The Hindu Business Line : End the NRI largesse

WITH DOMESTIC INTEREST rates out of alignment with international trends, arbitrage opportunities continue to exist, making various deposit schemes for non-resident Indians attractive. Tag on the tax benefits and the exchange rate protection, and domestic depositors have been treated unfairly. Till some time back, sweetened NRI deposit schemes were probably necessary to augment forex reserves, but no longer. The NRI wooing has left banks with international liabilities that are twice as high as corresponding assets, posing a systemic risk. To correct the mismatch, a working group of the Reserve Bank of India has sensibly suggested bringing interest rates on all non-resident deposits closer to the international rates.

There is no equivalence between interest rates on domestic and non-resident savings rate deposits and the RBI group believes returns on NRE savings deposits be reset quarterly and linked to a ceiling of one month US dollar. It may be better to place on par returns on NRI deposit schemes with Libor to end the a costly skew in pricing deposits. The group favours taxing interest incomes from NRI deposits to bring some parity with domestic depositors whose earnings are taxed. This is a grievous injury to domestic depositors (especially the aged and retired population) who lack avenues to protect their incomes from a 5 per cent inflation. "To prevent money laundering," the group wants to phase out NBFCs and non-financial corporates from accepting foreign deposits, reserving the job for banks. Incidentally, deposits taken by these entities do not enjoy DICGC cover and it may be best to keep them out of this business. Together, the suggestions should rein in the inflow of dollars and cut down excess liquidity in the financial system.

Banks seem to be taking high risk on the liabilities side, though the better option is using liquidity support from the government to fill in asset-liability mismatches even if frowned upon as risk management. The fear is genuine as more than half the non-resident deposits (53.9 per cent in March 2004) is with six banks; 61.4 per cent of FCNR(B) deposits in March 2004 was held by top six banks against their share of 50.2 per cent of NRE deposits. On the assets side, it helps the six banks to provide foreign currency loans to importers and exporters. The share of foreign currency loans in FCNR(B) deposits moved up from 44.8 per cent in June 2000 to 67.4 per cent in 2003 before dropping to 60.3 per cent by March 2004 and the simple reason could be that forex loans tied to Libor are cheaper than rupee loans.

The RBI group is pleading for a reversal of policies adopted in the years gone by when the country did not have enough forex reserves. If the US Fed marks up interest rates in the near future, there may be little profit in placing funds in NRI deposit schemes. The RBI in recent months has been moving in the same direction primarily as economic growth has not been able to absorb dollar inflows. Do we need to continue, at this point of time, with such usurious deposit schemes as their case has become weak?

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