The Hindu Business Line : OBUs pursue NRI deposits

WITH the imminent possibility of a liquidity crunch and hardening interest rates in the domestic market, several offshore banking units (OBUs) of Indian banks have begun canvassing for NRI deposits with renewed vigour.

"While Indian banks are virtually bound by an administered mechanism as far as NRI interest rates are concerned, there is no such restriction on these OBUs. So they would be able to offer higher rates, and successfully wean away some of the high value big-ticket NRI accounts from the traditional banking circles. The competition for NRI deposits have become quite fierce," Mr A. Sethumadhavan, Chairman of South Indian Bank, said.

The offshore units do not come strictly under the purview of the RBI and enjoy greater leverage in fixing their interest rates. But their biggest advantage is that the NRIs will not have to pay income tax on the accrued interest income - - the most potent threat confronting NRI deposits in India.

"This renewed interest in NRI deposits will severely test the chemistry in the Indian banking industry between the traditional banks and their customers," Mr K.P. Padmakumar, Chairman of Federal Bank, said.

Since it is not mandatory for the OBUs to maintain CRR and SLR, these additional savings can easily be passed on to the customer in the form of better returns. Several banks like SBI and ICICI Bank have already set up OBUs in foreign countries.

The net losers will be banks such as State Bank of Travancore and Federal Bank, which have a dominant volume of NRI deposits but do not have OBUs. The immediate gainers will be banks such as ICICI Bank, raring to harvest more NRI deposits and have OBUs in countries such as Bahrain and Singapore.

The bank has already launched a campaign to attract more NRI deposits through its OBUs.

But the biggest player in the NRI deposit market, SBI, is expected to come out unscathed since it already has OBUs and will not only be able maintain its present portfolio, but also to shore it up further, bankers said.

The threat on the NRI deposits of other banks becomes all the more real as the NRIs perceive the income tax on their interest income as the biggest hurdle.

Though there had been several attempts at cherry picking the high value big-ticket NRI deposits in the past by new generation and foreign banks, none of these efforts had been successful, the bankers said.

But he combination of threat of income tax on the one hand and inducement of better returns on the other might work in their favour now.