FCNR(B) Deposits Become Low‑Cost Lifeline for Indian Banks, BofA Finds

Bank of America’s securities research team has zeroed in on an unexpected winner in India’s funding market – the Foreign Currency Non‑Resident (Bank) deposits, better known as FCNR(B) accounts. In plain terms, these NRI‑sourced deposits are turning out to be far cheaper than the usual 3‑5‑year rupee term deposits that banks typically raise.

Where banks have been paying around 6.5‑7.5 % on conventional rupee deposits, the term‑sheet data BofA examined shows many larger banks offering interest rates between 5.25 % and 6 % on foreign‑currency deposits. Add to that the fact that the Reserve Bank of India shoulders the foreign‑exchange risk, and the math starts to look pretty attractive for lenders.

There’s another angle that makes FCNR(B) deposits especially alluring – they’re exempt from the cash reserve ratio (CRR) and the statutory liquidity ratio (SLR). In practice, this means a bigger chunk of the money can be channeled straight into lending, rather than being parked as a regulatory buffer.

The numbers back up the enthusiasm. The RBI has already mobilised roughly $127 billion from non‑resident Indians through commercial banks – a figure that dwarfs its original $50 billion target. The response was so strong that the scheme, originally slated to run until the end of September, was shut down on August 31.

One might wonder who bears the cost of hedging the currency exposure. According to BofA, the RBI itself takes on that burden, but it stands to earn about 4.5‑5 % on the foreign‑reserve build‑up generated by these deposits. That potential earnings stream could more than neutralise the estimated hedging expense of up to 3 %, assuming a five‑year hedge horizon.

Lastly, BofA challenges the prevailing assumption that all FCNR(B) funds will flow back to the market once they mature. The research suggests that a significant portion may stay put, providing banks with a semi‑permanent, low‑cost source of capital.