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Poornima Mohandas

A freeing of the FCNR interest rates would enable banks to attract dollar funds.

Mumbai , Oct. 25

BANKERS suffering from a cash dollar shortage, which has been further accentuated by the recent redemption of the $5.1-bllion Resurgent India Bonds, are seeking some measures from the RBI in the forthcoming Credit Policy.

The move comes in the backdrop of corporates being ever greedy for dollar loans (since the dollar is depreciating and has lower interest rates vis-à-vis the rupee) and most FCNR deposit bases having dried up. "The central bank should take off the cap on FCNR deposits. Banks have sufficient experience in pricing these deposits by themselves in such a way that there is an opportunity for profitable deployment,'' said the treasury head of a state-run bank.

Currently, FCNR deposit rates are capped at 25 basis points below Libor/swap rates for the corresponding maturities. They are in tune with global interest rates for foreign currency deposits in the dollar, pound sterling and euro.

A freeing of the FCNR interest rates would enable banks to attract dollar funds and the cash dollar shortage would soon be a thing of the past. Fresh accretions to FCNR deposits have been minimal with rates being unattractive; most banks are surviving on the historical deposits alone.

However, a section of bankers feels that this measure will not be forthcoming since it will add to the dollar liquidity in the system, which the central bank is attempting to curb. "It will be policy reversal of sorts with the apex bank having trimmed NRE deposit rates for the third time in four months to restrict NRI money coming into the system,'' said a private sector banker.

If FCNR deposits were to flow into the system, either banks would dispense it as dollar loans to corporates who would in turn sell it in the local market adding to the overall dollar liquidity or they would convert the funds into rupees and lend it out. Either way the dollar supply in the market would increase and add to the `problem of plenty' in forex reserves. Another suggestion bankers are likely to raise with the apex bank in meetings preceding the Credit Policy will be that of lifting the cap on foreign borrowings of banks. The cap is currently fixed at 25 per cent of unimpaired Tier I capital.

Most banks are close to this limit — by way of ECBs, inter-bank borrowings and borrowings from international institutions — and feel that an upping of this limit would help meet their demand for greenbacks and significantly bring down their cost of funds.

However, the RBI might not be open to this suggestion although it would be beneficial to the Indian economy and the banking system as a whole.

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