Mumbai: As New Delhi and RBI explore ways to tame the rupee, Indian banks have urged the regulator to lift a guarantee restriction to attract the diaspora money.
Banks, which the RBI sounded out last week on a possible foreign currency non-resident (FCNR) special deposit scheme to increase dollar supply, told the central bank to relax its directive on standby letter of credit (SBLC)-a credit comfort or guarantee-that some of the large Indian banks had given to offshore banks in 2013. The SBLC paved the way for overseas banks to liberally lend to NRIs who placed the borrowed funds as FCNR deposits.
“RBI didn’t say it was opening a FCNR window. In fact, banks said while FCNR may be a quicker route to bring in dollars, it would be expensive. Subsidising the hedging cost of dollar bonds and external commercial borrowings by PSUs and corporates may cost less though dollar inflows could take longer. We get a sense the RBI and the government want to be ready with all information so that the rollout, if needed, can be quick. They don’t want any step to be seen as a panic reaction,” a senior banker told ET. “If oil stays around $90, they may not take big measures,” he said.
The SBLC curb, a forgotten issue, cropped up when RBI sought banks’ response to a FCNR plan. In 2013 and earlier, NRIs took huge leverage-often four to ten times-of the amount chipped in to make risk-free return on the difference between the borrowing cost and return from the FCNR facility. Say, an NRI in Dubai would chip in $100,000, borrow another $900,000 from a UAE bank to place $1 million as deposit.
To cover its credit risk, the UAE bank would obtain a SBLC from the Indian bank holding the FCNR deposits. The arrangement allowed the offshore bank to directly receive funds from the Indian bank. “Instead of a pledge on deposits, where the money would come from through the customer’s (or borrower’s) account, overseas banks preferred SBLC. But later, the SBLC mechanism was largely discontinued for FCNR following RBI’s instruction,” said a source.
Without SBLC, there won’t be leveraging, and without leveraging there won’t be enough FCNR inflows,” said the person.
Although there was no notification, RBI had told banks to restrict the use of SBLC to genuine trade payments. “Last week, when RBI sought banks’ view on a similar FCNR proposal, the need to withdraw the SBLC restriction was pointed out. Banks also said that RBI may have to bear almost the full cost of hedging (as banks convert FCNR dollars into rupees). Besides, RBI must account for some existing FCNR deposits converting into new deposits under the proposed scheme. However, unlike in 2013, the gap between US and Indian interest rates has narrowed significantly. So, FCNR route could be costly,” said another banker.
It’s widely felt that if oil hardens, Middle East conflict continues, and INR stays under pressure, RBI may announce certain measures on May 6, along with the monetary policy. “There are talks about controlling outflows: lowering the $1 billion annual limit on Overseas Direct Investments (ODI) under the automatic route and cutting the maximum single ODI from four times the net worth. Earlier conversion of dollars (into INR) in Exchange Earners’ Foreign Currency Account (EEFC) is also speculated. First, there’s corporate lobby resisting ODI and LRS cuts. Second, RBI and the Centre could try avoiding measures that appear as capital controls,” said another banker.
