Rising borrowing costs from the RBI's FCNR(B) deposit scheme are pushing loan rates up amid fierce competition, with banks leveraging foreign currency inflows and negotiations ongoing.
The rush to capitalise on the Reserve Bank of India’s FCNR(B) deposit scheme is already pushing up borrowing costs, with leveraged loan rates rising 20-25 basis points as banks compete intensely for a window that bankers estimate could generate substantial foreign currency inflows.
The rate pressure is emerging faster than many expected. Floating rate loans against FCNR(B) deposits are currently available at 4.90-5.25%, but once converted into fixed-rate instruments for three or five years, the cost climbs to 5.25-5.50% after accounting for the term premium.
“Loans are now available at floating rates of 4.90-5.25% for depositors. Once these are converted into fixed-rate loans for three or five years, the cost rises to 5.25-5.50% after adding the term premium,” said a senior public sector bank executive who has received preliminary quotes from foreign banks.
Bankers are clear, however, that rates cannot rise much further without undermining the scheme’s fundamental logic. The interest rate arbitrage — the gap between what depositors earn on dollar deposits abroad and what they can earn by parking funds in FCNR(B) accounts — must remain sufficiently attractive, or the deposits simply will not come.
“Domestic deposit rates will act as a ceiling. Banks will also have to assess how effectively they can deploy these foreign currency funds into the domestic credit market through rupee lending,” said a banker at a state-run lender.
o attract those deposits, Indian banks have already moved aggressively, raising FCNR(B) rates by 200-300 basis points to a range of 5.25-7.13% for maturities of three to five years.
RBI provides additional tailwind
The RBI has provided additional tailwind by agreeing to bear the entire hedging cost on fresh FCNR(B) deposits mobilised between June 8 and September 30 — a concession that makes dollar deposits substantially more attractive and removes a significant cost burden from banks.
With lending spreads narrowing as deposit rates rise, the business is increasingly a volumes game. Margins are thin; the money is in scale. Even banks with existing overseas operations are now looking to supplement their own resources by borrowing from foreign lenders, using those lines to mobilise larger FCNR(B) deposit books.
