MUMBAI: Friday's central bank move to shorten the swap-support window for overseas deposits will likely prompt banks to raise short-term loans abroad and quicken deposit collection as regulatory latitude on the foreign currency non-resident-bank (FCNR-B) programme ends in less than two weeks, people aware of the developments said. Overall foreign borrowings by banks, however, will likely be lower than earlier estimates.
Bankers said some lenders now plan to borrow more short-term funds, possibly at a higher rate, to finance the promised leverage to FCNR(B) clients after the Reserve Bank of India advanced the deadline for swap support. These funds will have to be replaced with a long-term loan or bond later, leading to a temporary mismatch between banks' foreign deposits and borrowings.
"The RBI has put banks in a tight spot. Banks had done roadshows, spent manhours on getting documentation ready and put a lot of investments into this. All this was planned with September 30 deadline in mind," said a senior private-sector bank executive.
Since large funds can't be secured for a longer tenure immediately, one option is to look for bridge loans.
"Not many banks have the capacity to raise a huge sum at such a short notice; so one option banks are exploring is to do a short-term bridge loan for now to ensure customers can be provided leverage on their deposits until the end of August. These short-term loans can be replaced with longer term borrowings later," said the executive cited above.
On Friday, the RBI advanced the deadline for mobilising FCNR-B deposits to August 31, from the originally announced September 30, citing higher-than-expected inflows. The RBI received $52.3 billion through FCNR(B) deposits until August 13, the latest update showed.
Banks can use the RBI's special zero cost swap facility, until September 11, 2026, versus the earlier date of October 16.
Bankers said the early closure was surprising since governor Sanjay Malhotra himself had said a week ago that the central bank neither planned to prematurely close the swap window because of robust inflows nor had it received any proposal to extend the timeline beyond the announced deadline.
"As of now, there is no proposal under consideration to close the scheme prematurely," Malhotra had said after the monetary policy announcement on August 5. The scheme's curtailment could expose lenders to liquidity mismatches.
"Some banks that were late in garnering dollars will probably stop in their tracks. Others may choose not to push for more dollars, while some with customer commitments will look for short-term funds immediately - possibly at a higher cost," said another private-sector banker. "This will create mismatches in the short term, which is not healthy."
For instance, ICICI Bank's $1.45 billion, four-year loan launched last week is currently under syndication. This loan also has a greenshoe option allowing ICICI Bank to upsize the total amount it wants to raise. The bank may want to wrap up the syndication early and not look at pushing the greenshoe.
Similarly, Punjab National Bank's $1 billion loan, which went into syndication in the last week of July, could be closed early as the bank scampers to get funds within the shorter deadline.
"Some mid-to small-sized banks, which had planned debut bond sales overseas, may now have to look at alternative sources. They will have to curtail their FCNR (B) targets because it does not look like the RBI needs more dollars," said a senior executive with a foreign bank.
Bankers said the RBI's decision has exposed them to risks of higher payouts immediately. There is also no certainty that whenever they tap the overseas markets, to match their three- to five-year FCNR(B) deposit liabilities, the US treasury, global rates or geopolitics will be favourable.
"Until last week, the RBI was in touch with banks pushing for more dollars. If dollar flows were too heavy, then there are ways to use them. Just open a special window for oil companies, for instance," said a third private sector bank executive.
Bankers said by closing the scheme early and at a short notice, the RBI would be indicating it has enough muscle to protect the rupee.
