What changed
Earlier, FCNR(B) deposit interest was capped at LIBOR/SWAP rates minus 25 basis points. Effective close of business on March 28, 2006, the 25 bps deduction has been removed, allowing interest up to the full LIBOR/SWAP rate. For floating rate deposits, the ceiling is now the full SWAP rate, with a six-month reset period unchanged.
What it means for you
Banks can now offer higher interest rates on FCNR(B) deposits, making them more attractive to non-resident depositors. This could increase FCNR(B) inflows but may also raise banks' cost of funds. Lenders need to recalibrate their deposit pricing strategies to remain competitive while managing margins.
What you must do
- Update FCNR(B) deposit interest rate ceilings to LIBOR/SWAP rates without the 25 bps deduction for contracts from March 28, 2006.
- Review and revise internal pricing models and system parameters for FCNR(B) deposits accordingly.
- Communicate the revised rate structure to branches and treasury teams to ensure compliance.
- Monitor competitive landscape and adjust offered rates to attract FCNR(B) deposits without eroding margins.
Who it affects
Banks accepting FCNR(B) deposits, Co-operative banks (specifically those under Section 35A of B.R. Act) handling FCNR(B) accounts, Treasury and ALM teams, Non-resident depositors
What is the effective date for the new FCNR(B) interest rate ceiling?
The revised ceiling applies to deposits contracted effective close of business in India on March 28, 2006.
Does this change affect floating rate FCNR(B) deposits?
Yes, for floating rate deposits, the ceiling is now the full SWAP rate for the respective currency/maturity, instead of SWAP minus 25 bps. The interest reset period remains six months.
Which currencies and maturities are covered under this circular?
The circular applies to FCNR(B) deposits of all maturities and all currencies for which LIBOR/SWAP rates are available.