While the Reserve Bank of India (RBI) has offered banks concessions to help them attract dollar flows, the biggest chunk of funds is expected to come in through arrangements where banks will first borrow in the market and then loan the money to non-resident Indians (NRIs), who in turn will park the money in long-term foreign currency non-resident (FCNR-B) deposit products.
Analysts, who had forecast inflows of around $10 billion thanks to the RBI’s swap facility, believe inflows could be stronger if clients use leverage to park money in FCNR products. At the end of July, outstanding FCNR deposits were $15.4 billion, data from the RBI showed, a marginal increase over $14.3 billion at the end of July 2012.
Depending on the NRI customer’s ability to leverage — which bankers say could be 18-19 times — he could earn effective returns of up to 20% on his investment. In a typical leverage arrangement, the bank may ask the NRI customer to draw a dollar loan at a spread, over Libor of, say, 1-2% and then park these funds at an interest rate of around 4-5% in FCNR deposits with a maturity of three years or above. The tenure of the loan would match that of the FCNR deposits. Therefore, on average, he would earn a return of 2-3% or even more on the leveraged portion, but effective returns on his investment could be much higher. The interest rate on FCNR deposits is capped at 400 bps above Libor; most banks offer the maximum rate.
By way of a special swap facility the RBI announced last week, banks can get rupees for the dollars raised through FCNR deposits at a fixed swap rate of 3.5%.
In other words, banks sell dollars to RBI for rupees and simultaneously enter into an agreement to buy dollars at a future date at a premium of 3.5%. In the market, banks will have to otherwise pay 7% as premium which is the current swap rate. The high swap rate had deterred banks from marketing FCNR deposits aggressively.
Senior foreign bankers confirmed they have started approaching NRIs while 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