Foreign banks in rush to raise dollar deposits from NRIs to milk RBI's special window
Foreign banks are scrambling to raise dollar deposits from non-resident Indians — even tempting them with loans — to open their foreign currency non-resident (bank), or FCNR (B), deposit accounts in India.
The move comes after the Reserve Bank of India (RBI), as part of its efforts to stem the rupee’s depreciation, opened a special window for swapping FCNR (B) dollar funds of three years or more at a concessional rate and offered various other incentives, including cheap dollar-rupee swap rates.
Observers say this has offered Indians residing abroad an opportunity to increase their income manifold using borrowed capital.
The process, as bankers and market participants explains, begins with a foreign bank requesting a non-resident to open a FCNR (B) deposit account with its India unit. The bank immediately offers the customer a loan against this deposit. The customer uses the loan to create another FCNR (B) deposit account, against which he is again given a loan. The process is repeated eight to 10 times. The customer benefits as he earns more interest on FCNR (B) deposits than he pays on loans against those.
Some of the Indian banks with foreign branches have also approached their non-resident customers to raise FCNR (B) deposits, but observers say these lenders are not as aggressive as their foreign rivals.
Industry analysts say, using this mechanism, non-resident Indians (NRIs) can make a net return that is significantly higher than the interest rates offered on deposits in developed markets like the US. The returns would easily lure NRIs. According to some estimates, by putting up just 10 per cent of the deposits, the client effectively makes between 18 and 21 per cent on the dollars.
The process, however, has raised concerns of systemic risk.
“The 2008-09 crisis was triggered by over-leveraging. We are again seeing foreign banks encouraging leveraging. There are reports that lenders are offering NRIs upfront loans against FCNR (B) deposits and repeating the process. Such leveraged money can leave as abruptly as it comes in, thereby increasing systemic risk,” Ajit Ranade, chief economist of Aditya Birla Group, says.
Bank expects to see improvement in deposit mobilisation after recent rate hike