offered to swap FCNR deposits of maturities above 3 years into rupees at a fixed rate of 3.5 per cent, less than half the prevailing market levels. That swap window is available until Nov. 30.
Investors need to have just 10 per cent of the amount of deposit they intend to place, and can earn nearly 20 per cent on their dollars.
Foreign banks can earn 3-4 per centage points over Libor for their dollars, while local banks in India can swap those dollars into rupees more cheaply than market rates using the central bank swap window.
Banks, both foreign banks with presence in India and local ones, have made a huge push to raise money from India's vast diaspora since the RBI relaxed rules on FCNR deposits. The FCNR deposits can be used as collateral to borrow overseas.
The difference in the new upfront financing scheme is that the banks pool their resources with non-residents and place deposits in India, thus creating bigger deposits with each new account.
One private banker with an American bank said the practice had been prevalent in the 1980s and 1990s and widely used by banks in 2000, when they raised $5.5 billion through an India Millennium Deposit scheme.
Indian authorities discouraged the practice thereafter because they were worried about hot money flows, he said. The Reserve Bank of India did not immediately comment.
One source at a European bank said banks were cherry-picking clients for this product.
"For every billion dollars I place in India, the bank has to fund $900 million," he said. "We can't allow just any customer to piggyback on us, only a handpicked few."
Still, bankers said the scheme was not without hurdles.
For one, the effective cost of the rupee funds would be about 8.5 to 9 per cent, he said, which limited the investment options. Ten-year rupee government bonds yield 8.5 per cent.
Secondly, there were unresolved issues of how much credit exposure foreign banks wanted to take on their India branches, and who would place the collateral for the loans and take the risk of premature withdrawal of the deposit by the non-resident Indian.
Lastly, investors placing millions