The Reserve Bank of India (RBI) has directed commercial banks to submit their claims for redemption of FCNR(A) deposits, both principal and interest payments, before August 31.
The apex bank has warned commercial banks that if the claims are not submitted by August 31, the date by which the FCNR(A) scheme will be fully phased out, it will not be responsible.
Banks, meanwhile, are in the process of completing their paper work for phasing-out of the scheme. Most of the FCNR(A) funds with banks are held in the form of rupees. A portion of it is held overseas. Banks will have to make redemption in foreign currency and hence have to put in their claims with the central bank for the exchange of their rupee funds - principal and interest - into foreign currency.
The FCNR A and B schemes are deposit projects for non-resident Indians (NRIs) with maturities varying between six months and three years.
Under the FCNR(A) scheme, the RBI bore any exchange rate risk, while in the case of FCNR(B) scheme banks have to bear the exchange rate risk. The FCNR(A) scheme was replaced by the FCNR(B) scheme in 1994 with the FCNR(A) scheme to be phased-out over a period of three years.
Sources in the State Bank of India (SBI), the bank with the largest FCNR(B) corpus, said most of the FCNR(A) funds have been converted by non-resident Indians under the Automatic Renewal Scheme (ARS) instituted by the RBI several years ago. This development has also been observed in Bank of Baroda, Bank of India, and Union Bank of India.
However, banks have welcomed the scheme as they have devised various uses for the foreign currency funds raised. The banks with huge foreign currency deposits and strong client bases lend out the funds in the form of foreign currency loans, export packing credit, line of credit among others.
Moreover, funds are often swapped into rupees and lent as rupee loans. Corporates, meanwhile, have been attracted by low interest rates on these funds and have rushed to borrow these funds.
This has encouraged banks to aggressively pursue FCNR(B) deposits and large banks including the SBI , Bank of India, Bank of Baroda, Union Bank of India, and IndusInd Bank welcome any addition to their foreign currency deposits.
