The Hindu Business Line : NRI funds flowing in despite rate cuts

There is a reluctance on the part of the NRIs not only to convert ones remittances into bank deposits, but even to renew the existing deposits at lower rates.

Kochi , April 22

DESPITE the steep cut effected on interest rates of foreign currency NRI deposits, there has been no lull in funds flowing in from abroad and seeking alternative avenues of lucrative investments.

Sounding a note of caution, Mr A. Sethumadhavan, Chairman of South Indian Bank told Business Line, "This single minded pursuit of higher returns could result in the growth and proliferation of doubtful investment avenues: tall on promises and short on delivery."

Others speculated that fly-by-night schemes such as equity in teak plantations, goat rearing and other quick money schemes could surface again.

Several such schemes had surfaced during the early part of the 90s only to vanish with the shareholders' money.

The returns on NRI deposits have now crashed to all-time lows of 1.4 per cent for one to two year tenure, 1.9 per cent for two to three year tenure, and 2.4 per cent for three years and above.

The interest rates on NRE savings bank deposit has been slashed to 1.2 per cent.

"The blue collar NRI workers of the Gulf will be the hardest hit by this slash in interest rates," Mr Sethumadhavan said.

Yet, the spate of NRI remittances continues unabated. "But a large segment of these remittances are not getting converted into bank deposits. It is just in order to fight the falling rate of the dollar that most NRIs are remitting their money as fast as they earn it," Mr K.P. Padmakumar, Chairman of Federal Bank pointed out.

But the bankers are not quite unhappy.

"The NRI deposits now offer one of the cheapest source of funds in India," said Mr T.R. Madhavan, Managing Director of Dhanalakshmi Bank.

But there is a reluctance on the part of the NRIs not only to convert ones remittances into bank deposits, but even to renew the existing deposits at lower rates. Federal Bank has been fighting to retain the last of its high cost (12 per cent) NRI deposits, and re-price it at the current lows.

Most banks have found their growth in NRI deposits falling in the recent past. Growth of NRI deposits held with South Indian Bank has fallen from 19.5 per cent as of March 2003 to 12.9 per cent as on March 2004.

In the case of Federal Bank, the growth has fallen from around 20 per cent to 15 per cent in 2003 and is expected to have plunged to 11 per cent in 2004.

"The best option for the NRI is to convert his remittances at the current rates and deposit it in NRO fixed deposits, which cannot be repatriated, but which command a handsome interest rate of 6 per cent," Mr Madhavan said.

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