Banks must guard against impending risks
| Photo Credit:
desifoto
The ‘special’ FCNR(B) scheme with concessional swap facility was operationalised on June 8. The RBI Governor, in an interview to this newspaper (July 27), said banks have mobilised $32 billion so far.Going by this trend, the total mobilisation will surpass the target of $50-70 billion by September 30, when the scheme ends.Banks are also likely to step on the gas as the deadline nears. More importantly, since NRIs are awaiting the US Fed rate decision in mid-September, FCNR(B) deposit inflows will likely accelerate towards September-end. Reportedly, there is 70 per cent possibility that the US Fed will hike the rates.Although the RBI did not publish bank-wise data, it is quite likely that those with relatively large overseas network (including in IFSC GIFT City) will garner more deposits.The ‘special’ FCNR(B) scheme has three pillars: (a) higher than normal interest rate, (b) zero-cost swap facility for fresh FCNR(B) deposits mobilised, including deposits renewed upon maturity, for 3-5 years’ tenor and (c) loan facility to the FCNR(B) depositors, or issuance of Standby Letters of Credit in favour of overseas lenders, against FCNR(B) deposits mobilised.Although media discussions have so far focused on the interest rate and the zero-cost swap facility aspects of the scheme, the emerging risks, for banks, from likely disbursement of substantial amount of loans to the FCNR(B) account holders have received little attention.This article discusses scenarios under which banks will likely be exposed to many risks.Likely risksLiquidity risk: Against the backdrop of eroded income base of NRIs in general and those in the US and Middle-East in particular, it is quite likely that the ‘special’ FCNR(B) deposits may be accumulated through the leveraging facility by the high-net worth NRIs, which may fuel ‘concentration’ risk.The ‘concentration’ risk, in turn, may have implications for ‘liquidity’ risk, if the depositor-borrowers intend to withdraw their deposits, prematurely. after the one-year lock-in, or want to repay their loans, fully or partly. This seems plausible if the global interest rates move upwards, particularly after the US Fed increases its rates.In such situations, lenders may have to quickly mobilise funds leading to a scramble for liquidity which, in a volatile market, may not be easy.Banks, no doubt, will earn penalty amount for premature withdrawals, but it should be sufficient to defray the costs of securing liquidity at short notice, at market rates. Therefore, strict conditions may be stipulated to mitigate ‘premature withdrawal’ risk.Default risk: The ‘lien’ on deposits protects lending banks from ‘default’ risk on the principal, but not on the interest due, which may also be substantial, and ruling out no borrower defaulting on timely interest servicing would be too ideal a situation. Timely servicing could falter due to several reasons, especially in today’s volatile global conditions.Without close monitoring, the risk of loan diversion for purposes other than buying FCNR(B) deposits remains a possibility.ALM risk: Three to five years tenor of the ‘special’ FCNR(B) deposits, coupled with the likely premature withdrawal risk, makes ‘Asset Liability Mismatch’ risk probable.Managing the risksIt is hoped that banks have appropriately considered the risks discussed above as well as other risks, if any, while pricing the loans. Otherwise, their ‘net interest income’ will be stressed, and in order to protect it if they consider reducing domestic deposit rates, it may be inequitable to domestic depositors and be viewed unfavourably.That said, the RBI’s step is an extraordinary move aimed at protecting the country’s external sector from the challenging global conditions and, therefore, accommodating the risks is a sine qua non for the entire banking sector.The writer is a former Assistant General Manager (Economist), SBI. Views expressed are personalPublished on July 29, 2026
