RBI’s New Practice: Ensuring LRS Fund Integrity with Overseas Remittance Checks

When sending money abroad or traveling overseas, individuals may face a barrage of inquiries from their banks, especially when the purpose involves purchasing property overseas. Instances have arisen where banks initiate inquiries about the source of funds, particularly when they’re intended for property purchases abroad. Such cases have prompted banks to scrutinize the income details of account holders. 

Moreover, customers have been questioned about funds being sent out of the country without any apparent recipient at the receiving end. This new practice is gaining ground in the banking sector, contrasting with earlier times when banks didn’t routinely inquire about the source of funds for foreign transactions. However, amidst concerns, this scrutiny has become imperative, especially in cases that raise suspicion.

Revised Liberalized Remittance Scheme: Stricter Controls Implemented

Under the Reserve Bank of India’s Liberalized Remittance Scheme (LRS), Indian residents are permitted to remit funds abroad for various purposes such as property acquisition and investments in securities (such as shares and bonds). However, the annual limit for sending money abroad under this scheme has been revised to $2.50 million, up from the previous limit of $2 million. Some tax professionals and bankers have noted that authorized dealers, meaning banks, are now increasing their scrutiny of LRS remittances before clearing them.

Previously, banks didn’t routinely inquire about the source of funds: Until recently, Indore resident Sudhir Jain’s three children studied in the United States, and he regularly sent funds abroad for their education without facing much scrutiny.

Concerns about misuse of the facility: Recently, even smaller private banks have started asking customers about the source of funds. Banks fear that some individuals might be using the LRS window for purposes other than its intended ones. This, however, is not the case for everyone.

Banks’ Right to Inquire about Fund Sources

Banks have the authority to inquire about the sources of funds being remitted abroad, as stated by banking ombudsman guidelines. They have the right to ask questions regarding the origins of funds being sent overseas. 

However, there are no clear guidelines on how and to what extent they should ask for information. If their demand for literacy or another advertisement is to be met, they must provide clear guidance. If their demand for literacy or another advertisement is to be met, they must provide clear guidance.