Sebi sets terms for public sector banks: investing NRI deposits

This comes even as public sector banks are devising schemes to attract non-resident Indian (NRI) investors.

One of the ways to propose maximising returns to investors is to invest a portion of the deposits in mutual fund units.

Recently the Union Bank of India (UBI) had sent a detailed proposal to the Reserve Bank of India (RBI) wherein it had proposed that a small portion of the NRIs' deposits with the bank would be invested in a mutual fund product.

The amount would be allocated between the bank deposits and the mutual fund units in such a way so that on maturity of the bank deposit, the capital would protected "" that is, the investor would be guaranteed at least his initial investment.

Sebi has, however, pointed out that this would be tantamount to the bank acting as a portfolio manager for the non-resident investors "" even though the portion to be allocated for investment in mutual fund units was only a small part of the total deposit.

The bank was told that it would have to obtain a license as a portfolio manager before it could offer discretionary services.

With returns on deposits for NRIs pegged at a maximum of 50 basis points over the Libor (London Inter-bank Offered Rate) putting money into bank deposits is not lucrative for the community.

One-year Libor is currently at around 3.65 per cent. NRIs have been increasingly turning to mutual funds for maximising their returns.

Recent initial public offerings of their schemes by J M Mutual Fund and Franklin Templeton saw a good portion of their subscriptions coming in from Indians settled in the Gulf region.

Incidentally some private sector banks and most of the foreign banks have obtained licenses for PM services since they offer investment in mutual funds to depositors through a mandate given to them by the latter. However, public sector banks are still to wake up to the idea.