KOCHI: Indian banks chased an unprecedented amount of foreign-currency deposits under the special FCNR(B) scheme. They got the dollars, swapped them with the Reserve Bank of India (RBI) and received their rupee equivalent.
Now comes the harder question: how do they deploy all those rupees profitably?
The RBI's special FCNR(B) window drew more than $127 billion from non-residents before closing on August 31. Banks offered rates of around 6–7 per cent, and in some cases even higher, as they competed aggressively for the deposits. The RBI's special dollar-rupee swap arrangement made the mobilisation particularly attractive by effectively taking away the principal-hedging cost.
But raising the dollars was only the first part of the story.
Once swapped with the RBI, the funds added to the pool of rupee liquidity available to banks. With the banking system already awash with surplus funds, the ability to deploy this money into earning assets could determine which banks actually benefit from the FCNR bonanza.
And this is where balance-sheet strength becomes important.
A bank with a high credit-to-deposit (CD) ratio, strong capital adequacy and robust credit demand has an obvious advantage. It already has a large loan book relative to deposits and can use the additional funding to support further credit growth.
For such banks, FCNR can be a genuine funding opportunity.
For banks with low CD ratios, the calculation is different. If they already have more deposits than they can comfortably lend, another large source of funding could simply add to their surplus liquidity. The money may then have to be parked in government securities, money-market instruments or RBI liquidity-absorption facilities such as VRRR and SDF.
That is where the economics could become uncomfortable.
Problem of plenty
A bank that has raised dollars at 6–7 per cent needs to compare that funding cost with the return it can earn on the resulting funds. If the money cannot be deployed into sufficiently high-yielding loans, parking it in short-term instruments could produce a much thinner return.
This suggests that banks may have had to make a calculation before aggressively joining the FCNR race: how much foreign-currency funding can the balance sheet actually absorb?
CD ratio, CRAR, credit-growth prospects, international lending opportunities and treasury capacity would all have mattered.
ICICI Bank provides an early example of effective deployment. It mobilised about $17.9 billion under the scheme and disclosed that around $9 billion had been deployed as loans through its international branches and subsidiaries. Another $3.63 billion was supported through standby letters of credit issued to other banks against loans.
A substantial portion of its mobilisation therefore already had identifiable lending avenues.
The question is whether other banks have similar capacity.
Money-market rates under pressure
The FCNR inflow has also contributed to an extraordinary surplus of rupee liquidity, forcing the RBI to absorb large amounts through liquidity-management operations. Money-market rates have consequently come under pressure.
That creates an unusual situation: banks may have paid 6–7 per cent or more to raise the FCNR funds while facing lower returns on surplus short-term rupee liquidity.
For banks with strong credit demand, the answer is simple: lend.
For those without it, the money may end up in the money market, securities or with the RBI.
The FCNR story, therefore, is not just about how many dollars banks managed to attract.
It is about what they can do after those dollars become rupees.
The winners may not necessarily be the banks that raised the most dollars.
They could be the banks that had the balance-sheet capacity, capital and credit demand to put those funds to work.
