Loans From Fresh Fcnr Corpus Set To Lose Shine

Lending from fresh FCNR corpus will become unattractive following the rupees depreciation.

The depreciation increases the cost of such funds for foreign currency borrowers. At present, the cost of such deposits for a year is about five per cent. The cost of such deposits for banks, inclusive of the cost of forward cover which has shot up to about 7.5 per cent, is about 12.5 per cent. Borrowers are likely to end up paying about 13.5 per cent to 14 per cent. This is much more than the PLR of 12.5 per cent or the CP rate of about 10 per cent.

 

However, lending based on existing FCNR corpus of nationalised banks will remain unaffected, since most have already covered their FCNR deposits.

The sources said that only those banks which have taken longer duration FCNR deposits are likely to be effected. Banks are allowed to accept FCNR deposits for up to three years.

And the kind of banks that have taken such deposits are particularly the South-based private sector banks. However, others like the Oriental Bank have preferred to adopt a conservative approach. These banks generally accept such deposits only for a maximum tenure of a year for which forward cover was already available.

For banks which have taken long-term FCNR deposits, the exchange rate depreciation could substantially erode their earnings. In fact some banks had chosen to leave such deposits uncovered during the last six months in view of the rupees propensity to appreciate. If these banks had left their positions uncovered in a situation where the exchange rate tends to appreciate, there would have been no losses.

But since the opposite has occurred, some of these banks are quietly making a beeline to take cover up to a year, as long as the forward premiums are still low at 7.5 per cent, the sources said. One forex dealer said, those of us who have already taken forward cover at low rates of five per cent some time ago are laughing all the way.