- RBI allows banks to lend against FCNR(B) deposits by marking a lien on them
- RBI bears hedging cost only on principal, not interest, for FCNR(B) swap scheme
- Jefferies notes FAQs ease operational issues but rates may limit deposit inflows
Banking stocks could remain in focus after brokerages highlighted the potential benefits of the Reserve Bank of India's latest clarifications on the FCNR(B) deposit swap scheme, although analysts believe banks may still need to offer more attractive rates to meaningfully boost deposit mobilisation.
According to the FAQs released by the central bank, banks will be permitted to provide loans to non-resident Indians (NRIs) against their FCNR(B) deposits. However, lenders will be required to mark a lien on the underlying deposits to secure such loans.
The RBI also clarified that under the special swap facility, it will bear the hedging cost only on the principal amount of eligible FCNR(B) deposits and not on the interest component. The clarification is aimed at helping banks accurately price deposits mobilised under the scheme.
ALSO READ: FCNR(B) FAQs: RBI Addresses Queries On Swap Facility, Permits Loans On Deposits
Jefferies said the RBI's FAQs address two key concerns that had limited participation in the scheme. The first is the ability of Indian banks and their overseas branches to extend loans or issue standby letters of credit (SBLCs) against FCNR(B) deposits mobilised under the scheme. The second is the flexibility to offer differentiated deposit rates based on tenor and deposit size.
According to the brokerage, both measures are supportive for FCNR(B) mobilisation as they reduce operational friction and improve flexibility for banks. However, Jefferies cautioned that current FCNR(B) rates and investor returns remain relatively low, which could limit deposit inflows. The brokerage expects banks to raise rates, particularly for large-ticket three-year deposits, and will closely monitor pricing changes across lenders.
Citi was more bullish on the implications of the RBI's clarification, describing it as a fundamental shift in the nature of the scheme.
The brokerage said the updated framework effectively transforms FCNR(B) deposits from a cost-arbitrage instrument into a broader balance-sheet expansion tool for banks. By explicitly permitting lending and SBLC issuance against FCNR(B) deposits, the RBI has significantly widened the scheme's utility, Citi noted.
The brokerage also highlighted that banks can now mark liens on FCNR(B) deposits linked to loans, reducing counterparty risks and enabling new lending structures for high-value NRI customers.
Citi believes the changes, combined with exemptions from CRR and SLR requirements and favourable liquidity coverage ratio (LCR) treatment, create a significantly stronger proposition for Indian banks. It added that the scheme could potentially attract larger foreign deposit and borrowing flows than the FCNR mobilisation drive seen in 2013.
However, Citi noted that banks with stronger global distribution networks, deeper overseas reach and the ability to move quickly are likely to benefit the most.
ALSO READ: RBI Unveils Five-Point Plan To Get Dollars Into The Country
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