Synopsis

Small and mid-sized Indian banks are ramping up FCNR(B) deposit rates to attract non-resident Indians after interest rate deregulation, offering returns above 7.4–7.5% without leverage benefits. In contrast, larger banks are focusing on structured offerings with high leverage (9–19x) but keeping base rates below 7%, leveraging their global partnerships and strong NRI relationships.

Kolkata: Small and mid-sized banks are aggressively raising deposit rates for non-residents, taking advantage of the interest rate deregulation, even as large institutions focus on offering 9 to 19-fold leveraging options on foreign currency non-resident bank (FCNR(B)) accounts while keeping baseline deposit rates under 7%.

Smaller banks, with the absence of long-term arrangements with international lenders for providing the leverage benefit, are trying to woo their overseas customers with better yields.

AU Small Finance Bank on Monday raised the foreign currency non-resident bank (FCNR(B)) deposit rates by 30 basis points to 7.4%. The bank is not offering any leverage to its non-resident clientele.

"Customers ask for leverage. The leverage arrangement would happen only if some international banks take a three-to-five-year exposure on us," AU Bank executive director Vivek Tripathi told ET.

"Being an SFB (small finance bank), we fall into a very different category for these international banks. It is an evolving area, and we are also trying to secure some long-term lines and arrangements, but they may not be directly beneficial to us immediately," he said.

Ujjivan Small Finance Bank was the first to take advantage of the interest cap removal. It is offering 7.5% on dollar-denominated FCNR(B) deposits since July 2. Before the interest rate deregulation, the rate was capped at 7.13%. Equitas Small Finance Bank now offers 7.52%.

A little higher rates are also beneficial, as that would help replace costlier bulk deposits and bring down the cost of funds. The RBI exempts fresh three- to five-year FCNR(B) deposits from cash reserve ratio and statutory liquidity ratio requirements, helping banks save about 30 basis points on the deposit cost, people aware of the matter said.

The banking sector as whole is estimated to have mobilised more than $26 billion in FCNR(B) deposits through the regulator-driven dollar mop-up exercise, surpassing the mobilisation seen in 2013 when a similar scheme was announced.

"PSBs, front-led by larger banks, are apparently anchoring the drive, ensuring incremental flows by leveraging not only the deposits, but also the trust built with materially significant clientele spread across various geographies and remaining tacitly agile by shifting their strategy to an optimally blended onshore-offshore game plan," SBI group chief economic adviser Soumya Kanti Ghosh said.

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