Overseas banks are implementing a clever strategy to capitalize on India's dollar demand while managing exposure limits. According to reports from The Economic Times, these banks are asking Indian banks to issue standby letter of credit (SBLCs) from their Singapore or UAE branches instead of India. This arrangement allows foreign lenders to offer substantial loans to NRIs for FCNR deposits, significantly boosting inflows while shifting country risk away from India. As per The Economic Times, banks are finding a smart way out by asking Indian banks preparing to mobilise money from the diaspora to issue 'covers' from other jurisdictions like Singapore and UAE instead of India.
The SBLC-based arrangement enables banks to provide leverage of up to nine times the initial deposit, as reported by The Economic Times. NRIs can place an initial FCNR deposit with a bank in India using their own funds, then borrow the remaining amount from foreign banks using the SBLC as collateral. The borrowed money is subsequently parked as FCNR deposits with the same bank, substantially increasing returns and FCNR inflows while maintaining the overseas banks' exposure to the Indian bank issuing the SBLC rather than the NRI borrower. According to The Economic Times, based on comfort from SBLCs, foreign banks would lend large amounts to NRIs who, after placing an initial FCNR deposit with a bank in India from their own funds, would park the borrowed money as FCNR deposits with the same bank.
As reported by The Economic Times, overseas banks are prioritizing SBLCs from Indian banks' offshore branches to manage country risk exposure. The arrangement ensures that country risk is attributed to UAE or Singapore rather than India, allowing lending banks to preserve adequate headroom for future business with Indian corporates and institutions. One banker explained that when SBLCs are issued by a local branch of the Indian bank, the overseas lender factors in the 'country risk' - or, India risk that determines total exposure to India. Since lending banks want to preserve adequate headroom for future business with Indian corporates and institutions, they want Indian banks launching FCNR to use their branches in Dubai International Financial Centre, or Singapore to issue SBLCs. Some overseas banks that don't operate in India are also participating in these arrangements, with the Reserve Bank of India's FAQ permitting such structures.
According to The Economic Times, two Middle East banks and several US and European banks, including a Swiss lender, are participating in SBLC arrangements with Indian banks' offshore branches. Indian banks without overseas operations can either lend from GIFT City branches or provide SBLCs to overseas banks that don't require guarantees from foreign branches. A foreign bank official indicated that there's no change in risk perception about India - they don't want to consume exposure limits with loans for the FCNR scheme. A bank official indicated that arrangements are expected to finalize within a week as banks complete paperwork and tie up loose ends. As per The Economic Times, banks are in the midst of completing paper work, tying up loose ends, with whatever arrangement a bank finalises expected to fall in place in another week.
As reported by The Economic Times, this strategic approach addresses foreign banks' concerns about exhausting exposure limits to India while maintaining their ability to participate in the lucrative FCNR scheme. The arrangement allows overseas banks to maintain their risk perception about India unchanged while providing NRIs with enhanced deposit returns through leveraged FCNR deposits. The structure ensures that country risk remains manageable within established frameworks while maximizing the benefits of India's dollar demand for both domestic and international financial institutions. Besides the SBLC arrangement, Indian banks have been permitted to lend from foreign and GIFT City branches to NRIs and accept the amounts as FCNR deposits with their branches in India.
