2 weeks ago
RBI excludes FCNR(B) deposit-backed advances from ANBC calculation
The Reserve Bank of India is the big bank that looks after money in India.
It has rules about how banks must lend to farmers, small businesses, and people who need help.
These rules are based on something called adjusted net bank credit.
Now the RBI says that loans given using special foreign money deposits will not count toward these rules.
These special deposits are called FCNR(B) and NRE deposits.
The RBI wants people living abroad to keep their foreign money in Indian banks.
Banks can even get the RBI to pay the swap cost when they bring in this money.
So far, banks have brought in more than $40 billion.
Some people think this is good for India's money savings, but others worry the country could run short of rupees later.
The RBI has allowed banks to exclude advances backed by fresh FCNR(B) deposits from the calculation of adjusted net bank credit (ANBC), the benchmark for priority sector lending targets.
Advances against FCNR(B) deposits with a tenure of 3-5 years, mobilised between June 8 and September 30, qualify for the exclusion, including deposits renewed upon maturity.
Advances against non-resident external (NRE) term deposits of three years or more, mobilised between June 19 and September 30, are also excluded from ANBC.
FCNR(B) deposits of more than $40 billion have been mobilised so far, with inflows expected to reach $60-80 billion by September under the RBI's special swap scheme.
Experts are divided: some say the move encourages foreign currency inflows and strengthens reserves, while others call it 'regulatory arbitrage' and warn of a future rupee crunch.
- Who
- The Reserve Bank of India (RBI), which set the exemption, and commercial banks that mobilise FCNR(B) and NRE deposits from non-resident Indians.
- What
- The RBI allowed banks to exclude advances backed by fresh FCNR(B) and NRE deposits from adjusted net bank credit (ANBC) calculations.
- Where
- India, with the RBI announcing the measure in Mumbai.
- When
- Deposits mobilised between June 8 and September 30 (FCNR(B)) and between June 19 and September 30 (NRE); no announcement date is specified in the articles.
- Why
- To encourage substantial foreign currency inflows and enhance India's foreign exchange reserves through a special swap scheme on which the RBI bears the swap cost.
Supporters of the move
Critics of the move
Regulatory relief vs regulatory arbitrage
Supporters of the move
M Narendra, former CMD of Indian Overseas Bank, said the RBI bearing the swap cost encourages banks to raise FCNR(B) deposits, and the ANBC exemption is further encouragement that builds steady foreign exchange reserves.
Critics of the move
MV Hariharan, former Treasury head of State Bank of India, called the move 'regulatory arbitrage' sanctioned by the regulator in 'desperate times', saying classifying these deposits toward priority sector lending compliance glosses over bank efforts and carries unknown long-term implications.
Short-term gains vs long-term outflow risk
Supporters of the move
The special swap scheme is meant to bring substantial foreign currency inflows, with more than $40 billion raised so far and $60-80 billion expected by September, providing medium-term steady reserves.
Critics of the move
An anonymous industry expert said inflation will go up and stocks will rise in the short run, but when outflows start 3-5 years down there could be a rupee crunch, and the RBI may lack the wherewithal to manage the USD/rupee.
Key facts
- Regulator
- Reserve Bank of India (RBI)
- Measure
- Advances backed by fresh FCNR(B) and NRE deposits excluded from adjusted net bank credit (ANBC)
- Benchmark affected
- ANBC, used to determine priority sector lending (PSL) targets
- FCNR(B) deposit tenure
- Minimum 3 years, maximum 5 years
- FCNR(B) mobilisation window
- June 8 – September 30
- NRE mobilisation window
- June 19 – September 30
- FCNR(B) deposits raised so far
- More than $40 billion
- Expected inflows by September
- Possibly $60–80 billion
Quotes
Anonymous industry expert
Industry expert, identifying anonymously
“Under the special swap scheme for FCNR B deposits mobilised from June 19 to September 30, RBI is bearing the swap cost, thereby encouraging Banks to mop up substantial FCNR B deposits during this period as India through this special scheme wishes to encourage substantial Foreign Currency inflows as well to enhance the foreign currency reserves of India.”
thehansindia.com
“Well, inflation will go up. Stocks will go up in the short run but will have major impact when the outflow starts 3-5 years down when there will be rupee crunch.”
thehansindia.com
Sources
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