Cannibalisation: FCNR(B)'s gain is NRE's loss

But RBI is fine as long as it boosts sentiments

The Reserve Bank of India’s concessional swap window for banks to mobilise FCNR(B) deposits, now closed, might have come at the cost of NR(E) RA deposits respectively, the Foreign Currency Non-Resident (Bank) and the Non-Resident (External) Rupee Account] schemes.

It is felt non-resident Indians might have  shifted their preference due to rupee volatility.

Incremental FCNR(B) deposits, mobilised for a minimum of three years, could be swapped at a fixed rate of 3.5 per cent for the tenor. The window, which was available till end-November, has fetched around $28 billion.

According to the latest data from RBI, in October the outstanding amount of NRE deposits fell sequentially, albeit marginally, after a surge in September ($4.92 bn in October and $4.96 bn in September. In September NRE deposits surged about $5 bn over August.

Banks expect, as the window was available till November 30, the full impact on NRE deposits would be felt when data for the month is released. The NRI deposit data is issued with a two-month lag.  

Overall, NRI deposits swelled $4.5 bn in October, mainly aided by strong inflows in FCNR(B) deposits. In September, NRI deposits went up a whopping $10 bn.

According to bankers, since these are rupee deposits, depositors need to hedge for fluctuation in the foreign exchange rate. As a result, even if NRE deposit rates are now deregulated and banks can offer as much interest as for domestic citizens, the hedging cost makes this proposition unattractive. FCNR(B) deposits, on the other hand, are kept in foreign currency; hence, no hedging cost. RBI had sweetened these further by increasing the deposit rate cap by 100 basis points over Libor plus 400 bps for deposits mobilised for at least three years.

Bankers said RBI had been collecting client-specific information from banks on how much of NRE deposits had been withdrawn by people to park these under FCNR(B). Rough estimates suggest 15-20 per cent of FCNR(B) deposits might have come from NRE deposits.

“Some of the NRE deposits contracted just before the swap facility was opened were withdrawn and parked in FCNR(B),” said the head of treasury operations of a private bank.

The central bank is, however, not concerned about the cannibalisation as long as it helps sentiment in favour of the rupee.

“To put things differently, one can say the funds that would have otherwise would have been parked as NRE deposits are now deposited as FCNR(B),” said a senior official of a public sector bank.

Banks have also gained from the new inflow as they have a leveraging of 10 times of such deposits. Some lenders even extended loans of 19 times the total deposit value.