Banks can tap NRI funds at 4.5%

The Reserve Bank has allowed banks to tap NRI deposits at international benchmark lending rate Libor, now at 4.5 per cent, to bridge the mismatch between faster credit offtake and a sluggish domestic deposit growth.

With hike in deposit rate for expatriates, RBI has reversed the trend of fall in NRI deposits and ensured that banks have additional funds to lend to needy sector of the economy.

Confirming this, Union Bank of India chairman K Cherian Varghese said, "NRI deposits are coming back as interest rates offered by us (Indian banks) have become attractive."

Two years ago, RBI had capped the NRI rate at 25 per cent lower than Libor to discourage inflow of "hot money" or short-term funds that have the tendency to flow out of the country suddenly.

As a result of the cap in rates, NRI deposits were falling by 28 per cent or Rs 20,914 crore (Rs 209.14 billion) till January first week this fiscal.

But the present liquidity shortage in the banking industry has prompted RBI to relax the norm on NRI deposit.

While credit has been growing close to 27 per cent and stood at Rs 3,26,740 crore (Rs 3267.40 billion) till January first week this fiscal, deposits have grown by 17 per cent at about Rs 2,81,617 crore (Rs 2816.17 billion), as per RBI data.

With NRI deposit now at Libor or 4.5 per cent, banks are finding it a cheaper source of funds and can be lent at over 7 per cent to top notch companies even after providing for forex premia of 1.8 per cent over six month Libor at 4.65 per cent.