Banks seek RBI nod on Guarantee Rule to boost NRI deposit inflows

Mumbai: As they prep up to attract dollars from the diaspora, banks have urged the (RBI) to iron out a kink in the regulation.

According to them, tweaking the language of the rule is necessary for () to leverage multiple times for investing in the new high-return foreign currency non-resident (FCNR) deposit scheme which was floated last week to arrest the rupee’s slide.

The regulatory clarification that banks are insisting on is expected to come in an FAQ from RBI. This holds the key to any meaningful fund mop-up through the .

WHAT EXACTLY ARE BANKS ASKING?

In the slew of measures announced with the monetary policy on June 5, RBI had relaxed a regulation to enable banks to give guarantees to overseas banks which would lend to NRIs. But the notification needs further clarification.

A guarantee–or standby letter of credit (SBLC) in banking parlance–is paramount to make the scheme a success. It’s on the back of the SBLCs that offshore banks would lend to NRIs, enabling them to park large amounts of borrowed money as FCNR deposits. The is meant to assure repayment of funds to the overseas banks once the deposits mature.

While the regulator is broadly agreeable to this–as is clear from the June 5 RBI release on the FCNR scheme–the wording of the notification, however, is posing a hurdle. The June 5 regulatory dispensation (to allow SBLCs from local banks raising FCNR deposits), links the issuance of such non-fund based facility for funds ‘raised by any entity’ — and not ‘any individual’.

“Banks have requested RBI to come out with a clarification so that SBLCs are given for the funds borrowed by NRI individuals, not entities. After it was pointed out by banks’ compliance departments, some banks wrote to the RBI, some conveyed the issue verbally,” said a source.

SBLCs FOR NRI MONEY STOPPED In 2024

Overseas banks demand SBLCs for operational convenience and minimise risks. “Compared to regular pledge, SBLC ensures that once FCNR deposits mature, the borrowed funds directly go back to the overseas lending banks. It was freely used in 2013,” said a treasurer of a large private bank.

However, the practice was discouraged by RBI in 2024 after a large private bank extensively used SBLCs to overcome an acute deposit crunch following a merger. “In 2023, the bank had issued SBLCs to three Middle East banks to raise FCNR deposits with more than nine times leverage. After this RBI’s senior supervisory managers told banks to confine the use of SBLCs for actual trade payments,” said the person.

The more the leverage, greater the return for an NRI putting money in the FCNR scheme. Say, an NRI puts in $100,000 of his own money and borrows $900,000 to deposit $1 mn in the FCNR of an Indian bank offering 6.5%. If he borrows money at 5.5% overseas, his total return would be 15.5% ($6500 from $100,000 he has put in, and $9000 from $900,000 he has borrowed). Net of processing charges, return would be around 14%. Bankers said the leverage often ranges between 9 and 19 times, but can extend well beyond that.

“Unlike 2013, the interest differential between overseas markets and India has narrowed significantly. So, unless there is enough leverage backed by SBLCs, the scheme will fall far short of expectations. We expect some clarification soon with the RBI making it very clear that banks have to play an important role,” said another person.