To be sure, even in the absence of regulatory clarity on financing, several banks, including the State Bank of India (SBI), are already offering a structured leveraged product that allows customers to raise a foreign currency demand loan to create an FCNR (B) deposit, with the deposit itself pledged as collateral with the lender.
“There is no indication yet the RBI has a problem with NRIs borrowing overseas and placing FCNR deposits,” said a banker familiar with the matter. “The question is around the structure when the lending branch and deposit-taking entity belong to the same banking group.”
Banks want clarity on whether an overseas branch of the same bank can lend to an NRI, who then places the proceeds back as an FCNR(B) deposit with the bank’s Indian entity.
Also Read: RBI temporarily eases FCNR(B), NRE deposit rate norms to attract overseas funds
Some bankers believe existing RBI rules do not permit banks to create a deposit by lending to the same customer.
Hence, the structured product being offered by some banks could violate the master circular on deposit mobilisation, unless there is regulatory clarity on the subject, they said.Commercial banks want explicit regulatory comfort before marketing such leveraged products widely. The central bank has already offered lenders sufficient latitude on hedging costs to help draw funds from the diaspora.
Bankers say a clarification from the regulator could accelerate the use of the leveraged FCNR structures, helping banks attract larger NRI deposits before the RBI’s special window closes in September. The RBI’s bespoke swap facility, which came into effect on June 8, is open up to October 16 for deposits mobilised until September 30.
A loan document reviewed by ET shows SBI has launched a product overseas that allows customers to take a foreign-currency demand loan that can be used to fund an FCNR(B) deposit. The bank creates an irrevocable lien on the FCNR(B) deposit, which serves as collateral for the loan.
Banks Seek RBI Clarity on FCNR
“This product has been launched selectively abroad after ensuring there is nothing against regulations,” said a senior SBI official. “There was some ambiguity over whether leverage will be allowed, but after due checks it is clear the RBI has not barred a leveraged deposit in the latest FCNR (B) scheme. Now that SBI has launched it, others will follow.”
The deposits are locked in for a minimum of one year. Upon the recall of the loan because of any reason, the bank has the right to liquidate the deposits and use the proceeds to recover its money, the document said.
Emails sent to the RBI and SBI remained unanswered until the publication of this report.
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While the structured product will be available to all classes of potential investors, the ultimate use would still involve traditional underwriting — or the credit profile of the NRI borrower.
Borrower Profile
“The whole idea of the government is to bring in more and more dollars, which will not happen if banks do not allow customers to borrow and invest in deposits,” said another senior public sector bank official. “All banks will offer this facility abroad, but the leverage will depend on a person’s credit profile. The loan will also be advertised more prominently abroad.”
Bankers said that the fact that this kind of leverage was allowed in 2013 means that the RBI will not do anything differently this time, although some bankers are wary because regulations have changed since 2013 and RBI has also tightened norms to not allow banks to give loans and make deposits out of such funds.
“The point is whether a large bank like SBI can raise money from its overseas or GIFT City branch through an ECB and lend it to a client in New York, who in turn will park this as a deposit as FCNR (B) in Mumbai,” said a senior treasury executive at a private sector bank. “Banks want the RBI to explicitly say that this is allowed so that they can advertise their products freely.”
Banks could offer up to nine times leverage on a $1 million deposit, promising them a 14.08% yield on deposits after leverage, compared with the upfront offer of a 6% dollar-based interest on a five-year lock-in.
This is how the math could work, assuming there is a potential client with $1 million in ready cash in the US. SBI New York can lend $9 million to this person, allowing her to leverage her deposit nine times, meaning she now has $10 million as the FCNR (B) deposit.
If SBI New York has borrowed the money at 5% overseas and lends to this client at 5.5%, the branch makes 0.5% in profits. This client brings the money to India and deposits it as a FCNR (B) at 6%, which means she is also making half a percentage point more by borrowing the funds.
If the leverage is extrapolated over a five-year period, the client earns 6% on her own $1 million and 0.5% on the rest of $9 million, which could give her 14% returns over a three-year period.
‘Not So Simple’
Bankers said though there are doubts on whether banks can lend and take the same money as deposits, the norms clearly allow for a standby letter of credit (SBLC) to be issued by banks to fund other banks’ clients.
But the SBLC system is not so straightforward.
“For example, SBI New York can issue a letter of credit to a client of Bank of America (BOfA) guaranteeing that if BoFA lends to the client and she defaults, SBI will make good the losses. That money will be brought to India as a FCNR (B) deposit,” said a senior executive at a foreign bank.
“But BoFA must be comfortable with the client’s credit profile because the bank is lending to the client. BoFA will have to do a KYC and take that credit risk even though it has the guarantee from SBI,” said this foreign bank executive. “BoFA will also have to ensure that the client ultimately deposits in the SBI account and not some other bank because the guarantee is issued by SBI. All this will be time consuming and need operational finetuning which will be difficult to implement in developed countries like the US, the UK and Canada.”