Foreign lender HSBC is offering non-resident Indians (NRIs) leverage, or the use of borrowed funds to enhance returns, of up to 19 times their own capital to create foreign currency non-resident bank or FCNR(B) deposits through its GIFT City branch.
This is said to be the largest such leverage being offered by banks since the Reserve Bank of India (RBI) announced the incentive scheme in June to boost dollar deposits, according to a person aware of the development and a term sheet seen by Mint. Most other banks are offering a leverage of up to nine times.
The British bank's enthusiasm points to how some lenders are trying to make the most of this scheme by mobilising low-cost foreign currency deposits, and using these to replace existing and expensive bulk deposits.
Broadly, the leverage structure allows customers to pledge a relatively small amount of their own capital and borrow the balance from the bank to create a much larger FCNR(B) deposit.
According to the term sheet, a customer pledging $100,000 can borrow $1.9 million from HSBC to create a $2 million FCNR(B) deposit, implying a leverage of up to 19 times the customer’s own contribution. The bank has two categories of leverage: lower and higher. Under the first category, leverage of nine times is available, while the second one offers 19 times.
“I feel that once the products are all finalised and the outreach is complete, the FCNR scheme will do quite well. Why would a NRI not want to get more interest than he can get elsewhere? With high leverage available now, it makes it even more attractive,” said the person cited above.
The product is being offered through HSBC’s IFSC banking unit at GIFT City, Ahmedabad, and targets high-networth NRIs looking to maximise returns under the RBI’s incentivised FCNR(B) window.
The scheme, announced on 5 June and valid till 30 September, allows banks to raise FCNR (B) deposits of three to five years and swap the dollars with the RBI at a concessional rate. India aims to raise $30-40 billion through the scheme.
A spokesperson for HSBC declined to comment.
Designed on the lines of the 2013 FCNR deposit scheme, introduced after the US Federal Reserve’s tapering of bond purchases put pressure on the rupee, the RBI's latest programme is seen as an attempt to offset foreign outflows triggered by the West Asia conflict, which has once again weakened the currency.
Nomura said in a note on 6 July that back in 2013, when a similar scheme was announced, India received $4 billion of deposits in the first month, $5.5 billion in the second month and flows peaked at $15 billion by the third month.
According to the term sheet cited earlier, HSBC is offering an FCNR(B) deposit rate of 5.5% while simultaneously extending a secured US dollar loan against the deposit at 5.15% for a three-year tenor, and 5.05% for a five-year tenor. The deposit rate remains the same at 5.5% for the three and five-years tenors. This leads to a return of 8.77-12.32% on the three-year deposit, and 9.68-14.25% on the five-year deposits.
Under the scheme, the central bank absorbs banks' currency hedging costs on fresh three- to five-year deposits. Essentially, this means commercial lenders can offer NRIs attractive dollar deposit rates while still earning a margin on these deposits.
The HSBC product is available on a ‘reverse enquiry’ basis, indicating that it is offered to customers upon request rather than being widely marketed.
While Indian banks are offering a lower leverage, they are offering higher interest rates. For instance, both HDFC Bank and ICICI Bank have FCNR deposit rates of up to 6% for five-year dollar deposits. Data on how much leverage individual Indian banks are offering is not publicly available.
“For foreign banks, the supply of dollars will not be a challenge and, therefore, [they] can offer higher leverage, whereas Indian banks will have to raise dollars or tie up with overseas lenders,” said an economist closely tracking these deposits.
Further, the document also said that premature closure of the deposit could attract a 4% penalty on the gross deposit amount.
Target markets
To be sure, banks expect a bulk of FCNR(B) inflows to come largely from the Gulf and Singapore, as depositors in the US and UK face stricter tax and compliance obligations. However, the leveraged structure could also attract wealthy NRIs from Africa and, in some cases, Australia, the person cited above said.
On 15 July, Mint reported that domestic banks do not expect significant FCNR(B) deposit inflows from the US as many NRIs there remain wary due to stricter tax scrutiny and compliance challenges following the 2013 programme.
Estimates of deposit inflows range between $7 billion and $12 billion, with the government and the central bank trying to drum up support for the scheme meant to raise dollar inflows into the world’s sixth-largest economy to aid its local currency. Finance minister Nirmala Sitharaman met heads of state-owned banks on 13 July, asking them to strengthen outreach to NRIs. The next day, bankers met RBI governor Sanjay Malhotra, deputy governors and executive directors.
This was followed by another meeting on 15 July where the central bank asked commercial banks reasons for a slower-than-expected response to its foreign-currency deposit scheme, which is trailing the pace of the 2013 effort that raised $26 billion. The central bank has also asked banks to report daily data on FCNR deposits, but has not released data on how much has been mobilised so far.