$15 billion likely to enter Indian banking system, boost liquidity

There was a time when banking products aimed at non-resident Indians (NRI), like NRE and NRO accounts, were regarded as duds, useless, due to their low interest rates. Not any more.

With India’s central bank deregulating interest rates on NRI deposits last month, saving hard-earned money in Indian banks appears to be a much more attractive option than parking savings in countries where income is earned. For instance, on one-year deposits, banks in most developed countries offer a measly 0.2-3.2% interest. In striking contrast, Indian banks offer 8-10% interest on NRI deposits.

NRE (non-resident external rupee deposits) and NRO (ordinary non-resident) accounts thus have become destinations for short-term NRI funds. What’s more, NRI deposits are entirely repatriable (meaning, NRIs can pull out deposits whenever they wish to). And NRE accounts are tax-free too.

Analysts predict deposits worth $10-15 billion will now find their way into the Indian banking system. This will help in boosting much-needed liquidity for banks. “Inflows are still developing. The NRI deposit products are much more powerful than they used to be earlier. We expect deposits worth Rs100 crore per month at least,” says Rajat Monga, chief executive officer, Yes Bank.

Similarly, HSBC India is upbeat. Stuart Davis, chief executive officer, says, “Deregulation will be positive for our (NRI) business.” Given the relatively high interest rates in India, NRIs might even prefer to deposit long-term funds, says Monga. Agrees Salil Datar, head, branch banking and NRI business, Dhanlaxmi Bank, a lender based in Kerala which typically receives huge NRI remittances. “Significant inflows are yet to be witnessed. The bank is, however, bullish on NRI product.” Federal Bank, another Kerala-based bank, claims money is already pouring in to its NRI accounts.  As on December 31, FB’s total NRE deposits  stood at Rs10,500 crore, says A Surendran, head, international banking division. The bank is now aiming to notch up Rs13,000 crore in NRI deposits by March 31.

There is a lot going for NRI accounts, not just high interest rates. They represent a good investment option in the current market environment, as the Indian rupee’s movement in forex markets will likely boost the returns of NRIs. Between June and December 2011, the Indian currency has depreciated by 18%. Historic trends suggest that it appreciates after a cycle of depreciation.

“When the NRIs are confident that the rupee has stabilised, then we will see an increase in deposits,” says Davis of HSBC.  Monga of Yes Bank goes a step further. “If the rupee appreciates from Rs52.50 to Rs48.50 (to the US dollar), it will eventually increase returns by 5%.”

Assuming that the rupee appreciation remains in the near one-term, NRI customers may like to take a personal loan from the country where are they based and invest the funds in India. Interest rate on personal loans in developed countries is in the 3-7% range, according to International Deposit Interest Rate Exchange data. This will help customers earn a 1-2% margin on these funds in a one-year timeframe.

Besides NRE and NRO accounts, NRIs have a third option in foreign currency non-resident (FCNR) accounts, which allow them to invest their foreign currency earnings with Indian banks. FCNR accounts used to offer interest rates that are 200 basis points over the London Interbank Offered Rate or Libor which tends to be very low. But the recent RBI deregulation will likely make FCNR less attractive as NRI customers would prefer higher yielding NRE and NRO accounts.

Since the RBI does not allow NRE and NRO interest rates to be higher than domestic deposit rates, and also links their movement to domestic rates, bankers suggest that this is possibly the time for NRIs to make the most of high interest rates. For, interest rates are seen to come down eventually, around this fiscal-end or the beginning of the next fiscal. “Once we achieve our desired base of NRE deposits, the high NRE deposit rates will start coming down. The high NRE deposit rates may hurt the net interest margins (NIMs) by about 30 basis points,” says Surendran of Federal Bank.