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Banks Prioritize Million-Dollar FCNR Deposits as Costs Rise

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Banks Prioritize Million-Dollar FCNR Deposits as Costs Rise

2026-07-13 00:10 UTCBy AlphaScala Research DeskSource reporting: livemint.comEditorial standards

Banks Prioritize Million-Dollar FCNR Deposits as Costs Rise

Banks are prioritizing million-dollar-plus FCNR deposits as overseas borrowing costs rise, leaving smaller depositors on the sidelines. The RBI scheme faces execution hurdles.

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More than a month after the Reserve Bank of India announced measures to attract foreign currency inflows, banks are picking winners. They are courting non-resident Indians who can pledge at least $1 million in equity and ignoring smaller depositors, three market participants said.

The shift is different from the optimism that followed the RBI’s 5 June announcement. Back then, banks and analysts expected around $40 billion to flow into India, drawing comparisons with the 2013 FCNR mobilization scheme. That year, India received $26 billion in such deposits.

“Banks are keen to offer this only to customers with very high-ticket deposits,” said Dhiraj Nim, foreign exchange strategist and economist at ANZ. “The credit risk also decreases with the customer’s net worth.”

Under a leveraged FCNR deposit, a non-resident Indian holding a dollar deposit at a foreign bank can pledge that deposit and borrow up to nine times the amount. The original deposit and the borrowed amount are then combined and invested in an FCNR account in India. Someone with $1 million can borrow $9 million and invest $10 million.

Every such transaction creates a sizable credit exposure for the lending bank. As a result, lenders are reserving these structures for wealthy clients. Market participants said banks are largely entertaining only million-dollar-plus deposits instead of pursuing smaller-ticket business.

“Non-resident Indians I know are saying they are yet to see a term sheet from banks. If you have a million dollars to use as equity for the leverage, you could get a phone call,” a foreign banker said. The banker said higher flows could come from next month once the arrangements are in place.

The growing selectivity comes as overseas funding has become more expensive. Bankers said Indian lenders are now borrowing dollars at around the Secured Overnight Financing Rate plus 120-130 basis points, up from around SOFR plus 90 basis points just a few weeks ago.

Most banks continue to offer around 6.5% on FCNR deposits, leaving little room to absorb the higher funding costs without squeezing margins.

Fresh FCNR(B) inflows have remained modest so far despite the RBI’s special swap window. Data on FCNR deposits are subject to a lag. Banks mobilized $166 million in fresh FCNR(B) deposits in April 2026, while the outstanding deposit base stood at $33.92 billion at April-end, up from $33.76 billion a month earlier, latest RBI data showed. Overall, NRI deposits across FCNR(B), NRE and NRO accounts stood at $165.59 billion, meaning FCNR(B) deposits account for roughly one-fifth of the total NRI deposit base.

Ajay Marwaha, president and head of fixed income at Nuvama Group, said the economics of the scheme are materially different from the 2013 episode. “The returns you see today are based on spot funding costs. If global rates rise by 100 basis points, the entire leveraged structure becomes unattractive. What looks like a 14% return today could fall to 5.00-6.00%.”

While money may still come in, much of it is likely to be short-term, he said. “The money that comes in under this scheme will be flaky money. It will go out with the same momentum that it came in.”

The rise in funding costs is already affecting banks’ overseas fundraising plans. Last month, State Bank of India shelved its planned dollar bond issuance after investors demanded higher borrowing costs.

Nim said global financial conditions remain a key constraint. “The view I have maintained from the beginning is that global financial conditions are very tight, and that is bound to have an impact on the quantum of FCNR flows.”

With funding costs rising and leverage becoming more selective, the scheme is proving harder to execute than initially anticipated. Nim said it is still early because documentation issues need to be sorted out and banks have not marketed the product aggressively. “From what I hear, the product hasn’t been marketed very well so far.”

Even if the FCNR scheme succeeds in attracting $30-40 billion, Marwaha questioned whether it would meaningfully strengthen India’s external position. He said a sovereign dollar bond would have been a more effective option. “If Bangladesh can issue a sovereign dollar bond, what is India waiting for? The government could simply announce a $20-25 billion international bond programme and get it done.”