Banks seek $50B from diaspora to bolster India's reserves

Banks are urging the Reserve Bank of India (RBI) to clarify regulations for the new Foreign Currency Non-Resident (FCNR) deposit scheme, which was floated last week to arrest the rupee's slide. The key regulatory clarification banks are insisting on relates to the use of standby letters of credit (SBLCs) for funds raised by non-resident Indians (NRIs).

Specifically, banks want the RBI to tweak the wording of the rule to allow NRIs to leverage funds multiple times for investments. This leverage, backed by SBLCs issued by local banks, is crucial for making the high-return FCNR deposit scheme successful. Overseas banks require SBLCs for operational convenience and to minimize risks, ensuring direct repayment of borrowed funds to them once deposits mature.

The practice of using SBLCs for leverage was discouraged by the RBI in 2024 after a large private bank extensively used them to overcome an acute deposit crunch following a merger. Bankers noted that without sufficient leverage, the scheme will fall far short of expectations, especially as the interest differential between overseas markets and India has narrowed.