Banks seek swap for interest portion of FCNR (B) deposits

Following subvention for the principal amount under foreign currency non-resident (bank), or FCNR (B), deposits, some banks want the interest portion of these deposits, too, to be covered under the Reserve Bank of India (RBI)'s swap window.

In September, RBI had opened a special concessional window for swapping FCNR (B) deposits to attract foreign exchange resources. Under this window, banks could swap fresh FCNR (B) dollar funds (deposits with a maturity period of at least three years) at a fixed rate of 3.5 per cent a year for the tenure of the deposit. RBI has entered into swap arrangements with banks for the principal amount to be brought under FCNR (B).

A senior public sector bank executive said, "What about the interest accrued under deposits? This issue (of subvention for the interest portion) came up for discussion at a meeting public sector bank chiefs had with the finance minister on October 24 in New Delhi."

THE SWAP STORY

• In September, RBI had opened a special window to swap FCNR (B) deposits
• Under this window, banks could swap fresh FCNR (B) dollar funds at 3.5% a year
• Only FCNR (B) deposits mobilised in permitted currencies after Sept 6 are eligible
• Calculating interest for swap difficult, as these payments have varying schedules
• Govt has urged banks to secure $20-bn FCNR (B) deposits till the window closes
• So far, Bank of Baroda has raised about $600 million in FCNR (B) deposits
• It plans to raise $300 million under the swap window for tier-I-linked borrowings

Officials of the finance ministry and RBI would discuss the swap arrangement for the interest portion. Currently, the swap is in the nature of a simple buy/sell foreign exchange swap from RBI. Only fresh FCNR (B) deposits mobilised in any of the permitted currencies after September 6, 2013, are eligible for the subvention benefit. To avail of the swap window benefit, these deposits must have a one-year lock-in period, RBI said.

The chief executive of large public sector bank said interest payments happened at different intervals, with varying schedules. Therefore, administration for this (calculating interest for swap benefit) would be difficult and entail huge costs.

The finance ministry has urged banks to ensure deposits raised under FCNR (B) rise to $20 billion till the closure of RBI's special window at the end of this month. Bank of Baroda has raised about $600 million and expects total FCNR (B) deposits to exceed $1 billion. It planned to raise $300 million under the swap window for tier-I-linked borrowings, said S S Mundra, the bank's chairman and managing director.

Senior public sector executives said while the government had nudged state-owned banks to step up mobilisation, not all would be able to show significant improvement in performance. For this, strategic focus and significant branch networks in regions that accounted for many non-resident Indians (such as Kerala and Punjab) were vital.