At present, South Indian banks attract a major part of such money from West Asia.
Even though inward remittances continue to surge, banks are chasing foreign currency non-resident (FCNR) and non-resident external (NRE) term deposits, a source of low-cost funds.
Banks, which do not have significant non-resident Indian (NRI) deposit portfolio, are now on a run to develop one in order to make the most of the surge in inward remittances in the aftermath of the global financial crisis.
However, banks are increasingly finding it difficult to retain NRE and FCNR term deposits as most of them are getting diverted to high-cost non-resident ordinary (NRO) term deposits, although interest earned on these deposits is subject to tax deduction at source (TDS), exchange rate risk and cannot be generally repatriated.
Since April, when inward remittances were at their peak levels, there had been about 15 per cent shift from FCNR and NRE to NRO term deposit accounts, said bankers.
Net inflows through various NRI deposits increased from $179 million in 2007-08 to $3.99 billion in 2008-09, according to the RBI data.
Since October last year, inward remittances had started increasing due to such factors as the global financial crisis, a comfortable exchange rate and higher interest rates. There was around 50 per cent rise in remittances in the second half over the first half of the year, said Abraham Thariyan, executive director of Thrissur-based South Indian Bank (SIB).
“Now, we are in a peculiar situation, where the increase in fresh remittances has stagnated, but is still 50 per cent higher than usual... Because of the higher rate of interest on NRO term deposits, NRE and FCNR deposits are not picking up well,” said Thariyan.
Interest rates on NRE and FCNR deposits cannot be changed by banks and are based on the London Interbank Offered Rate (Libor), but the balances held in such accounts can be repatriated abroad freely and they also enjoy tax exemptions.
On the other hand, the interest rate on NRO accounts, is almost at the same level as that on domestic term deposits. Also, NRO account-holders, though subject to TDS, can avail tax concessions under the double taxation avoidance agreement that India has entered into with a host of countries.
Thus servicing NRO term deposits is also not as attractive for banks as other NRI deposits, which has interest rate of close to 3 per cent. “We have seen about 15 per cent shift to NRO deposits since April,” said TM Bhasin, executive director, United Bank of India.
To stop the drift, several banks have renewed marketing activities abroad, particularly in line with expected increase in remittances during the festival season.
“The growth in NRE deposits has not been satisfactory. In case of NRO term deposits, the future cost is higher. We have put specific marketing guidelines for NRE deposits,” said MG Sanghvi, executive director, Bank of Maharashtra.
At present, south-based banks garner a large chunk of NRI deposits mostly through remittances from the Gulf countries.
“At present, we do not have a substantial NRI deposit portfolio, but we are trying to develop one. I have instructed our marketing division to engage people in NRI pockets in India and abroad in this regard,” said Allahabad Bank CMD KR Kamath.
UCO Bank is also planning a special campaign abroad to attract NRI deposits.
“Unfortunately our geographical presence is not much in countries from where NRI deposits come, so the chances of mobilising NRI deposits is less. We are trying to create a database of customers in countries where remittances come from. We have started sending them mails and entice them to send us money,” said SA Bhat, chairman and managing director of Indian Overseas Bank.
Mangalore-based Corporation Bank is also planning tie-ups with about six-seven exchange companies to attract NRI deposits.
