Mobilisation test: Foreign banks' leverage key to FCNR (B) inflows

Foreign banks' India exposure limits may shape FCNR(B) inflows as Indian lenders tweak deposit rates and tenors to attract NRI funds under the RBI scheme

Foreign banks’ exposure limits to India and individual Indian lenders could emerge as a key determinant of eventual inflows under the Reserve Bank of India’s (RBI’s) concessional foreign currency non-resident bank, or FCNR (B), scheme. 

Indian banks are expected to rely on overseas lenders for leverage because of the limited size of their overseas balance sheets, while foreign banks, with their lower cost of funds, are better placed to extend such financing against standby letters of credit (SBLCs) issued by Indian banks. 

Even as initial estimates by banks suggest deposit mobilisation is gathering pace, lenders are likely to tweak deposit rates and tenors as the deadline approaches to make the scheme more attractive. In addition to standard tenure structures, such as three-to-less than four years, four-to-less than five years, and five years, banks are likely to offer tenors such as 555 days and 666 days, similar to domestic deposits, bankers said. 

The ‘India line’ — a foreign bank’s internal exposure limit to India — refers to the amount of exposure it is willing to take on the country. These limits vary across lenders. Most large foreign banks have sufficient India exposure to support FCNR (B) inflows of $50 billion to $60 billion. Mobilisation beyond that level may require those limits to be increased. 

“The balance sheet of our overseas branches is only of a certain size. Beyond a point, you have to source additional leverage. Where customers obtain leverage from foreign banks, we can provide the SBLC. Ultimately, everything depends on the India exposure limits,” said a senior banker at a private bank. “I believe those limits are sufficient to support mobilisation of around $60 billion under the scheme. Mobilising significantly more than that would require foreign banks to substantially increase their India exposure.” 

Under the structure being offered by banks, an NRI first places funds in an FCNR (B) deposit with an Indian lender, which then issues an SBLC in favour of a foreign bank. Based on this credit enhancement, the foreign bank extends leverage — typically up to nine times the deposit amount — allowing the NRI to invest a multiple of the original deposit. 

 

However, the exposure created through the SBLC counts towards the foreign bank’s internal exposure limits on both India and the Indian bank issuing the guarantee, which bankers said could eventually constrain mobilisation under the scheme. 

Foreign banks are better placed to provide leverage because they can lend at a spread over US Treasury yields. In contrast, overseas branches of Indian banks must first raise funds from foreign lenders at a markup before on-lending, making the economics less viable. As a result, Indian banks are expected to use SBLCs to access such leverage.

 

"If a foreign bank lends to an NRI who lives and works in its own country, that exposure could arguably be treated as exposure to the country where the borrower resides rather than to India, since the borrower will ultimately repay the loan from income earned there. However, different institutions have different internal policies, so I am not sure how each bank will treat it. Indian banks do not have a large presence in many overseas markets from where a significant portion of these deposits is expected to come, and that is where foreign banks come into the picture," another banker said, adding that $40-50 billion of inflows under the scheme appears achievable at this stage. 

A third banker at a mid-sized private sector bank said both country-level and bank-specific exposure limits maintained by foreign banks would come into play. “Ultimately, the extent of mobilisation under the scheme will depend on these limits,” the banker said. 

Most bankers said interest among NRIs in the scheme remains strong, with inflows expected to gather pace from the third week of July as lenders intensify customer outreach and finalise leverage arrangements. August and September are likely to account for the bulk of the deposits. 

“You will see the real momentum building after July 15-20. So far, the leverage component has not really taken off at any bank, and most of the inflows have come from standalone NRI deposits. The real mobilisation through leveraged deposits is expected to begin in the second half of July,” said another senior banker at a state-owned bank. 

Mobilisation test

• Current India lines can support $50-60 billion in FCNR (B) mobilisation, bankers estimate
• SBLC-backed leverage can multiply deposits by up to nine times, subject to exposure limits
• Foreign banks have a funding-cost advantage over Indian banks’ overseas branches
• Leverage-led inflows are expected to pick up from the second half of July, with August-September contributing the bulk