Regulation 5 explained: this guide covers what it means, who it applies to, the step-by-step process, documents required, fees, due dates and penalties in India — so you can stay compliant with confidence and avoid costly mistakes.
Regulation 5 says who in India may lend in foreign exchange, and Schedule III sets out the five cases of external commercial lending (ECL) to a borrower outside India. Banks have their own sub-regulations; other eligible entities are sent to the Schedule.
These are the Foreign Exchange Management (Borrowing and Lending) Regulations, 2018 (Notification No. FEMA.3(R)/2018-RB, December 17, 2018), as per the text on the Reserve Bank's site, amended up to February 16, 2026. ECL is lending by a person resident in India to a person resident outside India in accordance with Schedule III. The Schedule covers an AD's loan to an overseas direct investment entity, foreign branches of Indian banks, an eligible entity's loan to a foreign entity in which it has invested, trade-related loans out of an EEFC account, and staff loans in foreign exchange by Indian companies. The Schedule still names the 2004 foreign security regulations.
Authority and text
The Regulations rest on the Foreign Exchange Management Act, 1999. Their preamble cites "clauses (a), (d) and (e) of Sub-Section (3) of Section 6, sub-section (2) of Section 47". The Act text now prints section 6(3) as omitted, and section 47(3) keeps earlier Reserve Bank regulations in force until amended or rescinded. See the Act articles on section 6 and sections 47 and 48.
Under regulation 3, which we explain in the opening article of this series, a resident may not lend in foreign exchange unless the Act, Rules or Regulations permit it. Regulation 5 and Schedule III are two of those permissions. For advice on a cross-border loan, our FEMA advisory team reviews the structure before money moves.
Regulation 5: lending by an Authorised Dealer
Regulation 5(A) has four sub-regulations for an Authorised Dealer (AD) in India or its branch outside India.
- (i) An AD in India or its branch outside India may extend foreign currency denominated ECL to a borrower outside India in accordance with Schedule III.
- (ii) An AD may grant loans to its constituents in India for their foreign exchange needs, rupee working capital or capital expenditure, subject to prudential norms, interest rate directives and guidelines issued by the Reserve Bank.
- (iii) Subject to Reserve Bank directions or guidelines, an AD in India may extend foreign exchange loans to another AD in India.
- (iv) Branches outside India of AD banks may extend foreign exchange loans against the security of funds held in NRE or FCNR deposit accounts, or any other account the Reserve Bank specifies, kept under the Foreign Exchange Management (Deposit) Regulations, 2016 (Notification No. FEMA 5(R)/2016-RB dated April 1, 2016).
Regulation 5(B): lending by persons other than ADs
Regulation 5(B) is a single paragraph: an eligible resident entity may extend foreign currency denominated ECL to a borrower outside India in accordance with Schedule III. Who counts as "eligible" is fixed by the paragraphs of the Schedule, as the table below shows.
Schedule III: the five paragraphs
The Schedule is headed "" and opens: "Eligible entities may extend External Commercial Lending (ECL) to borrowers outside India in accordance with the provisions contained in this Schedule."
| Paragraph | Lender | Borrower and conditions as printed |
|---|---|---|
| 1 | An AD in India | May extend ECL in foreign exchange to a foreign entity in which an Indian entity has made overseas direct investment in accordance with the 2004 foreign security regulations named in the paragraph |
| 2 | Foreign branches of Indian banks | May extend foreign exchange loans in the normal course of their banking business outside India |
| 3 | An eligible entity as defined under the 2004 foreign security regulations (Notification No. FEMA.120/RB-2004 dated July 7, 2004) | May lend in foreign exchange to a foreign entity in which it has made direct investment, in accordance with those regulations |
| 4 | A person resident in India | May lend in foreign exchange out of funds held in his or her EEFC account, for trade related purposes, to an overseas importer customer, on terms the Reserve Bank stipulates in consultation with the Government of India |
| 5 | Indian companies | May grant loans in foreign exchange to employees of their branches outside India for personal purposes, in accordance with the lender's Staff Welfare Scheme or Loan Rules and other terms applying to staff resident in India and abroad |
A drafting point to note
Paragraphs 1 and 3 of Schedule III refer to the Foreign Exchange Management (Transfer or Issue of any Foreign Security) Regulations, 2004. That is how the Reserve Bank page consulted prints the paragraphs; this article does not rewrite it. The sibling articles on the Overseas Investment Regulations, 2022 explain the current overseas investment framework as printed in that instrument, and the two should be read together before relying on the 2004 references. Which text governs a particular loan should be confirmed against the current instruments.
Terms the Schedule leaves to the Reserve Bank
Schedule III prints no rate, maturity or amount limit. Where the text speaks of terms, it leaves them to the Reserve Bank: paragraph 4 says "terms and conditions as stipulated by the Reserve Bank of India from time to time in consultation with Government of India". Regulation 5(A)(ii) and (iii) similarly refer to Reserve Bank guidelines and directions. The Regulations therefore say who may lend, not the pricing or reporting; those sit in separate Reserve Bank directions, which should be checked.
Practical example
Latitude Machines Limited, an invented Indian company, holds an overseas subsidiary that needs short-term working funds. Under paragraph 3 the company, if it is an "eligible entity" as defined in the 2004 foreign security regulations, may lend in foreign exchange to a foreign entity in which it has made direct investment, "in accordance with the provisions under the said regulations". It cannot rely on paragraph 5, which is for staff loans, or paragraph 4, which is for trade-related loans out of an EEFC account to an overseas importer customer. For an AD bank in the same chain, paragraph 1 covers the bank's own ECL to a foreign entity in which an Indian entity has made overseas direct investment.
For the guarantee, pledge and other forms of financial commitment that Indian entities may give to a foreign entity, see the dedicated articles in the overseas investment series, beginning with guarantees for a foreign entity under regulation 5. Our guide to financial commitment by equity, debt, guarantee and pledge gives the wider picture.
Amendments and circulars after February 16, 2026 should be checked.
Need help with lending abroad?
A loan to an overseas subsidiary or a trade-related loan out of an EEFC account involves more than one instrument. Our FEMA advisory work includes mapping the loan to the right paragraph and checking the reporting that follows.
Key takeaways
- Regulation 5(A) covers AD lending in India and abroad; regulation 5(B) covers other eligible resident entities, both through Schedule III for ECL.
- Schedule III has five paragraphs: AD loans to an ODI entity, foreign branches of Indian banks, direct investors lending to their foreign entity, EEFC-funded trade loans, and staff loans.
- The Schedule prints no amount or rate; terms come from the Reserve Bank.
- Paragraphs 1 and 3 name the 2004 foreign security regulations.
- Check later amendments and circulars before acting.
Read next
- Borrowing in foreign exchange by residents: regulation 4
- Rupee loans with NRIs and change of residence: regulations 6 to 9
- Financial commitment other than equity and loans: Overseas Investment Regulations 1 to 4
- ODI under FEMA: an overview
Disclaimer: Based on the rules, regulations and Reserve Bank Master Directions under the Foreign Exchange Management Act, 1999 that this article names, each in the version and up to the date stated in the article, as consulted on 2 October 2026. Some texts are third-party copies or older prints and are identified as such. Limits, forms and time limits change by amendment and circular; later changes should be checked on the Reserve Bank and Gazette sites. This article is general information, not legal advice; check the official text before acting.