by Moiz Mannan
Fret not if you don’t have enough cash to make the most of a weak rupee. Moves by India to strengthen its currency have given NRIs — rich and poor — the opportunity to take advantage of its weakness.
Not surprising, therefore, that rich NRIs have already sent in more than $500m to dollar deposits in Indian and blue collar workers of the state of Kerala alone have remitted in half of this year what they did in the whole of last year.
For the wealthy non-resident Indians, a bunch of foreign banks, who also operate in India, are reportedly set to offer up to 90 per cent upfront financing to make dollar deposits. They would make use of the recently introduced Reserve Bank of India (RBI) window to swap fresh foreign currency non-resident (bank), or FCNR (B), dollar funds. The scheme would be operational up to November 30.
Business Standard reports that last week, Deutsche Bank alone raised about $450m FCNR (B) deposits from about 10 non-resident Indians and swapped it with the central bank.
The funds were mobilised for three years and priced at 3-3.5 per cent a year. The swap window, recently made available by RBI, allowed the bank to convert the dollar funds into rupees at 3.5 per cent. The paper quoted analysts who said had it not been for this facility, the swap cost would have been seven or eight per cent, considering the recent rupee-dollar forward rates.
According to a Reuters report, foreign banks, including Citi, DBS and Standard Chartered Bank are all set to officially launch the special bank accounts this week, offering their wealthiest private banking clients about 90 percent of the foreign currency deposit placed in India.
Although these loans are priced higher than market rates, NRIs benefit because the interest on FCNR (B) deposits is higher than the payments on these loans. The process, as bankers and market participants explains, begins with a foreign bank requesting a non-resident to open a FCNR (B) deposit account with its India unit.
The bank immediately offers the customer a loan against this deposit. The customer uses the loan to create another FCNR (B) deposit account, against which he is again given a loan. The process is repeated eight to 10 times. The customer benefits as he earns more interest on FCNR (B) deposits than he pays on loans against those.
On September 4, the RBI had announced a swap window to attract FCNR (B) dollar funds. “The RBI has been receiving requests from banks to consider a special concessional window for swapping FCNR (B) deposits that would be mobilised according to the recent relaxations permitted by RBI. Accordingly, it has been decided to offer such a window to banks to swap fresh FCNR (B) dollar funds, mobilised for a tenure of at least three years, at a fixed rate of 3.5 per cent a year for the tenure of the deposit,” the apex bank had said.
Government officials have hinted that the RBI move is expected to bring in $15bn-$20bn in a short term measure to pull up the beleaguered rupee. Economists opine that the scheme is in fact a disguised NRI bond without calling it that, because the deposits would be locked in for at least three years. An official bond issue would have entailed questions on international ratings and the fear of under-subscription.
Officials have been quoted off-the-record as informing that the idea of upfront loans was floated in July at a meeting between investment bankers and Raghuram Rajan, who was then with the finance ministry but is now central bank governor. Never mind the motive of the Indian authorities, the fact of the matter is that the NRI investors stand to gain by around 20 percent on their dollar deposits of which they would have put only 10 percent from their pockets. Ten-year Indian government bonds yield about 8.5 percent.
The FCNR (B) scheme is a spin-off of the FCNR accounts, which are term deposits NRIs can maintain in several currencies in banks onshore and earn a fixed rate of interest. It may be mentioned here that last month, the RBI had also freed interest rates on FCNR deposits.
It allowed banks to offer as much as 400 basis points over the London interbank offered rate (Libor) for deposits with maturities between 3 years and 5 years. It exempted these deposits from statutory bank reserves. But under the upfront financing scheme, the banks pool their resources with selected high networth non-residents and place deposits in India, thus creating bigger deposits with each new account.
The low and middle income NRIs on the other hand can utilise the FCNR accounts to make their dollar deposits yield leveraged returns. As for the financing, such NRIs, particularly those in the Gulf, may leverage bank loans to boost their rupee holdings back home in India.
From sending teams overseas and setting up core committees to issuing advertisements, banks based in India are doing everything possible to trying hard to attract NRIs in the Gulf to put money in FCNR deposits. Already remittances this year have zoomed. According to data released by the State Level Bankers Committee in Kerala, the remittance flows have surpassed the year-end targets in the first six months alone.
Non-resident deposits with banks in Kerala has shot up from Rs556.63bn in June 2012 to Rs758.83bn in June 2013, an increase of more than 36 percent year-on-year. The first six months of 2013 witnessed an increase of over 21 percent up from Rs627bn at the end of 2012.
There were media reports that NRIs were borrowing money from credit cards and bank loans and pumping them back to the country to make arbitrage income, as interest rates are low in those countries coupled with the steep plunge in the rupee. Banks in the Gulf offer lucrative personal loan schemes. The average interest rate on loans in these places range from five to six per cent.