Banks Free To Invest Long Term With FCNR-B

Mumbai, April 29: | Updated: Apr 30 2002, 05:30am hrs
The Reserve Bank of India (RBI) has allowed long-term investments of funds mobilised under the foreign currency non-resident (FCNR-B) deposits. The move, will help banks to avoid asset-liability mismatches. The move is also in consonance with risk management guidelines put in place by RBI.

The RBI has also reduced banks’ interest rates offered for FCNR-B deposits. Banks now have to offer FCNR-B deposit rates at 25 basis points below to Libor/Swap rates for the corresponding maturities. This move is in view of the prevailing international low interest rates, and will help reduce banks’ cost of FCNR-B deposits. At present, banks are free to accept FCNR-B deposits for a maturity period of 1-3 years and to offer fixed and floating rates, subject to the ceiling of Libor/Swap rates.

Said Bank of Baroda’s chairman and managing director PS Shenoy: “Capping the interest rates on FCNR deposits to 25 basis points below Libor/Swap will help banks in containing the cost of such funds. The management of FCNR funds will be further aided by the much awaited freedom to invest these funds in long term fixed income instruments of overseas centres”.

The RBI has permitted banks to invest their FCNR-B deposits in longer term fixed income instruments. However, such investments are subject to appropriate rating prescribed for the fixed income instruments. Moreover, banks have to obtain prior approval from their boards with regard to tenor of instruments along with relevant rating and likely cap on such investments within the asset-liability management guidelines in force.

Currently, banks are allowed to accept FCNR-B deposits for a period of 1-3 years. On the asset side, however, there are certain restrictions on deploying these funds: banks can lend funds to Indian residents for their foreign exchange requirements or for financing of joint ventures or wholly owned subsidiaries set up by resident corporates. Besides, banks can also invest such funds in certain money market instruments which satisfy prescribed rating.In view of restrictions on the deployment of funds, the asset side could be shorter in tenor than the liabilities side resulting in asset-liability mismatches.