Rajan reforms to fuel $10-bn FCNR inflows

Written by fe Bureau | Mumbai | Updated: Sep 6 2013, 10:27am hrs
A day after Raghuram Rajan, the new Reserve Bank of India (RBI) governor, offered incentives for banks to raise dollar funds and in turn help bridge the current account gap, bankers feel that up to $10 billion could be raised through foreign currency non-resident (FCNR) deposits while banks have headroom to raise an additional $30 billion as part of their Tier-1 capital ratios.

On Wednesday, the RBI raised the limit on overseas borrowing by banks to 100% of their unimpaired Tier-1 capital, as against 50% earlier. The central bank also offered a 100 basis points discount on the swap rate if banks chose to bring this borrowing back to India.

This is a good move and a positive signal. Expect good demand from investors if banks go overseas to raise capital, said Hemant Contractor, managing director in charge of international operations at State Bank of India.

Indian banks can currently raise short-term funds of 1-3 years in the overseas market at 100-150 basis points over the London Interbank Offered Rate (Libor). This cost, however, gets magnified when the cost of swapping dollars into rupees for the life of the transaction is accounted for. The current swap rate is 6-8% ,which when added to the cost of raising funds makes it unviable for banks. However, the mathematics of raising overseas funds becomes more favourable now, with the RBI offering a 100 bps discount to the market swap rate.

While the overseas market is challenging currently, it should be possible to raise short-term money at an overall cost of 8.5-8.75% after accounting for the 100 bps discount offered by the RBI on swap costs. That will make it viable for banks to raise funds overseas and deploy them back home, explained Ashish Parthasarthy, head treasurer at HDFC Bank.

The countrys top banks have currently raised under 45% of Tier-1 capital through overseas borrowings, estimates Kotak Securities. This leaves banks with a headroom to raise an additional $38 billion since they are now allowed to raise 100% of Tier-1 capital through overseas borrowings.

Not all banks will rush to raise funds overseas. Banks that are in need of liquidity and find that availing of it domestically is difficult may look at this window, SBIs Contractor said.

Currently, even the 50% limit is not utilised, but the 1% discount on the swap rates will make it more viable for banks to bring in funds under this window, said Contractor. Speaking for SBI, we have not had any liquidity issues. However, with this incentive, we can consider whether it makes sense to go overseas, he added.

VR Iyer, chairperson and managing director, Bank of India, too finds no urgent need for liquidity, though he agrees that this move will be helpful for the banking system to bring in more dollars.

Smaller banks more reliant on wholesale funding may be among the first to tap the window. Banks like Yes Bank and IndusInd Bank which have seen increase in wholesale funding costs could now look to raise cheaper dollar funds overseas, depending on global market conditions. Bankers estimate that up to $5 billion could flow in through this route in the near term.

They (RBI) are reversing conventional wisdom which says that you should hike rates to protect the currency. Instead, they are effectively lowering the cost for Indian banks to raise money abroad, drawing in dollars, and in turn, also keeping domestic cost of funds in check. In theory with this, no bank should offer 8.5-9% for domestic deposits, said Jaideep Iyer, group president- financial management, Yes Bank.

In response to the RBIs moves, bank stocks surged in trade on Thursday with the Bank Nifty an index to top bank stocks gaining 9.46% during the day.

Meantime, the central bank also announced a special window for foreign currency non-resident (FCNR) deposits with a duration of three years and above, by offering banks a fixed swap rate of 3.5%.

Lenders say this measure will revive their interest in FCNR deposits, which were earlier seen as too expensive. Earlier, the RBI had partially deregulated such deposits by offering a bigger spread of 400 bps over Libor to customers as compared with 300 bps offered earlier, allowing banks to increase their deposit rates.

The higher deposit rate and swap cost meant that the deposits were too costly for banks to raise and deploy domestically. However, with the RBI now offering a fixed swap rate much lower than the market rate, banks with foreign presence like SBI and ICICI Bank among others, may look at aggressively marketing this product.

We were earlier offering 6-7% for swap costs, this has now become fixed at 3.5%, allowing us to get funds at cheaper rate through the FCNR window, said A Surendran, head- retail and international business, Federal Bank.

As per an estimate by Morgan Stanley on Thursday, the FCNR window may bring in dollar inflows worth an additional $5-10 billion. Another estimate by JM Financial, puts this number at $12 billion over the next three months.

FCNR deposits stood at $15 billion as on June 30, 2013 a fraction of the total $70 billion outstanding in overall non-resident indian (NRI) deposits.

In terms of quantum, the FCNR facility should be able to draw in more funds. In terms of timing, the banks will probably be able to raise money more quickly, said Jaideep Iyer of Yes Bank.