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Leverage on FCNR(B) deposits

BS Banking Bureau

CREDIT POLICY

The Reserve Bank of India has allowed banks to invest their FCNR(B) deposit funds in longer term fixed-income money market instruments with a maturity more than one year provided such papers have a good rating.

The central bank has also reduced the cap on the FCNR(B) deposit rates from the London inter-bank overnight (Libor) rate to Libor minus 25 basis points.

At present, one-year Libor is ruling at 2.62 per cent. According to the central bank, the first measure has been taken to help better asset-liability management for banks, while the second measure is in accordance with the dip in the global interest rates.

The banks, however, will have to obtain prior approval from their boards with regard to type and tenor of instruments along with relevant rating and likely cap on such investments within the asset-liability management guidelines in force.

At present, banks are allowed to accept FCNR(B) deposits for a period of 1-3 years.

However, on the assets side, they can lend these funds to Indian residents for their foreign exchange requirements or for financing of joint ventures or wholly owned subsidiaries set up by resident corporates.

Banks can also invest such funds in certain money market instruments but with maturity up to one year and prescribed rating.

The central bank said: "In view of restrictions on the deployment of funds, the assets side could be shorter in tenor than the liabilities side resulting in asset-liability mismatches."

Further, there exists interest rate risk in view of changes in Libor rates, if matching investment opportunities are not available to banks.

And the allowance to invest in the long term fixed-income instrument will help to solve these mismatches, the apex bank said.

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