Rajan reforms to fuel $10-bn FCNR inflows

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SummarySpace for banks to raise additional $30 billion in Tier-1 capital

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 country’s 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, SBI’s 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

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