HDFC Bank Warns Customers Against Using Cards for Overseas Capital Transactions

MUMBAI: India's largest non-state bank HDFC has alerted its customers to refrain from swiping credit, debit, and forex cards to buy stocks, float companies and own properties abroad.

In recent times many resident individuals, banking with various financial institutions, have used cards to carry out such international capital account transactions-oblivious that they were violating foreign exchange and banking rules. Some probably did it consciously to dodge the tax collected at source (TCS) or sidestep restrictions on overseas forex remittance.

The bank, in a customer mailer this week, has unambiguously stated that "as per regulatory guidelines capital account transactions outside India are not permitted" using HDFC cards. Opening offshore bank accounts are also covered under such transactions.

Indeed, several individuals who had used credit cards for making the initial deposit for Dubai property deals have been recently questioned by the Enforcement Directorate.

"Many residents, out of sheer convenience, swipe their international cards for overseas property bookings or initial share capital remittances into foreign entities, unaware that such payments are not recognised as valid remittances under the Overseas Investment Regulations, 2022. Specific capital account transactions mandate the mode of payment to be 'proper banking channels'. Card payments are not considered as 'proper banking channels' and non-compliance attracts RBI penalties and compounding," said Srinivas Maddury, managing partner of Maddury & Associates, a CA firm specialising in forex and anti-money laundering regulations.

A resident individual can annually remit up to $250,000 under the RBI's liberalised remittance scheme to invest abroad using banking channels as well as carry out current account transactions like shopping, dining, booking hotels and flights tickets during overseas holidays, subscribe to foreign publications and download music from merchants abroad.

Unlike the 'overseas direct investment' route, where a company can borrow and remit upto four times its net worth to set up a business abroad or acquire a firm, individuals cannot take a loan from a local bank to invest abroad through the LRS window.

HDFC has cautioned customers that capital account transactions will not be processed by the bank and attempts to process them "may result in declines or restrictions" on the card.

The bank's reminder to customers come at a time when many individuals are being tapped by foreign interactive brokers offering stock and currency derivative trading accounts, developers in the UAE where property prices have softened, as well as overseas cryptocurrency and betting platforms. These overseas service providers are sharing the payment links over emails and WhatsApp for customers to move money across the border using international cards. While transactions like real money gaming and derivatives are categorically barred under LRS, most banks ask customers to give an undertaking to stop investment of LRS funds in cryptos.

According to Harshal Bhuta, partner at P. R. Bhuta & Co which advises on cross-border tax and foreign exchange laws, "Banks may be restricting the use of debit and prepaid cards for LRS remittances, particularly for capital account transactions, due to sheer practical constraints. In the case of new customers without a one-year banking relationship, the due diligence requirements laid down by the Reserve Bank of India (including review of past account activity, bank statements and latest tax records) may not be adequately addressed. In addition, these channels may not effectively support purpose code validation, real-time monitoring of LRS limits, TCS collection, or transaction screening."

Sharing a similar view, a senior official of another large private bank said that most banks would find it difficult to track the declining LRS balance following use of international debit cards for capital account transactions. LRS data is regularly pooled and compiled to prevent the use of multiple bank accounts to remit funds beyond the limit of $250,000.

Under the Foreign Exchange Management Act (FEMA), current account transactions like travel and accommodation are permitted unless expressly prohibited while capital account transactions like overseas investments, immovable property purchases abroad, are prohibited unless expressly permitted. According to banking circles, HDFC, in its advisory to customers, has drawn from the RBI's Master Direction on 'Other Remittance Facilities'.