Foreign banks offer to fund NRIs' dollar deposits in India

Foreign banks have proposed to lend to their wealthy non-resident Indian clients, helping them to deposit dollars back home, offering the dollar-strapped government another alternative for dollar funds.

The facility, however, is not new as Indian expatriates in the member countries of the Gulf Cooperation Council (GCC) are already leveraging bank loans to boost their rupee holdings back home in India.

In fact, according to money exchanges and banks in the Gulf, personal loans by NRIs have touched an all-time high as they bid to take advantage of a record fall in the value of Indian rupee against other currencies, including the US dollar.

Foreign banks now see an arbitrage opportunity in lending overseas against dollar deposits in India while for dollar-strapped India, this would offer another front for rupee defence.

Foreign banks can earn 3-4 percentage points over Libor for their dollars, while local banks in India can swap those dollars into rupees more cheaply than market rates using the RBI swap window.

Reports said foreign banks, including Citi, DBS and Standard Chartered Bank, have proposed to finance the bulk of these dollar deposits.

The loans, however, will only be offered to the richest segment of their private banking clients by providing roughly 90 per cent of the foreign currency deposit placed in India, reports quoting private banking sources said.

Banks will roll out these upfront loans this week, the sources added.

The Reserve Bank of India's (RBI) has already opened a concessional window for banks to swap fresh Foreign Currency Non-Resident (Bank) or FCNR (B) deposit dollar funds in a bid to raise the country's foreign exchange reserves by an estimated $10 billion.

However, to benefit from the RBI's swap facility, banks may have to pay 400bps over and above the Libor/swap rate and the cost of deposit mobilisation for banks might go up to 8.5 per cent on an average.

Still, banks may benefit from the swap as incremental FCNR (B) deposits raised from NRIs have been freed from the requirements of cash reserve ratio and statutory liquidity ratio.

The swap facility, which allows banks to swap their dollar liabilities against FCNR(B) deposits at 3.5 per cent per  annum for three years is available to the banks till 30 November.

The central bank has also increased bank's overseas borrowing limit of unimpaired Tier I capital to 100 per cent, from 50 per cent earlier in order to attract dollar inflows into the country. The borrowing mobilisation can be swapped with the RBI at 100 bps lower than the market rate.

While these moves could help boost capital inflows into the country and possibly reverse the trend of foreign institutional investors (FIIs) selling their holding of securities in India, these might also drive up interest rates, making borrowing abroad a losing proposition.