The Hindu Business Line : What price NRI deposits?

A RECENT REPORT of the Reserve Bank of India on the external liabilities of scheduled commercial banks places in the right perspective the debates on NRI (non-resident Indian) deposit schemes. The report explains why the once immensely popular schemes, through which banks mobilised large sums, are now sought to be discouraged. The latest Budget seeks to take away a very important incentive: The tax exemption on the interest income from NRI deposits that had defined the scheme and along with assured higher yields and reconversion into hard currency, provided NRIs the incentive to invest in India. Earlier, through successive moves, the interest rate advantage the NRI deposits conferred were whittled down; the RBI accomplished that by asking banks to cap their rates vis-a-vis the LIBOR rates. NRIs, of course continue to enjoy repatriation facilities on their deposits, but it is unlikely that they will continue to invest in bank deposits in India, at least to the degree they did so until recently. Far from being whimsical the apparent U-turn in the official policy is rooted in the vastly changed dynamics of the external sector.

Beginning the 1970s these debt-creating inflows were consciously encouraged by policy-makers, through a variety of sops. This was justified by the situation of scarce external resources prevailing then. Along with many developing countries India had started depending on foreign savings to finance its current account deficit. The oil shocks of the 1970s transferred a substantial portion of the domestic savings from India and other developing countries to the oil-producing countries, where it fuelled an investment boom. That, in turn, created job opportunities for the sub-continent. This category of emigrants was more prone to send back to India a significant part of its earnings. Indian banks, aided by official policy, were quick to exploit this potential. NRI deposit schemes really took off post-oil shocks. The realisation may have eventually dawned that these short-term deposits were a comparatively expensive way of resources mobilisation but was most certainly dictated by the fact that from mid-1990s onwards the share of non-debt creating inflows, comprising almost half of foreign savings, started expanding.

The new approach to NRI money is rooted in the premise that the country is better off attracting non-debt creating flows, including quite spectacularly those that have been coming in as remittances from Indians abroad. The country can, therefore, discourage debt-creating inflows such as NRI deposits, which had grown considerably from about 13.8 per cent of the country's total external debt to 25.8 per cent by December 2003. The RBI report cites anecdotal evidence of more than a decade ago to buttress its stance of pruning the NRI deposit schemes. NRI deposits have proved extremely volatile, being more like demand deposits than tenure deposits. For all purposes the depositors are free to withdraw at extremely short notice as they did en masse in 1991-92, when there was a net outflow of close to $1.6 billion from the FCNR(A) schemes. This is well known but the RBI is citing it only after it feels the NRI money is better encouraged as non-debt creating remittances and maybe equity.

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