Foreign Banks' Exposure Limits and FCNR (B) Scheme
The Reserve Bank of India's concessional foreign currency non-resident bank, or FCNR (B), scheme relies heavily on the exposure limits of foreign banks to India and individual Indian lenders. These limits are crucial determinants of potential inflows under the scheme.
Key Factors Influencing the Scheme
- Leverage on Overseas Lenders:
Indian banks depend on foreign banks for leverage due to their limited overseas balance sheets. Foreign banks, with lower funding costs, are in a better position to provide financing via standby letters of credit (SBLCs) issued by Indian banks. - Deposit Mobilization:
Initial estimates suggest that deposit mobilization is increasing, with banks likely to tweak deposit rates and tenors to attract more deposits as the deadline approaches. Proposed tenors include standard structures as well as specific ones like 555 and 666 days.
The 'India Line' and Exposure Limits
- India Line Definition:
The 'India line' refers to a foreign bank's internal limit on exposure to India, which varies across banks. - Current Exposure Support:
Most large foreign banks can support FCNR (B) inflows of $50-60 billion, but exceeding this may require an increase in these exposure limits. - SBLC and Leverage:
Under the scheme, NRIs place funds in an FCNR (B) deposit, which is backed by an SBLC, allowing foreign banks to provide leverage up to nine times the deposit. These SBLCs count towards foreign banks' exposure limits.
Advantages for Foreign Banks
- Funding Cost Advantage:
Compared to the overseas branches of Indian banks, foreign banks can lend at a spread over US Treasury yields, making leverage offerings more economically viable. - Potential Inflows:
Despite varying internal policies, foreign banks are crucial for significant inflows, with estimates suggesting $40-50 billion is achievable under current conditions.
Expected Trends and Mobilization
- Interest Among NRIs:
Strong interest is anticipated from NRIs, with major deposit inflows expected in August and September as banks finalize leverage arrangements and intensify outreach. - Timeline for Mobilization:
Significant momentum is expected from the second half of July, with leverage-led inflows gaining traction post-July 15-20.
Conclusion
- The successful mobilization of funds under the FCNR (B) scheme hinges on foreign banks' exposure limits and their ability to offer competitive leverage solutions compared to Indian banks.
