MUMBAI: The Reserve Bank of India’s (RBI) incentives to attract Foreign Currency Non-Resident (Bank) (FCNR(B) deposits have prompted leading private-sector banks to approach overseas lenders with proposals aimed at financing their non-resident Indian (NRI) clients and encouraging them to place funds through this route.
“Foreign banks will gain access to a large NRI customer base and tap secured lending opportunities with limited credit risk. We, in turn, can multiply FCNR deposits beyond our existing dollar liquidity, while NRIs benefit from interest-rate arbitrage,” said a senior banker at a private-sector lender.
According to sources, HDFC Bank, Axis Bank and IndusInd Bank have lined up proposals for offshore lenders as they compete for a share of the estimated $50 billion expected to flow through the FCNR(B) route.
While HDFC Bank and Axis Bank did not respond to queries until press time, an IndusInd Bank spokesperson said: “We are actively engaging our NRI customer base through dedicated relationship teams and targeted outreach initiatives. Given the current returns, along with tax efficiency and protection from exchange-rate volatility, we expect customer interest to remain healthy.”
Under one proposal, a private bank has sought tie-ups with partner banks that would extend foreign-currency loans to select NRI customers sourced by either institution. The Indian bank would mobilise the FCNR deposit and create a lien in favour of the partner bank on behalf of the customer.
The structure is designed to leverage deposits. For example, while an NRI may invest $1 million, the foreign bank could extend a loan of up to $9 million, resulting in a total FCNR(B) deposit of $10 million. Assuming a loan rate of 5.2% and a deposit rate of 5.5%, the customer could benefit from the interest-rate spread, with annualised returns potentially reaching 13%. Upon maturity, the Indian bank would repatriate the FCNR deposit proceeds to the NRI’s account with the foreign lender.
A second proposal from another private-sector lender follows a similar approach but uses standby letters of credit (SBLCs) issued against FCNR deposits rather than a direct lien. Under this structure, offshore banks with surplus liquidity would lend to NRI customers, while the Indian bank would mobilise the deposit and provide credit support.
The opportunity has emerged following the RBI’s decision to bear the full hedging cost on fresh FCNR(B) deposits mobilised until September 30 for maturities of three to five years. Through the central bank’s swap facility, lenders can convert foreign-currency inflows into rupee liquidity and deploy the funds to support domestic credit growth at a time when deposit mobilisation remains challenging.
For foreign banks with limited retail deposit franchises in India, the arrangement offers a scalable route to access affluent NRI customers by channelling funds into high-yield FCNR deposits that can subsequently be leveraged through overseas branches.
Sources said both proposals remain under discussion and the final structures could evolve as banks compete aggressively to mobilise FCNR deposits under the RBI scheme. Bankers expect these deposits to be raised at costs lower than bulk deposits and even some domestic term deposits.
Meanwhile, Indian and foreign banks are independently targeting wealthy expatriate Indians for dollar deposits, offering financing structures that can be recycled into FCNR placements.
Until recently, FCNR(B) deposits offered returns of around 3.5%. With the RBI absorbing hedging costs, banks have raised rates significantly. Given that three-year US Treasury yields are around 4.2% and five-year yields about 4.27%, lenders have increased FCNR(B) rates by 200-300 basis points to attract depositors. Current offerings range from 5.25% to 7.1% for maturities of three to five years.
For NRI customers, the timing appears favourable. A Jefferies report estimates that returns on the original investment could range between 17% and 27%, depending on the leverage structure employed.
Source: The Financial Express
