FCNR(B) deposits emerge as cheaper funding source for banks: BofA
Bank of America reports that FCNR(B) deposits have become a cost-effective funding source for Indian banks due to RBI-backed hedging and exemptions from reserve requirements. The scheme saw high demand, exceeding initial targets before its early closure.
Why it matters
This analysis explains how specific banking instruments are being utilized to manage liquidity and funding costs in the Indian financial sector.
Foreign Currency Non-Resident (Bank) or FCNR(B) deposits have emerged as a significantly cheaper source of funding for Indian banks under the current design of the scheme, according to a research note by Bank of America (BofA) Securities Research.
“Typically, banks would raise 3-5 year deposits at present at around 6.5%-7.5%. By most term sheets we have seen, larger banks have offered interest rates mostly between 5.25%-6% on their foreign currency deposits and with the FX risk being borne by the RBI, for banks, technically the FCNR (B) become a much cheaper source of funding, than conventional rupee deposits will be, especially when compared to CD rates,” BofA Securities said in a research note released on September 8.
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