Finance Minister Nirmala Sitharaman will meet public sector bank (PSB) chiefs on Monday to review the progress of the Reserve Bank of India’s (RBI) special scheme to mobilise foreign currency deposits to support the rupee, sources told FE.
The meeting comes a month after the RBI relaxed regulations governing Foreign Currency Non-Resident (Bank) [FCNR(B)] and Non-Resident External (NRE) deposits.
The central bank has introduced a concessional swap facility and will bear the entire hedging cost for deposits with a maturity of 3-5 years. It is also open to banks providing an SBLC (standby letter of credit) to lenders of deposit customers. This would help depositors leverage their capital and boost their returns. The RBI package allows unlimited leverage against eligible deposits and permits Indian banks to extend loans to non-resident Indians (NRIs) through their overseas branches.
Banks have raised FCNR (B) deposit rates by 200-300 basis points to 5.25-7.13%, making the product more attractive. State Bank of India is understood to have mobilised more than $1.5 billion so far and others are confident about the initiative, sources said. The pace of inflows has been gradual as banks and depositors work through operational and funding arrangements. “A level of fund flow has started. It is not a flood of money, but the process has begun,” an official said. He added that depositors are still in the process of tying up loans from banks to park in FCNR (B) deposits in India.
Micro-Structuring Hurdles
“The groundwork on our side is complete. What is taking time is the structuring at the overseas end,” the official said, adding that some foreign banks have already started increasing lending rates in response to higher demand. Officials expect that foreign deposit inflows will accelerate over August and September.
Experts believe the FCNR(B) scheme could bring in $50-60 billion, with a significant portion expected through leveraged loans. The window for mobilising deposits remains open until September 30.
“Between August and September is when significant amounts should come in. Most of the preparatory work is now behind us,” the official said, adding that there are no plans at present to extend the scheme beyond September.
Target Pool
According to another official, the mobilisation drive is expected to be led by State Bank of India, Bank of Baroda, Canara Bank, Punjab National Bank and, to some extent, Bank of India because of their overseas presence and large NRI customer base.
Although all banks are allowed to mop up FCNR(B) deposits, those without an extensive international network would need to team up with larger lenders that have overseas operations to source deposits.
“No bank would want to remain outside the scheme. It is an opportunity that everyone would like to cash in on in some way,” the official said.
Announced on June 5, the RBI package is aimed at boosting foreign exchange inflows, improving dollar liquidity and supporting the rupee. The measures remove interest rate caps on fresh FCNR(B) and NRE deposits until September 30, exempt FCNR(B) deposits from Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR) requirements, and introduce a special swap facility under which the central bank bears the full hedging cost for fresh three- to five-year FCNR(B) deposits mobilised between June 8 and September 30.
The initiative is modelled on the FCNR(B) mobilisation scheme introduced during the 2013 external sector stress but has been adapted to current global market conditions.