MUMBAI: Indian lenders have sought clarity from the Reserve Bank of India (RBI) on whether domestic banks can leverage the foreign currency non-resident bank [FCNR(B)] deposit scheme by extending loans to depositors through their overseas branches, bankers said.
This follows the RBI’s decision to allow depositors to borrow from foreign banks for placing FCNR(B) deposits with Indian banks, while permitting Indian banks to issue letters of credit (LoCs) to support such borrowings.
“It remains unclear whether the guidelines permit overseas branches of Indian banks to provide leverage to their own customers. The current rules do not explicitly address that scenario, and further clarification is needed,” said a senior executive at a large private-sector bank.
The executive added that if such lending is permitted, the scheme would closely resemble the FCNR(B) mobilisation programme introduced in 2013. He expects the RBI to issue an additional circular clarifying the matter.
Another senior official at a private-sector bank said the key driver of FCNR(B) deposit growth in 2013 was banks leveraging deposits themselves.
“What is unclear now is whether a bank can allow a client to borrow against an FCNR(B) deposit placed with it and then rebook that deposit. Such a structure would expand both the bank’s assets and liabilities,” the official said.
Under the revised framework, non-resident Indians (NRIs) can borrow from overseas banks and place the proceeds in FCNR(B) deposits with Indian banks. In the operational guidelines issued on Monday, the RBI removed restrictions on leverage, enabling NRIs to borrow abroad and deploy those funds into FCNR(B) deposits to benefit from the interest-rate arbitrage.
For instance, an NRI could invest $100 of personal funds, borrow $900 from a foreign bank, and place the entire $1,000 as an FCNR(B) deposit with an Indian bank. The Indian Bank may issue a letter of credit to back the overseas borrowing.
However, the RBI has not explicitly clarified whether Indian banks can themselves provide such leverage through their foreign branches. During the 2013 FCNR(B) mobilisation scheme, overseas banks were permitted to lend to FCNR(B) account holders against a lien on their deposits.
On Friday, the RBI announced that it would absorb the full hedging cost on incremental FCNR(B) deposits mobilised under the special swap window, as part of a broader package of measures aimed at attracting foreign currency inflows and supporting the rupee.
With leverage now permitted through overseas borrowings, banks expect FCNR(B) inflows to exceed earlier estimates. Industry executives project inflows of around $40-50 billion through the FCNR(B) route.
Source: The Financial Express
