The foreign bank will conduct its own due diligence on a domestic bank’s NRI customer before extending a loan to them
Small and mid-sized private sector banks, which have no overseas or GIFT City presence, may find mobilising fresh 3-5 year Foreign Currency Non-Resident (Bank) deposits under the RBI’s limited period swap window a bit of a challenge.Having no presence either overseas or in GIFT (Gujarat International Finance Tec) City, India’s only International Financial Services Centre (IFSC), is likely to constrain their ability to provide leverage to these banks’ Non-Resident Indian (NRI) customers.Larger banks with operations overseas or in GIFT City or both are better placed in this regard as they can offer leverage support to their NRI customers, encouraging them to channel the proceeds of such loans into fresh FCNR (B) deposits with them.There are 33 banks currently operating in the IFSC, comprising 15 foreign banks, 10 private sector banks and 8 public sector banks. Banks that do not have either overseas or GIFT City presence include CSB Bank, City Union Bank, DCB Bank, Dhanlaxmi Bank, Jammu & Kashmir Bank, Karnataka Bank, Karur Vysya Bank, Tamilnad Mercantile Bank, Bandhan Bank and all small finance banks.Bankers caution that even if small and mid-sized domestic private sector banks offer their NRI customers stand-by letter of credit (SBLC) to help them raise SBLC-backed loans from foreign banks and place the proceeds with them as FCNR (B) deposits, it could lead to a roll-over risk (either the depositor will be unable to refinance maturing debt or may be able to raise fresh debt only at a higher interest rate).The reason is that a foreign bank will be willing to offer a loan only for a year or so to an NRI based on the strength of SBLC issued by a domestic bank, whereas the proceeds of the loan will be placed as a FCNR (B) deposit for a minimum 3-years. So, the NRI may face a loan roll-over risk and the domestic bank may face a SBLC invocation risk.Further, the foreign bank will conduct its own due diligence on a domestic bank’s NRI customer before extending a loan to them. This is despite the comfort provided by the domestic bank by way of SBLC, leading to a delay in loan sanction and disbursement and consequent placement as a FCNR (B) deposit with the Indian bank. So, the customer may gravitate larger banks, said a senior executive of a private sector bank.Credit riskDeep Mukherjee, Partner, BCG India, said, “FCNR(B) inflows are likely to gravitate towards larger, highly rated banks, as overseas depositors will factor in credit risk and ratings when deciding where to place their money. Lenders whose international ratings are likely to be in sub-investment grade will find it challenging to raise funds, unless a significantly higher rate is offered.”India–US 3–5 year yield spread has also narrowed sharply from roughly 650–800 basis points (bps) in 2013 to about 200–220 bps currently (India hovers around 6.2–6.4 per cent compared to US at 4.2 per cent), reducing the carry advantage for investors and limiting the likelihood of meaningful inflows into sub-investment-grade debt.NRI customers are looking for leverage facility as this will help them park a large sum in FCNR (B) deposits. For example, a large bank is offering up to nine times the deposit amount against a FCNR (B) deposit of $1 million, with the loan proceeds of $9 million and the original deposit getting placed with it as a $10 million fresh deposit.Banks have revised interest rates on these deposits (denominated in US Dollar/USD) to 5.25-7.00 per cent thereabouts for a 3-5 year tenor from about 3 per cent earlier, after the RBI announced on June 5 that it will bear the full hedging cost for banks raising fresh 3–5-year FCNR (B) deposits till September 30, 2026. RBI also exempted the deposits so raised from statutory pre-emptions such as cash reserve ratio and statutory liquidity ratio.To make up for the constraint in offering leverage, small and mid-sized domestic banks are dangling the carrot of higher interest rates on FCNR (B) deposits.For example, Bandhan Bank is offering 7.1 per cent interest rate to NRI customers placing FCNR (B) deposits of $1 million or more for ai 3-5 years tenor and 7 per cent on deposits up to $1 million.Depending on the tenor (3-5 years), SBI is offering an interest rate of 5.50 per cent to 6.00 per cent to NRI customers placing FCNR (B) deposits of $1 million or more and 5.25 per cent to 5.75 per cent on deposits up to $1 million.Published on July 6, 2026
