions that have been given special permission by the Reserve Bank of India (RBI) to deal in foreign exchange transactions. Without this authorization, a bank cannot process cross-border payments, whether for imports, exports, or investments.

AD banks are divided into different categories, based on the scope of activities they are allowed to handle:

• AD Category–I Banks: These are usually major commercial banks. They are authorized to handle all types of current and capital account transactions permitted under FEMA. This includes export and import remittances, overseas investments, external commercial borrowings (ECBs), and trade credits. For exporters, AD Category–I banks are the primary channel through which foreign exchange earnings are received.
  
• AD Category–II Banks: These institutions, often co-operative banks or smaller banks, have more limited authorization. They can handle specific transactions like remittances for education, travel, medical expenses, or small personal transfers, but not full-fledged trade payments.
  
• AD Category–III Banks: These are financial institutions such as select NBFCs. Their role is very restricted, typically dealing with foreign exchange for investment-related activities, such as portfolio investment schemes.
  

For most exporters, AD Category–I banks are the only relevant type, since they are authorized to process export and import-related payments. This is why almost all export remittances in India flow through them.

FEMA and the Role of AD Banks

To understand why RBI has created these provisions, it is important to start with FEMA. FEMA is the law that governs all foreign exchange transactions in India. Every transaction has to be classified into one of two categories.

• Current account transaction: These do not affect a person’s assets or liabilities abroad. For example, when an exporter ships goods and receives payment, it is treated as a current account transaction.
  
• Capital account transaction: These involve a change in assets or liabilities outside India. Examples are foreign investments or loans.
  

To ensure that these transactions are handled properly, RBI gives specific banks the status of Authorised Dealer (AD) Category-1 Banks. These banks act as the main link between exporters, importers, investors, and the RBI. Their job is not only to process payments but also to make sure that each payment follows FEMA rules.

Normally, this means an exporter’s foreign buyer sends money directly to an account in India maintained with an AD bank. However, FEMA and RBI rules allow some exceptions where an overseas branch or correspondent of the AD bank can be involved.

When Offshore AD Bank Channels Can Be Used

Even though exporters are expected to receive payments in India, the RBI recognises that there are situations where a foreign branch of an Indian AD bank may be useful. These cases are narrow in scope and carefully defined.

1. Special Non-Resident Rupee (SNRR) Accounts

This is the most direct provision for involving an overseas branch. A Special Non-Resident Rupee (SNRR) account can be opened by a person or company resident outside India, provided they have a business interest in India.

• Where it can be opened: With an Indian AD bank in India or with its foreign branch.
  
• Nature of the account: It is non-interest bearing. The account is tied to the business activity for which it was opened. It can remain open for the duration of the contract or business, up to a maximum of seven years.
  
• Permissible use: Only for genuine transactions linked to the declared business interest in India.
  

Example in practice: Suppose a foreign buyer has an ongoing business arrangement with an Indian exporter. Instead of sending international wire transfers for each shipment, the buyer opens an SNRR account with the local branch of an Indian AD bank in their own country. They deposit funds into this account in their local currency. The money is then transferred into the Indian exporter’s account in India.

Why this matters: From the moment the funds are credited to the SNRR account, they are already within the Indian banking system. This makes the payment simpler for the foreign buyer and ensures compliance for the exporter.

2. Loans Against Indian Deposits

RBI also allows Indian AD banks to let their foreign branches or correspondents provide loans abroad against deposits that are held in India.

• Deposits eligible for this facility: Non-Resident External (NRE) accounts and Foreign Currency Non-Resident (FCNR-B) accounts.
  
• How it works: A non-resident pledges their deposit in India and obtains a loan abroad from the overseas branch of the same AD bank. The loan may be given to the depositor or to a third party nominated by them.
  

Practical significance: This is not a direct export payment route but it shows how RBI uses the international presence of Indian banks to meet financial needs of non-residents. A non-resident does not need to transfer money out of India to access funds abroad.

3. Accounts for Specific Purposes

Apart from SNRR accounts and loans against deposits, RBI rules also allow certain categories of entities to use accounts through Indian AD banks abroad.

• Foreign Portfolio Investors (FPIs): They can open foreign currency accounts with Indian banks to manage their investments in India. These accounts are non-interest bearing and are meant only for investment purposes.
  
• Multilateral organisations: If India is a member of an international organisation, that body and its officials may open deposits with Indian AD banks.
  
• Other defined cases: RBI occasionally provides for other special accounts for very specific purposes. Each such case comes with clear conditions on how the account can be used.

Restrictions and Important Conditions

The RBI has deliberately kept these exceptions narrow. Exporters and foreign businesses must keep the following points in mind:

1. Purpose driven use: SNRR accounts are not general-purpose accounts. They must only be used for the specific business purpose for which they were opened.
   
2. Compliance responsibility: Even if the payment is made through a foreign branch, the AD bank in India is responsible for ensuring that all rules under FEMA are followed.
   
3. Country-specific restrictions: Individuals or entities from Pakistan and Bangladesh cannot open such accounts without prior approval from the RBI.
   
4. Prohibited uses: Certain types of transactions are never permitted, such as remittances from lottery winnings, racing income, or for buying banned material.
   
5. Not a substitute: These overseas routes cannot be used as a replacement for the standard rule of receiving export proceeds in India. They exist only for specific, approved circumstances.

Conclusion

The default rule for Indian exporters is straightforward: receive export proceeds in India through an AD Category-1 Bank. However, FEMA and RBI guidelines also provide flexibility for specific business arrangements.

The most practical of these is the Special Non-Resident Rupee account. This gives non-residents with a business interest in India a structured way to make payments that flow directly into the Indian banking system. Other provisions, such as loans against NRE and FCNR deposits or accounts for portfolio investors, show how RBI uses Indian banks’ foreign presence to meet international business needs.

These allowances are not meant to replace the standard process. They are exceptions, tightly monitored, and permitted only for genuine business requirements. Exporters and businesses should always consult with their AD bank before considering such arrangements to make sure every transaction remains compliant with FEMA and RBI rules.

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