Mumbai: HSBC, State Bank of India (SBI) and ICICI Bank garnered half of all inflows under the Reserve Bank of India’s (RBI) deposit incentive scheme to attract dollars and strengthen the rupee, official data showed.
The new FCNR scheme allows non-resident Indians (NRIs) to make leveraged and unlevered deposits at Indian banks with the central bank taking the hedging risk, offering the potential for high returns. FCNR stands for foreign currency non-resident account and allows NRIs to keep fixed deposits in India in foreign currency. The scheme was announced on 5 June and rolled out three days later, running till the end of September.
Presenting data on the scheme’s deposit inflows in the Parliament on Monday, junior finance minister Pankaj Chaudhary said that as the fresh deposits mobilized by banks will be swapped with the RBI, it is expected to increase the foreign exchange reserves as well as the banking system liquidity after the first leg of the transaction, and the same will be reversed on maturity.
“The increase in foreign exchange reserves and banking system liquidity will depend on the total amount of foreign currency mobilized under the forex swap facility during the period,” said Chaudhary.
The data presented in the Parliament shows the amount of outstanding FCNR deposits on 5 June—when the scheme was announced—and where it stood on 30 July. For the banking sector, the difference between the two is $28 billion. This is the net number and would account for withdrawals as well. Interestingly, RBI said in a statement on 1 August that banks have received $36.7 billion under this route till 31 July.
A similar effort in 2013 had raised $26 billion.
While for HSBC, the outstanding FCNR deposits rose $6.1 billion, for SBI and ICICI Bank, the increases were $4.1 billion and $3.7 billion, respectively. Other banks that raised over $1 billion include Standard Chartered Bank ($1.9 billion), Kotak Mahindra Bank ($1.7 billion), Axis Bank ($1.6 billion), HDFC Bank ($1.4 billion), and Bank of Baroda ($1 billion).
Mint reported on 15 July that HSBC was offering non-resident Indians (NRIs) leverage, or the use of borrowed funds to enhance returns, of up to 19 times their own capital to create FCNR deposits through its GIFT City branch. This was touted as the largest such leverage offered by banks under the scheme. The leverage structure allows customers to pledge a relatively small amount of their own capital and borrow the balance from the bank to create a much larger FCNR(B) deposit.
Public sector banks got $8.8 billion under the scheme, private sector banks $10.7 billion and foreign banks $8.4 billion. The remaining came into small finance banks and cooperative banks, the data showed.
Apart from the FCNR scheme, the RBI had also announced incentives to encourage foreign currency borrowings. Chaudhary said on Monday that in order to ensure the effectiveness of the schemes, various factors such as prevailing market conditions, interest rate differentials, expected returns for investors, hedging costs and compliance requirements were considered.
“The potential cost of providing the swap facility would depend on the quantum of foreign exchange mobilized, the maturity of the swaps and exchange rate as well as the forward premia at the time of the swap,” said Chaudhary.
Analysts are bullish on the prospects of the RBI schemes. Suresh Ganapathy, managing director and head of financial services research at Macquarie Capital wrote to clients on Monday that at the current rate of $10 billion per week run rate of FCNR flows, and considering the deadline is 30 September, and 31 December for the foreign currency borrowing windows, India will comfortably be past the initial expectations of $80 billion.
Goldman Sachs said in a note on 31 July that the RBI’s June measures have attracted strong foreign currency inflows. The note said that in an interview (to The Hindu Business Line), RBI governor (Sanjay Malhotra) highlighted that banks have garnered around $32 billion of inflows under the RBI’s swap facilities, with the deposits under the FCNR(B) scheme accounting for a bulk of the inflows.
“However, the corresponding increase in the RBI’s foreign currency assets (FCA) has been more modest, thus far, at around $8 billion, reflecting the lag between banks getting deposits and subsequently swapping these inflows with the RBI,” the note said.
