Global brokerage firm Jefferies has identified that a marginal increase in Internal Rates of Return (IRRs) could significantly lift the mobilization of Foreign Currency Non-Resident (Bank) - or FCNR-B - deposits for Indian lenders. According to the latest sector note on Indian financials, while current rates hover just below the optimal 'attractiveness' threshold, a minor strategic tweak could unlock substantial foreign inflows. The report reveals that a detailed comparison across the banking sector shows a distinct trend: the divergence among banks is noticeably wider when it comes to headline interest rates than it is for actual IRRs.
State Bank of India (SBI) presents a mixed picture in this landscape, as highlighted by Jefferies. The country's largest lender offers a 3-year IRR that lags behind its industry peers, but it outpaces the competition in the longer term, with its 5-year IRR standing higher than the market average. This divergence pattern is consistent across the banking sector, where banks show varying performance across different tenure periods. Recent market data confirms that SBI maintains its position as a key player in the FCNR-B market despite its current rate structure challenges.
The note reveals distinct strategies employed by foreign banks operating in the FCNR-B space. These institutions are currently offering lower headline FCNR-B rates but are utilizing high client leverage to elevate the effective IRR for depositors. However, Jefferies notes a critical prerequisite for this strategy: banks must first secure and raise the necessary funding to support these client-leveraging structures before they can aggressively mobilize new FCNR-B deposits. This approach allows foreign banks to compete effectively in the FCNR-B market while maintaining their funding flexibility.
Looking ahead, Jefferies assesses that current FCNR-B rates remain 'a tad below' the threshold required to make them universally attractive to non-resident depositors. To bridge this gap and stimulate a robust influx of deposits, the brokerage suggests that banks have two primary levers to pull: a modest increase of 20 to 30 basis points across tenures and offering customized, upward rate adjustments tailored specifically for larger, high-net-worth clients. By employing these adjustments, Indian banks could effectively boost the appeal of their FCNR-B offerings and drive a renewed cycle of deposit mobilization. Recent market analysis supports this strategy as banks continue to seek ways to enhance their FCNR-B competitiveness.
