Indian banks are likely to use foreign-currency deposits raised from NRIs (Non Indian Residents) in the next few months to replace expensive funding on their balance sheets before lending money to companies, according to Axis Bank’s chief executive officer Amitabh Chaudhry.
The remarks come as lenders prepare to benefit from the Reserve Bank of India’s () recent policy measures, which are aimed at encouraging banks to attract more foreign currency deposits from the Indian diaspora.
“The first thing banks will do is reduce or pause growth in other very expensive deposits for some time,” Amitabh Chaudhry told Bloomberg News in an interview.
Following that, the quickest areas for deployment of fresh funds would be across infrastructure projects, data-center investments, commercial real estate and large capital-expenditure plans, he said.
Why are Indian banks looking to attract more NRI deposits?
Indian banks have been facing a funding crunch as loan growth has outpaced the pace at which they are attracting deposits. Loans expanded 18% in the two weeks ended May 31, the fastest pace in almost two years, according to RBI data. Deposits, on the other hand, grew 12% over the same period.
To bridge this gap, many lenders had to rely on costlier sources of funding, such as certificates of deposit with rates as high as 7.5250% for three-month paper issued in March, according to the news agency. The apex bank’s latest move aims to ease this pressure by making it more attractive for banks to raise foreign currency deposits from .
How will RBI’s latest move help banks raise more foreign money?
Earlier this month, the central bank announced that it would absorb the hedging costs incurred by banks when they raise dollars overseas. The measure is part of a broader effort by policymakers to attract foreign capital inflows, support the rupee and improve liquidity in the banking system.
Bank shares have rallied in recent weeks following the announcement, as investors bet the regulator’s support will help increase lenders’ margins and feed into profits. Analysts estimate the measure could bring in around $50 billion from abroad, with a significant share expected to come from the Gulf region, followed by Southeast Asia, Bloomberg News reported.
RBI allows banks to give loans for FCNR deposits
In another move to bring in more money to the country, RBI clarified last week that Indian banks and their overseas branches can to a non-resident, or issue a guarantee in favour of foreign lenders against foreign currency non-resident deposits (FCNR) 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 earlier, citing people familiar with the matter.
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 HDFC 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.