A surge in leveraged trades involving FCNR(B) deposits is likely to have propelled loans against fixed deposits to their fastest growth rate in more than three years, with outstanding advances jumping 43.2% year-on-year to ₹2.04 lakh crore in August, according to Reserve Bank of India (RBI) data. The last time growth was higher was in June 2023, when such loans had risen 47%.
Advances against fixed deposits rose by around ₹42,750 crore in just one month, from ₹1.62 lakh crore at the end of July. Compared with August last year, when outstanding advances stood at ₹1.43 lakh crore, the increase was around ₹61,500 crore.
“My sense is that a large part of this is driven by the various leveraged trades which have been done by NRIs on these FCNR(B) deposits,” said Prakash Agarwal, Partner at Gefion Capital.
Under such transactions, an NRI depositor can borrow against an FCNR(B) deposit and redeploy the borrowed funds into deposits, effectively leveraging the original deposit. Agarwal expects advances against fixed deposits to rise significantly further in September, as more such transactions get reflected in the data.
After the Reserve Bank of India allowed leverage against deposits, banks were providing leverage upto 9 times to customers.
Sachin Sachdeva, Vice President and Co-Group Head, Financial Sector Ratings at ICRA, also pointed to FCNR(B)-linked leveraging as a possible reason for the sudden spike. Banks provided leverage against deposits, with the borrowed funds being deployed back into FCNR(B) deposits, he said.
The spike coincides with a flood of FCNR(B) money into the banking system under the RBI’s special window. Banks mobilised $132.98 billion through the facility by August 31, following which the window was closed ahead of schedule.
However, the precise contribution of leveraged FCNR(B) transactions to the surge cannot be established from the available data. The RBI’s classification of advances against fixed deposits includes loans against FCNR(B), NRNR and other deposits, but does not provide a separate break-up for individual categories.
Despite the sharp rise, loans against fixed deposits remain a tiny part of banks’ overall loan books. At ₹2.04 lakh crore, they accounted for less than 1% of overall bank credit of around ₹224 lakh crore at the end of August.
Beyond FCNR(B)-linked trades, loans against FDs are generally used to meet short-term liquidity needs. Instead of prematurely breaking a longer-tenure deposit, a depositor can borrow against it while allowing the FD to continue earning interest, Sachdeva said.
Such loans are also considerably cheaper than unsecured personal loans because the deposit acts as collateral. But they are less attractive for longer-term borrowing because the interest charged on the loan exceeds the return on the underlying deposit, creating a negative carry.
According to Paisabazaar, loans against fixed deposits are typically priced 50-200 basis points above the applicable deposit rate. SBI, for instance, charges 100 basis points above the applicable time-deposit rate.