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Informist, Tuesday, Jul. 14, 2026

 

By Meera Nair and Aaryan Khanna

 

MUMBAI – The tensions rising once again in West Asia have begun to weigh on banks' mobilisation of foreign currency non-resident deposits, complicating the inflows at a time banks have offered higher returns to attract customers, eight officials from various lenders said. A delay in rolling out the leverage scheme has already slowed potential inflows over a month after the Reserve Bank of India announced incentives to muster foreign capital. 

 

Officials at various banks said inflows have remained positive but have fallen short of expectations as many non-resident Indians employed in West Asia are delaying long-term deposit decisions amid heightened geopolitical uncertainty. Indian expatriates are concerned about their employment prospects. Some have been laid off as hostilities escalate. The US and Iran have exchanged strikes on each other's assets over the past almost a week despite their agreement in June to extend the ceasefire first announced in April, with Tehran also launching attacks on US allies in the region in recent days.

 

This has led to non-residents avoiding the three- to five-year FCNR(B) deposit scheme, bankers said. The central bank had last month introduced a swap facility to absorb the entire hedging cost on such deposits, but the scheme has a minimum lock-in of one year. Lenders have reported strong enquiries by customers but estimate that inflows across the banking system have added up to only about $10 billion so far. The scheme, which runs until Sept. 30, is expected to draw around $50 billion in deposits and foreign currency into India, according to economists.

 

"We would have received almost 10 times the inflow by now had these tensions not escalated," an official who handles deposits by non-resident Indians at IndusInd Bank told Informist. "Customers who had enquired about FCNR(B) deposits, particularly highly paid employees in directorial roles, have been laid off after tensions escalated," the official said. "Instead of placing FCNR(B) deposits, many are keeping their money in regular fixed deposits." Regular deposits can be withdrawn, albeit with a lower rate of interest and a penalty, in case of need. FCNR(B) deposits have a lock-in that cannot be worked around.

 

Scheduled banks in India and some foreign lenders have raised interest rates on dollar deposits under the FCNR(B) scheme by over 300 basis points in some cases after the RBI launched the scheme as the RBI's swap window allows them to price these deposits on a par with domestic liabilities. The regulator did away with caps on offering deposit rates in June, which was seen as a push to maximise inflows. 

 

IndusInd Bank has raised interest rates on dollar-denominated foreign currency non-resident bank deposits by 290-315 basis points to 6.60-6.75% for three- to five-year tenors. Ujjivan Small Finance Bank increased its FCNR(B) deposit rate for 3-5 years to 7.50% in June, the highest across all banks. Large public- and private-sector lenders are offering around 6.00% on these deposits, while foreign banks are offering 5.60-6.00%.

 

"The flow is there, but it is impacted," said a treasury official at another private-sector bank, which has a large NRI client base in West Asia. The official added that banks are expecting stronger mobilisation in the coming weeks through leveraged deposits, which they are still in the process of setting up. 

 

When the FNCR(B) scheme was last used in 2013, the bulk of the deposits were garnered through leveraging, which offers customers higher returns. Leveraging refers to a bank lending an NRI several times their intended deposit amount so they can park a larger sum in the FCNR(B) deposit. The RBI has allowed this through banks' domestic as well as foreign branches. However, most Indian lenders do not have a large capital base offshore and are struggling to offer customers significant leveraging.

 

Borrowing offshore has turned more expensive with the cost of raising funds through three- to five-year dollar bonds rising 30-40 bps over the past month as investors demand higher returns, in anticipation of Indian banks tapping the market. Smaller banks with no offshore branches are negotiating with foreign banks the leverage they can provide customers and the cost, bankers said. In this route, the overseas arm of the foreign lender issues a loan to the NRI against a standby letter of credit from a domestic bank.

 

"We are seeing a trickle of inflows but across PSUs (public-sector banks) the flows are not significant, maybe a few million each, less than $200 million for anyone except SBI (State Bank of India)," an official in charge of international banking at a state-owned lender said. "Since the offshore borrowing costs are so high, so leverage is proving to be a problem." 

 

State-owned banks and financial institutions told Finance Minister Nirmala Sitharaman Monday to expect the pace of offshore borrowing to pick up in the December quarter, after the FCNR(B) window closes. The RBI has also issued a concessional swap window of 1.5% for such fundraising until Dec. 31.

 

So far, only HDFC Bank, Axis Bank, and State Bank of India have raised dollar bonds, which they are likely to offer to NRI clients as leverage for FCNR(B) deposits, bankers said. ICICI Bank is said to be in discussions to raise funds offshore by the end of the month, while some state-owned lenders, including Punjab National Bank and Bank of Baroda, have put their fundraising plans on the backburner, according to several treasury officials.

 

Bankers said one option available to lenders is to make FCNR(B) deposits more attractive by offering higher interest rates, which they may consider if flows don't pick up in the next few weeks. Some lenders are also concerned about where to deploy the high-cost funds as yields on rupee-denominated debt have fallen since the RBI announced the measures on Jun. 5. Others, however, said the blended cost of funds would be comfortable at higher rates, especially with the regulatory push to ensure the scheme's success. In addition to the finance minister meeting chief executives of public-sector institutions Monday on FCNR(B), the RBI met the heads of state-owned and some private-sector lenders Tuesday for wide-ranging discussions.

 

Even as the intensity of hostilities in West Asia increases, potentially deterring a large catchment area of NRIs, bankers are confident the FCNR(B) scheme will get a significant amount of deposits by Sept. 30. Even in 2013, the inflows were back-ended and the majority of the $24 billion that accrued through the scheme came in the last month that the window was open, they said. In addition to the diaspora in West Asia, the finance ministry highlighted strong interest from NRIs in the US, UK, Hong Kong, and Singapore in a release Monday.

 

"We have not begun offering leveraged FCNR(B) deposits yet, but we are close to finalising our processes," an official at a US-based foreign bank said. "Give it another two weeks as banks sort out their internal processes and we should see regular inflows of several billion (dollars) per week. It's too early to worry about it."  End

 

Edited by Rajeev Pai

 

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