Banks Are Vying For Non-Resident Deposits Again. Will It Work?
Will banks be as successful in raising non-resident deposits now, as they were in 2013?
Domestic banks are once again campaigning to increase their deposit base from non-resident depositors, in a drive that has been compared to the rush to raise dollar deposits in 2013. Large banks with sizeable non-resident liabilities have started pushing up deposit rates, after the regulator removed certain limitations.
According to bankers who spoke with BQ Prime, unlike 2013, lenders are seeking to raise more non-resident rupee fixed deposits, rather than foreign currency non-resident deposits this time.
Most banks have raised NRE deposit rates by 50-80 basis points over the last week, compared with 5-15 basis points increase in FCNR deposit rates. This is because banks have fewer avenues to deploy foreign currency deposits and did not wish to take on too much foreign exchange risk on their liabilities, the bankers explained.
The customer has to take the exchange risk on NRE deposits, since the foreign currency deposits are converted to rupee. Under FCNR deposits, banks have to take on the exchange risk, if they are unable to deploy the foreign currency deposits.
India's largest private sector lender HDFC Bank announced a special two-day NRI fixed deposit drive over Wednesday and Thursday, where it increased rates by upto 50 basis points, for some deposits. According to an internal note reviewed by BQ Prime, NRE fixed deposits worth Rs 2-5 crore and with tenors longer than a year were being offered at 6.3-6.8% during the drive, compared with 5.75-6.25% offered normally.
Similarly, Federal Bank announced on Thursday that it will offer 6.4% for 15-month NRE fixed deposits under Rs 2 crore and 6.65% for deposits of the same tenor worth Rs 2 and above. These rates are about 80 basis points higher than what was being offered previously, the bank said in a statement.
Lenders including IDBI Bank, Axis Bank and Bank of Baroda have also announced rate hikes for this category of deposits.
"We are expecting to see traction among our NRI depositors who wish to take up the benefit of these higher priced deposits, because normally banks offer similar rates to residents and non-residents," said Ashutosh Khajuria, executive director and CFO at Federal Bank. "Even addressing for the exchange rate, these deposits will earn the depositors a good return, since the interest is tax exempt."
According to Satheesh Krishnamurthy, Executive Vice President and head of the NRI business at Axis Bank, banks are likely to hike rates closer to 6% to attract NRI funds.
"NRI deposits across the banking system were at about Rs 10.5 lakh crore in March, up about 5.5% year-on-year. We expect these deposits to grow at about 7-9% this year," said Krishnamurthy said, adding that Axis Bank's NRI deposit base as of June 30 stood at around Rs 56,000 crore.
While depositors who earn dollar incomes are keen on placing their deposits with domestic banks, NRI depositors from UAE and the Middle East are also likely to deposit more money with domestic banks as their local economies improve on a resurgence in oil prices, bankers say.
NRI deposits, which had increased sharply during the two Covid-19 waves in 2020 and 2021, have started to shrink, according to data available from the RBI.
The rate hikes by banks come after the central bank announced a number of steps to encourage foreign inflows after the rupee weakened against the dollar. The rupee has remained close to Rs 80 a dollar for over a week.
On July 6, the Reserve Bank of India announced that incremental non-resident rupee fixed deposits and foreign currency non-resident deposits raised till Oct. 31 will be exempt from statutory liquidity ratio and cash reserve ratio requirements.
The banking regulator had removed these requirements between September-November 2013 as well. However, then the regulator had also opened a special window for banks, where they could swap their dollar deposits for rupee funds at a fixed rate. At the time, deposits worth $34 billion had been swapped under the window, the RBI had disclosed in a statement.
The lack of a special swap window this time means that fewer banks are interested in raising more FCNR deposits, a senior official at a large public sector bank said, speaking on conditions of anonymity.
Smaller lenders are likely to benefit more, by offering 50-100 basis points more to NRI depositors, since their deposit base is small. However, this is unlikely to add significant value to the broader ecosystem, the banker quoted above said. Without a swap window, the Indian banking system is unlikely to see a large inflow of foreign currency into India.
Even in 2013, individual NRI depositors contributed only about 10-20% of the total foreign currency deposits, with banks and other institutions accounting for the rest, this banker explained.
"Since in 2013, the entire currency risk was being borne by the RBI, banks and depositors were having a field day with these deposits. This time around, the move may have some incremental impact, however, it will not be sizeable," said Anindya Banerjee of Kotak Securities.
