Mumbai: Banks chasing NRI dollar deposits under the RBI's FCNR(B) window are pairing double-digit return projections with warnings on the risks of leverage.
Term sheets from HSBC, SBI and IDBI Bank show customers can borrow between 9 and 19 times their own capital to generate effective dollar returns of 13%-16%, but they should pledge their deposits until maturity while accepting lender control, liquidity constraints and regulatory risks. HSBC warns early redemption attracts a 4% penalty on the entire deposit, not just the investor's equity, potentially magnifying losses. SBI and IDBI do not specify monetary penalties but require loans to remain co-terminus with the deposits, preventing independent early withdrawals without first repaying the loan.
The RBI's concessional swap window, introduced on June 5 to boost foreign currency inflows, had attracted $20.72 billion by July 17, including $17.4 billion through fresh FCNR(B) deposits. The facility allows banks to swap overseas deposits with the central bank at concessional rates until September 30, sharply reducing funding costs and triggering intense competition for NRI money.
Alongside the race for deposits, banks have launched leveraged FCNR(B) products that allow customers to borrow several times their own contribution to amplify returns. HSBC IFSC offers leverage of up to nearly 19 times in certain structures, IDBI Bank up to 12 times and SBI IFSC up to nine times, producing effective annual dollar yields ranging from 13% to 16%.
Among the three, HSBC spells out the harshest consequences for early exits.
Its customer illustration states that premature redemption attracts a flat 4% penalty on the entire deposit amount, not only on the investor's own contribution. In one illustration, a customer contributing $1 million and creating a $20 million leveraged deposit would incur an $800,000 penalty on premature redemption, wiping out as much as 80% of the original capital before accounting for other charges.
The bank also warns that any change in residency status from NRI to resident could trigger enforcement over the pledged deposit. During the mandatory one-year FCNR(B) lock-in, investors may be unable to access their funds despite continuing to service the associated loan.
The other two banks require the loan to remain co-terminus with the FCNR(B) deposit, effectively preventing customers from redeeming the deposit independently before repaying the loan.
