What changed
The interest rate ceiling on fresh NRE term deposits (1-3 years) was lowered from LIBOR/SWAP plus 100 bps to plus 50 bps. For FCNR(B) deposits of all maturities, the ceiling was reduced from LIBOR/SWAP rates to LIBOR/SWAP minus 25 bps. These changes apply to new deposits and renewals from close of business on January 31, 2007.
What it means for you
Banks must immediately cap NRE deposit rates at the new lower ceiling, reducing their cost of funds from these deposits. The tighter FCNR(B) ceiling makes these foreign currency deposits less attractive to NRIs, potentially slowing deposit inflows. RBI also flagged concerns about large advances against such deposits and prohibited fresh loans above Rs 20 lakh against them, impacting banks' lending strategies.
What you must do
- Update NRE term deposit rate sheets to ensure rates do not exceed LIBOR/SWAP plus 50 bps for 1-3 year maturities.
- Adjust FCNR(B) deposit pricing to stay within LIBOR/SWAP minus 25 bps for all maturities, including floating rate deposits with six-month reset.
- Apply the new ceilings to all fresh deposits and renewals effective from January 31, 2007.
- Comply with the prohibition on granting fresh loans exceeding Rs 20 lakh against NRE/FCNR(B) deposits.
Who it affects
All scheduled commercial banks (excluding RRBs) offering NRE and FCNR(B) deposit accounts, NRI depositors and their relationship managers, Bank treasury and asset-liability management teams
What is the new NRE deposit rate ceiling?
For fresh NRE term deposits of 1-3 years, the ceiling is LIBOR/SWAP rates for US dollar of corresponding maturities plus 50 basis points, down from plus 100 bps.
Does the FCNR(B) ceiling change apply to all maturities?
Yes, for all maturities contracted from Jan 31, 2007, interest must be within LIBOR/SWAP rates minus 25 bps. Floating rate deposits use SWAP rates minus 25 bps with a six-month reset.
Are existing deposits affected?
No, only fresh deposits and renewals after maturity from close of business on Jan 31, 2007 are subject to the new ceilings.