The finance ministry has convened a high-level meeting of chiefs of public sector banks, IDBI Bank and other public financial institutions on 13 July to chalk out a strategy to mobilize foreign capital, according to an official document reviewed by Mint. The government wants to boost the inflow of funds through foreign currency non-resident (bank) [FCNR (B)] deposits, overseas foreign currency borrowings (OFCBs) and external commercial borrowings (ECBs).
The meeting, to be chaired by finance minister Nirmala Sitharaman, comes amid a broader push to strengthen the funding base of banks and attract overseas capital, the Department of Financial Services (DFS) said in the communication directing the heads of the institutions to attend in person.
Last month, the Reserve Bank of India introduced a dollar-rupee swap facility for fresh FCNR (B) deposits mobilized from 8 June to 30 September, with swap access available until mid-October. The move was aimed at accelerating foreign currency inflows as bank credit growth continues to outpace deposit growth, increasing the need for diversified funding sources.
According to people aware of the matter, the discussions will focus on scaling up mobilization of FCNR (B) deposits from overseas Indians, leveraging the RBI's swap facility, increasing overseas borrowings by banks and facilitating greater use of ECBs to provide lower-cost funding for the economy.
“The interaction is also expected to review the response from banks following the RBI's special measures announced in June and discuss institution-wise mobilization strategies and implementation plans,” one person said.
Under the temporary FCNR (B) arrangement, the central bank will absorb the entire hedging cost—estimated at 280-300 basis points—allowing banks to offer substantially higher returns on foreign currency deposits without bearing the associated currency risk. The facility makes FCNR (B) deposits attractive for non-resident Indians, with several banks increasing interest rates to as much as 7.1% for certain US dollar deposits.
Incremental inflows
The RBI simultaneously extended similar concessional swap support for eligible OFCBs by banks and specified categories of ECBs, aiming to lower foreign currency funding costs across the financial system. Market participants estimate these measures could attract $35 billion to $70 billion of incremental foreign currency inflows.
Credit demand has been sustained in India's banking system in recent years, while deposit collection has not grown at a similar pace, prompting policymakers to explore additional funding channels. Higher FCNR (B) inflows would strengthen banks' foreign currency resources, improve liquidity, support the country's foreign exchange reserves and provide an additional cushion for the rupee.
“Greater use of overseas borrowings could also reduce funding costs for banks, enabling cheaper credit for productive sectors of the economy while diversifying the liability profile of lenders,” the person said.
Banks are aggressively marketing FCNR (B) deposits in key overseas markets, including the US, the UK, Canada and the Gulf region. According to media reports, Punjab National Bank managing director and chief executive officer Ashok Chandra indicated that the bank aims to mobilize $2.5 billion-3 billion under the revised framework.
Lenders including State Bank of India, Bank of Baroda, Canara Bank, Union Bank of India and private sector banks have revised their FCNR (B) deposit rates upward to capitalize on the RBI's swap support, according to media reports.
“The finance ministry is expected to review the progress made so far and discuss further measures to accelerate mobilization during Monday's meeting,” the person said.
Insulated from fluctuations
FCNR (B) deposits are fixed-term deposits maintained by NRIs, persons of Indian origin and overseas citizens of India in designated foreign currencies such as the US dollar, pound sterling, euro, Japanese yen, Canadian dollar and Australian dollar. The deposits remain denominated in foreign currency, insulating depositors from exchange-rate fluctuations, and both the principal and interest are freely repatriable.
OFCBs refer to foreign currency borrowings raised by Indian banks from overseas, while ECBs are foreign currency loans raised by eligible Indian companies and institutions from international lenders for permitted end-uses, including infrastructure and capacity expansion.
Together, these instruments form an important part of India's external financing architecture and are increasingly being used to supplement domestic funding as the economy's investment requirements expand.
An email sent on 10 July afternoon to the finance ministry, RBI and the DFS seeking comment on the matter did not elicit a response at publishing time.