Banks pare FCNR (B) inflow expectations amid leverage and tax hurdles

Banks expect strong NRI interest in RBI's FCNR(B) scheme but say leverage limits, overseas regulations and tax issues could curb fund mobilisation

Banks have turned cautious about their forecast on potential fund mobilisation via the Reserve Bank of India’s Foreign Currency Non-Resident (Bank) or FCNR (B) deposit scheme owing to a combination of challenges posed by tax disadvantages in the US and Europe, among other markets, leverage restrictions in certain jurisdictions, and a heavy reliance on overseas lenders for leverage. 

While the interest from non-resident Indians (NRIs) remains strong, leverage availability is likely to determine the final mobilisation, with the bulk of inflows expected over the next two months, bankers said. There is intense competition among banks to secure funding lines from foreign lenders. 

According to Sashidhar Jagdishan, managing director and chief executive officer (MD & CEO), HDFC Bank, it does not make economic sense for customers to take leverage and invest in FCNR (B) deposits in in Australia, Europe and the US where taxation is levied on the gross interest earned. 

Amid ongoing geopolitical tensions in West Asia, certain central banks, particularly the United Arab Emirates (UAE) and Oman, have restricted leverage, while encouraging banks to prepare for contingencies by maintaining higher liquidity buffers. “So, what we had envisaged in terms of country limits from the counterparty banks has also been scaled down,” Jagdishan said during the bank’s earnings call. 

The Central Bank of the UAE (CBUAE) advisory and the embargo on HDFC Bank in Dubai is a bit of a constraint for the bank, he added, estimating overall FCNR (B) inflows to be around $50-55 billion. 

FCNR (B) deposits worth nearly $8 billion have been mobilised so far, sources said, with the State Bank of India (SBI) expected to receive around $2 billion. Most banks are yet to see deposits coming from customers who have taken the leverage.

 

“The mobilisation has two components — the deposit itself and the leverage offering, which is the key driver of larger ticket inflows. We have already exhausted the leverage limits available to us and are now awaiting additional limits. Since several banks are simultaneously tapping this opportunity, there is some congestion in the allocation of leverage limits. Despite this, demand remains healthy,” said Vinay Tonse, MD & CEO, Yes Bank. 

HDFC Bank and Yes Bank said they are offering up to 9x leverage to eligible NRI customers. ICICI Bank said the extent of leverage would depend on the customer's profile and the amount its partner banks are willing to extend, while Kotak Mahindra Bank said it is offering leverage only for FCNR (B) deposits above a specified threshold. Depending on the counterparty banks' jurisdiction and policies, leverage ranges from 9x to 19x, bankers said.

 

“On our own leverage programme, the amount we can offer depends on the borrowings we raise. At the same time, we have to balance our funding mix, as we do not want borrowings to become an unduly large share of our liabilities. Given these considerations, we expect roughly one-third of the total mobilisation we are targeting to be supported through our own leverage, while the remainder will come through a combination of leverage from partner banks and direct FCNR (B) deposits,” said Jagdishan.

 

“The NRI customer demand is very strong, because it’s such an attractive opportunity. On the FCNR (B) front, we will offer leverage, although it will be available only for deposits above a certain threshold. The extent of leverage will depend on our partner banks, our own balance sheet capacity and the availability of funding through our GIFT City and DIFC (Dubai International Financial Centre) operations. These aspects are still being worked through,” said Ashok Vaswani, MD & CEO, Kotak Mahindra Bank.

 

The RBI’s concessional FCNR(B) deposit window is open until September 30, under which the central bank will absorb the entire hedging cost of around 3-3.5 per cent on eligible deposits.

 

Banks said that there is considerable demand from NRI customers, especially from West Asia and Singapore among other regions, but some constraints such as the CBUAE’s decision could be a dampener.

 

“It is still at an early stage, and we expect the momentum to build over the next couple of months. We expect mobilisation to gather pace over the next few weeks and months as both our partnerships with foreign banks and our own bond issuances support the programme”, said Sandeep Batra, executive director, ICICI Bank. 

Mobilisation landscape

• Taxation on gross interest in the US, Australia, Europe make such deposits less attractive
• Leverage curbs by UAE, Oman amid West Asia conflict weigh on mobilisation  
• Leveraged deposits are yet to come for most banks
• Most banks offer 9x leverage; some extend up to 19x
• RBI’s concessional FCNR (B) scheme open until Sep 30, 2026