2 days ago
FCNR(B) Leverage Helps Drive Loans Against Fixed Deposits Higher
Banks saw a big increase in loans given against fixed deposits in August.
These loans reached ₹2.04 lakh crore, growing 43.2% from a year earlier.
Analysts think some non-resident Indians borrowed against FCNR(B) deposits and put the money into more deposits.
This is called leverage because the original deposit is used to support additional borrowing.
Banks reportedly allowed borrowing of up to nine times the deposit amount.
However, the available data does not show exactly how much of the increase came from FCNR(B) transactions.
People also use these loans for short-term cash needs without breaking their fixed deposits.
The loans are cheaper than unsecured personal loans but can cost more than the deposit earns.
Loans against fixed deposits rose 43.2% year-on-year to ₹2.04 lakh crore in August.
Advances increased by approximately ₹42,750 crore from July and ₹61,500 crore from August last year.
Analysts linked the surge partly to leveraged trades involving FCNR(B) deposits by non-resident Indians.
Banks reportedly offered leverage of up to nine times against deposits after an RBI rule change.
The data does not separately identify FCNR(B) loans, and such advances remain below 1% of total bank credit.
- Who
- Banks, non-resident Indian depositors, the Reserve Bank of India, and financial analysts including Prakash Agarwal and Sachin Sachdeva.
- What
- Loans against fixed deposits rose 43.2% year-on-year to ₹2.04 lakh crore in August.
- Where
- India’s banking system.
- When
- The increase was recorded in August; further growth was expected to appear in September.
- Why
- Analysts suggested that leveraged FCNR(B) deposit transactions contributed to the surge, while the loans are also used for short-term liquidity needs.
Leverage Explanation
Data Caution and Other Uses
Cause of the surge
Leverage Explanation
Prakash Agarwal and Sachin Sachdeva said leveraged transactions involving FCNR(B) deposits may have driven a substantial part of the increase.
Data Caution and Other Uses
The RBI classification combines loans against FCNR(B), NRNR, and other deposits, so the precise contribution of FCNR(B)-linked transactions cannot be established.
Purpose of borrowing
Leverage Explanation
NRIs could borrow against FCNR(B) deposits and redeploy the funds into additional deposits, magnifying the original deposit through leverage.
Data Caution and Other Uses
Loans against fixed deposits are also commonly used for short-term liquidity, allowing borrowers to avoid prematurely breaking a deposit.
Cost of the loans
Leverage Explanation
Using a deposit as collateral makes these loans considerably cheaper than unsecured personal loans.
Data Caution and Other Uses
They are less attractive for longer-term borrowing because interest rates are generally 50–200 basis points above the deposit rate, creating negative carry.
Key facts
- August outstanding advances
- ₹2.04 lakh crore
- Year-on-year growth
- 43.2%
- Monthly increase
- Approximately ₹42,750 crore from July
- Annual increase
- Approximately ₹61,500 crore from August of the previous year
- FCNR(B) funds mobilised
- $132.98 billion by August 31 through the RBI’s special window
- Reported maximum leverage
- Up to nine times the deposit
- Share of total bank credit
- Less than 1% of approximately ₹224 lakh crore
Quotes
Prakash Agarwal
Partner at Gefion Capital
“My sense is that a large part of this is driven by the various leveraged trades which have been done by NRIs on these FCNR(B) deposits”
financialexpress.com
Sources
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