The Reserve Bank of India (RBI) on Tuesday clarified that Indian banks and their overseas branches can extend loans to a non-resident, or issue a guarantee in favour of foreign lenders against deposits raised under the new window.
Several lenders had sought clarity from RBI on whether they can raise FCNR (B) deposits by extending loans to non-residents through their overseas branches, The Economic Times reported on Monday, citing people familiar with the matter.
On 5 June, RBI said it will absorb the foreign exchange hedging cost on fresh foreign currency non-resident (bank), or FCNR (B), deposits, creating an unusual opportunity for overseas Indians: the possibility of earning equity-like returns from what is essentially a fixed-income product.
This was part of a broader package to attract dollar inflows and support the Indian rupee, allowing banks to raise fresh and renew existing FCNR (B) deposits of three to five years and swap the dollars with the at a concessional rate. Hedging cost for banks will be zero, effectively removing a major cost that previously prevented banks from offering attractive rates on dollar deposits. The scheme is open till 30 September.
A banker at a state-run bank said this was one of the sticking points in the previous circular, and now that the RBI has clarified, the bank will start pushing the product to its customers. “We were waiting for the FAQs (frequently asked questions) from RBI,” said the banker cited above.
On Tuesday, RBI said the facility is a plain buy-sell foreign exchange swap from the central bank covering only the principal amount of the deposits and not the interest on those .
Mint reported on 11 June that private bankers and wealthy NRIs are not merely interested in this because of the higher deposit rate but the ability to get leverage.
According to calculations by Emkay Global Financial Services, an investor putting in $1 million from his/her pocket and leveraging it nine times could generate annual returns of about $220,000, translating into a return of 21.8% on the original amount invested. Even at lower leverage levels of five times and three times, returns work out to 15% and 11.6%, respectively.
The last time such a scheme was announced during the taper tantrum in 2013, the banking industry raised around $34 billion from FCNR deposits, and the biggest beneficiary was Bank, raising $3.4 billion, followed by SBI at $3.07 billion and ICICI Bank at $2 billion, Suresh Ganapathy, managing director at Macquarie Capital Securities, said in a note to investors on 9 June.