Funds flowing in through the foreign currency non-resident (FCNR) deposit window, where the Reserve Bank of India (RBI) is offering a discounted swap rate, are likely to be deployed towards working capital loans.
Bankers say that most of the dollar inflows that are being converted into rupees through the RBI window can only be used for shorter-tenor credit such as working capital loans and unsecured loans for retail customers.
“The fund coming in through the FCNR window is in the three- to five-year category, so it cannot be used for long-term lending. So it is not like these will help in reducing the interest rates on retail loans much,” said a senior official at a private sector bank. The average tenure of a home loan works out to 15-20 years, while that of a car loan is between seven and 10 years.
Though credit growth due to these funds may not be high, deposit growth has already started to show an uptick.
According to Arun Kaul, chairman and managing director, UCO Bank, as Indian banks continue their aggressive approach towards garnering FCNR deposits, deposit growth will surge in the next few fortnights. According to the RBI’s latest data for the fortnight ended October 4, outstanding deposits in the banking system grew by 14.82% year-on-year to R73,61,690 crore. Deposit growth has stayed above the 14% mark and is now inching closer to the RBI’s annual estimate of 15%, data for the fortnight ended September 20 showed, owing to the strong FCNR flows.
The two windows announced by Raghuram Rajan on September 4 — his first day as RBI governor — offered banks a fixed swap rate of 3.5% for dollars raised through three- to five-year FCNR deposits. The RBI also allowed banks to raise 100% of their unimpaired tier-1 capital through overseas borrowing and allowed them to swap the funds at 100 basis points below the prevailing market rate. Both these windows will remain open till November 30. According to figures released by the RBI on October 5, $5.6 billion had come in through the two windows.
Indian banks like HDFC Bank, Kotak Mahindra Bank, Bank of India, State Bank of India and Bank of Baroda have been aggressively pushing their FCNR products. Bank of India has already raised $1 billion through the FCNR route and aims to improve it to $1.4-1.5 billion before the November 30 deadline, said VR Iyer, CMD of the bank.
According to market sources, foreign banks like Standard Chartered Bank and Deutsche Bank have been the most aggressive in getting FCNR deposits. “It helps their foreign branch to show lending growth, while the Indian branch can show good deposits. They also make money on the arbitrage during the currency swap,” said a senior official at a private sector bank.
Since the bulk of the FCNR funds are flowing in through foreign banks, bankers expect deposit and credit growth within that segment of the banking system to pick up. As on June 30, foreign banks accounted for 4.2% of the banking system’s deposit base and 5.2% of the gross bank credit.
Systemic liquidity conditions will also benefit from the increased inflows, say bankers. Along with a pick-up in deposit growth, liquidity conditions too have eased as a result of the inflows.
“Slowly these flows will add to liquidity in the market,” said NS Venkatesh, head, treasury, at IDBI Bank.