Cover in Dubai, dollars in India, foreign banks are ready to play

Mumbai: Several overseas banks who are eager to cash in on India's dollar demand but fear exhausting exposure limits to India, are offering a smart way out.

They have asked Indian banks preparing to mobilise money from the diaspora, to issue 'covers' from other jurisdictions like Singapore and UAE instead of India, two senior bankers participating in the discussions told ET.

These covers or guarantees -- standby letter of credit (SBLC) in banking parlance - is a key feature in the special foreign currency non-resident (FCNR) scheme where banks in India would offer tempting returns to attract deposits from non-resident Indians (NRIs).


Based on the comfort from SBLCs, foreign banks would lend large amounts to NRIs who, after placing an initial FCNR deposit with a bank in India from their own funds, would park the borrowed money as FCNR deposits with the same bank. Such leverage, as seen in the past, exceed nine times the initial deposit, significantly raises the return, and increases FCNR inflows.

Though the overseas banks lend to NRIs, their exposure is not to the borrowers, but to the Indian bank which issues the SBLC.

"When SBLCs are issued by a local branch of the Indian bank, the overseas lender factors in the 'country risk' - or, India risk that determines total exposure to India. Since lending banks want to preserve adequate headroom for future business with Indian corporates and institutions, they want Indian banks launching FCNR to use their branches in Dubai International Financial Centre, or Singapore to issue SBLCs. Then, the country risk would be on UAE or Singapore, and not on India," said one of the persons. "Also, some of these lending banks don't operate in India...It's possible as per the Reserve Bank of India's FAQ," he said.

On basis of credit and risk assessment, a country risk is an internal cap a bank decides on the total loan amount to borrowers in a specific foreign country to contain losses if that country faces political, social or economic crisis.

"Two Middle East banks and few US and European banks, including a Swiss lender, prefer SBLCs from Indian banks' offshore branches. There's no change in risk perception about India. They don't want to consume exposure limits with loans for the FCNR scheme," said a foreign bank official. Such overseas banks may strike SBLC deals with only Indian banks having a presence abroad.

Besides the SBLC arrangement, Indian banks have been permitted to lend from foreign and GIFT City branches to NRIs and accept the amounts as FCNR deposits with their branches in India. Banks with no operations abroad would either lend from GIFT branches or give SBLCs to overseas banks who do not insist that guarantees should come from a foreign branch of the Indian bank.

"Whatever arrangement a bank finalises, things should fall in place in another week. Banks are in the midst of completing paper work, tying up loose ends," said another person.