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Leveraged NRIs on returns trip may fuel FCNR inflows

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SummaryAt the end of July, outstanding FCNR deposits were $15.4 billion.

some Indian banks too are tying up with other foreign banks to provide leverage to their customers.

Large Indian banks like SBI, ICICI Bank and Axis Bank would tie up with other large foreign banks and guarantee the loans given to NRIs, which are in turn deposited in the FCNR accounts of the Indian banks,” said a senior official at a mid-sized private bank. “People even borrow money and bring into deposits. Through this, some lending also happens for the bank; some big banks are doing this,” said A Surendran, head-retail and international business, Federal Bank.

Since FCNR deposits come under private banking products, offering leverage with the package is an ongoing practice, they said.

“Given the prevailing forward premiums and the FCNR pricing, no bank was interested in marketing these deposits. The RBI has addressed this situation through the swap,” said the head of treasury at a foreign bank. The benchmark one-year forward dollar/rupee premium was around 7.5%.

The bank sees a growth in its business, both on the deposits and the loan book. Such leverages can be cross-border as well, bankers said. Both the bank and the NRI customer bear the cross-border risk.

The RBI announced last week that banks can swap dollars raised through FCNR deposits with it at a rate of 3.5% under a special window. The swap rate in the market is around 6-7%, bankers said. While the facility is available to all banks, it is largely foreign banks and banks with significant overseas presence who will be able to draw in funds, say bankers.

“Foreign banks are better placed to do this because they can leverage it in a better way. Even Indian banks that have large branch networks overseas can offer this leverage,” said an official at a private bank.

Foreign banks also stand to benefit in terms of cost of funds. Since foreign banks don't have a large retail deposit franchise and borrowings from the RBI's liquidity adjustment facility has been capped, they have been forced to borrow funds from the Marginal Standing Facility (marginal standing facility) at 10.25%.

The FCNR scheme will allow them to raise cheaper funds offshore

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