UAE central bank restrictions may dampen NRI dollar mobilisation

Dubai: A recent UAE Central Bank circular that restricts certain facilitative activities by representative offices, including documentation support and cross-selling has thrown a spanner into hopes of a surge in Foreign Currency Non-Resident (Bank) dollar deposits from NRIs in the UAE in Indian banks with unexpected operational challenges, bankers said.

Bank executives said they were seeking regulatory clarification, cautioning that the changes could slow deposit mobilisation, particularly among retail customers, especially when lenders are aggressively marketing FCNR (B) deposits under the Reserve Bank of India's special window until September 30.

The UAE is a key market for FCNR(B) deposits, with industry estimates suggesting that more than 70% of such inflows are expected to originate from the Gulf region.


"The response from the NRI community has been good so far, but the UAE Central Bank has come out with a circular that imposes certain restrictions on representative offices in facilitating business. We believe this could impact operations and mobilisation of deposits," said a senior executive at an Indian bank in the UAE.

Most Indian banks operate in the UAE through representative offices. Only Bank of Baroda has a full-fledged onshore commercial banking license from the Central Bank of the UAE (CBUAE), which means it functions like a local UAE Bank.

The State Bank of India and ICICI Bank hold Category 1 licenses specifically inside the Dubai International Financial Centre, wherein they can cater to corporate and professional clients.

Most Indian banks operate in the UAE through representative offices. Only Bank of Baroda has a full banking license in the country. While the State Bank of India has secured a banking license, it continues to operate through its representative office.

Representative offices have traditionally assisted with document collection, KYC coordination, and liaison with branches in India. If those activities are curtailed, bankers said, onboarding customers for FCNR (B) deposits and the associated leverage facility could become more cumbersome. "It could mean that documents may no longer be sent to India or certificates processed through representative offices as before, impacting the processing of the leverage facility as part of the offering. If representative offices are unable to facilitate documentation, KYC, and related activities, then deposit mobilisation will also be affected," said another executive of an Indian bank in Dubai.

FCNR (B) deposit window allows NRIs to place fixed deposits in US dollars, while earning tax free interest in India. Following RBI's relaxation of norms, several lenders are offering attractive interest rates of up to 7% and a leverage of up to nine times the value of the deposit, taking total annual returns upwards of 15% in most cases.

Bankers said the operational impact of the UAE Central Bank restriction is likely to be felt most by retail customers, owing to the documentation requirement to avail the leverage facility. They said that the UAE Central Bank's communication specifies activities that representative offices should not undertake, including business facilitation, cross-selling, documentation and similar activities.