As West Asia boils again, RBI likely to assess FCNR flows

Mumbai: Amid fears that dollar loan rates may harden with the US intensifying strikes on Iran, the Reserve Bank of India (RBI) is expected to take stock of the special foreign currency deposit and borrowing inflows from banks next week.

The RBI governor has called a meeting with bank CEOs on July 14, said two senior bankers.

The rate at which non-resident Indians (NRIs) borrow from overseas banks and foreign and GIFT City branches of Indian banks would determine the quantum of mobilisation through the foreign currency non-resident (FCNR) scheme.


While banks have announced higher returns on FCNR deposits following regulatory support, the sudden spike in Middle East tensions following the ceasefire collapse has complicated situations for Indian banks tapping the diaspora.

Banks would raise dollars to on-lend to NRIs who would place the borrowed money as FCNR deposits.

"Banks have already announced FCNR rates. For customers to derive an effective yield of say 13 to 15%, banks have to offer fixed rate loans to them. Banks' borrowing cost and subsequent loan rates for NRIs can rise in the current environment. It's already up 8-10 basis points in last two days," said a banker.

Multiple bankers and wealth advisors said that while there's huge interest among NRIs, several banks are taking time in finalising the fixed rate for lending to NRIs.

The three key elements in the FCNR scheme are: deposit rate, the fixed loan rate, and the extent of leverage - or, the number of times of the initial deposit an NRI can borrow to place as FCNR deposit.

A higher borrowing cost would require higher leverage to generate an effective yield that would attract NRIs. The leverage going beyond 9 times would mean disbursing more loans to NRIs, thereby increasing the pressure on overseas and GIFT branches to raise more dollars for on-lending.

In order to make some money banks would typically charge a loan rate that's slightly higher than the rate they pay to raise dollars from the market. Alternatively, loans to NRIs can be given by overseas banks on the back of guarantees - or standby letters of credit (SBLC) - from India banks accepting FCNR deposits. However, with SBLC, Indian banks end up accepting deposits without earning a spread from on-lending.

"Given the recent flight of liquidity to Singapore and Switzerland, Middle East banks may not be as gung ho as in the past. There maybe compulsion not to overextend. Also, restrictions put by the UAE regulator on bank representative offices have increased paper work, causing NRIs to visit Indian consulates and embassies to certify document copies for KYC," said another banker.

RBI is also providing concessional USD-INR forex swap facility for External Commercial Borrowings by PSUs to attract dollars.

"Since the governor has called the meeting, we feel discussions could also be on ECBs, banks' offshore dollar bonds and a few other issues like mule accounts or cyber-security. But due to the market situation, we expect RBI to assess the FCNR position, particularly given the attention it has attracted," said another banker.